The District's real estate market experienced another year of phenomenal growth in 2000, according to Thomas Fulcher Jr., senior vice president of Julien J. Studley Inc. "Demand from law firms, associations and non-profits remained strong as tenants competed for a limited supply of available space or development sites in the tightest market in 20 years," he says. Tenants leased 10.1 million square feet in 2000, up 28 percent from 7.9 million square feet in 1999. This figure accounts for 29 percent of leasing activity in the region.

Overall rental rates in D.C.'s central business district increased by 2.9 percent to $37.02 and the vacancy rate decreased to 5.3 percent. In the East End, the vacancy rates decreased to 5.8 percent. Rental rates in the East End are the highest in the city with the average at $39.45 overall and $43.07 for Class A space. Available space is virtually non-existent in the West End, Georgetown and Southwest submarkets where the vacancy rates are 1.1 percent, 2 percent and 3.7 percent, respectively.

Washington is a very steady real estate market. The tenant base is made up largely of law firms and other professional service firms, associations and government. While there will be trends up and down, these groups will tend to show less dramatic ups and downs than are seen in many other types of users.

"In the past few years, we have seen solid growth followed by cautious developers putting up properties to meet demand as it occurs," Fulcher notes. "For the most part, properties have gone up and, while they might not be fully leased when they start construction, they are fully leased by the time they are ready for occupancy. The level of development has stayed somewhat behind demand, which has increased the competition for good spaces and driven up rents."

As Washington, D.C., looks forward, demand could be slowing down. Unfortunately for tenants, the amount of available space out there is still relatively scarce, especially higher end and larger blocks of space. A "slow down" might mean that there are fewer competitors for a space -- but that there would still be competition. For developers, this is good news. Staying the course and remaining prudent and cautious will continue to reap rewards, although it might not mean a continuation in the rapid escalation of rents that we have seen recently. Rents should stay steady and continue to produce solid returns on new development.

Adding significantly to the luster of Capitol Hill is 101 Constitution Ave. While this property is unique in its views of the Capitol and prominence on the Mall, it is making the Capitol Hill submarket more acceptable as a viable destination for companies seeking office space, says Fulcher. However, this area continues to attract more associations and governmental users rather than law firms, which are less willing to be pioneers. A property that is being developed speculatively, 601 New Jersey Ave., is one example of a building that will benefit from the halo effect of the successful development of 101 Constitution.

The East End continues to benefit from the catalytic effect of the MCI Center development. AARP's recent purchase of its headquarters building at 601/611 E St. NW for $204 million represents one of the area's most significant transactions. The development of the north side of the AARP's block (the site of the old Hechts building), paired with 901 F St. and the conversion of the Tariff Building to a hotel, are moving the boundaries of the East End even farther to the east.

Of the 4.7 million square feet currently under construction or renovation in the city, 53 percent is preleased. The East End has nearly 1.8 million square feet under development, while the central business district and Capitol Hill have 1.4 million square feet and 1.5 million square feet, respectively. Rehab opportunities remain an alternative source of new product at more attractive rates than new construction.

The D.C. Zoning Commission approved proposals for the development of four data centers to be located throughout the city. These approvals are the first to come after new regulations were adopted last October in an effort to preserve the revitalization prospects for targeted areas, including the NOMA district - D.C.'s tech corridor. "The regulations are intended to prevent an overwhelming presence of large, fortress-like buildings that house few employees and are having a chilling effect on the development of data centers in the District," Fulcher says.

There are a number of areas that are vying to be the homes of the newest wave of office development. Much of the new development will be taking place in the heart of the old downtown district along F Street, east of the Treasury Building in the East End. At one end is the Metro Center area, where much of the development activity of the late-1980s took place. At the other end is the MCI Center, and in between are a number of development sites that will bring new office space to the market. These developments include Carroll Square at 10th and F by the John Akridge Cos.; the Atlantic Building by Clover Development at 930 F St.; and the old Woodies building by Douglas Development. New York Avenue, near the old and new D.C. Convention Centers, has a few large sites available. At approximately 500,000 square feet, 901 New York Ave. represents one of the few larger sites in the city, west of Capitol Hill. Development of this site would require the momentum of development to shift slightly to the north. But given the presence of the D.C. Convention Centers and lack of other large sites, this area could be a winner sometime soon. The central business district has a number of sites that currently are the homes to older buildings awaiting their demise. Most of these sites are not large (most have a development capacity in the 200,000-square-foot range or smaller), but the highly developed amenity base of the area will continue to draw tenants to these developments.

Sales transactions decreased 29.4 percent from 1999 and are unlikely to rebound this year. Most REIT's are still out of the market except for development deals, European buyers are retrenching, pension funds that are nearly fully allocated for office are seeking to diversify and an overall concern for a slowing economy is affecting the sales market. Capitalization rates range from sub-8 percent for Class A to over 10 percent for Class B and C space.

One of the most significant sales transactions of the year is the Freedom Forum's purchase of the Department of Employment Services site at 6th & Pennsylvania Ave. NW for $100 million. The Freedom Forum development project will relocate and expand the Newseum, an interactive museum of news that takes visitors behind the scenes to experience how news is made, into a 476,000-square-foot multi-use complex that includes office, restaurant, retail and condominium uses. The client preempted the public bid process with a $100 million offer that included a $75 million bid for the land, plus a $25 million grant for affordable housing initiatives within D.C., contingent on the transaction being completed by the end of 2000. The project will break ground at the end of 2001 and construction and relocation are expected to be completed by mid-2004.

"While 2001 is expected to be a more moderate year relative to a cooling of the general economy, the District's market will remain healthy as demand from law firms and associations remains steady, lenders move forward cautiously and the community deals with a shortage of land and developable sites," Fulcher says. "A slight slowdown in the market could be beneficial to tenants by enabling them to gain some leverage over landlords."

Thomas Fulcher Jr. is senior vice president of Julien J. Studley Inc.


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