Speculative development is still moving forward in Washington, D.C., and in select submarkets in Northern Virginia inside the Beltway. From the Beltway and going west, speculative development has halted due to the large amount of sublease space returned to the market from the high-tech and telecommunications consolidation, says John McEvilly, principal with Millennium Realty Advisors.

Current significant developments in the market are government-related, according to McEvilly, who says a number of federal government agency requirements active in D.C. and close-in Virginia markets may require up to 4 million square feet of space. Additionally, a number of government/defense contractors are collectively lining up more than 1 million square feet of space in the Northern Virginia market for 2002 occupancy once pending contracts are awarded. A recent George Mason University study predicts that defense contractors will need between 3.5 and 4 million square feet of office space in the next 12 to 18 months to support the fight against terrorism.

Additionally, some public agencies located in the District are discreetly seeking disaster recovery facilities in the western suburbs of Northern Virginia. These companies are primarily looking for buildings rich in fiber and backup power infrastructure such as those formerly occupied by high-tech/telecommunications firms. Over the next 12 months, this activity will help to absorb some of the 14 million square feet of space currently available in Northern Virginia.

Presently, the majority of development is taking place in Washington, D.C., and inside the Beltway in Northern Virginia. "This is being driven by government agencies preferring buildings located within 2,500 walkable feet from an operating metro train station," McEvilly notes. Also, defense contractors are looking for immediate space within close proximity to the Pentagon.

Collectively, the federal government will be the largest tenant absorbing space over the next few years. The U.S. Patent and Trademark Office has leased 2.5 million square feet in Alexandria. FDIC, USAID, INS, Army Material Command, Office of Naval Research, FTC, Department of Justice, Agriculture and the SEC will bring an additional 4 million square feet of requirements over the next 3 years.

Several newcomers are leading the current generation of D.C.-area developers: Monument Realty, Miller Global, Tishman Speyer, Zumot Development, Dupont Fabros, Lawrence Ruben Company, Archon, Republic Properties and Crescent Resources.

Vacancy rates in Washington, D.C., are currently at 5.5 percent for prime space and 7.2 percent for prime plus sublet space. In Northern Virginia, vacancies are at 7.8 percent for prime space and 13.2 percent for prime plus sublet space. And in Maryland, current vacancy rates are 8.3 percent for prime space and 10.6 percent for prime plus sublet space.

Class A rental rates in Washington, D.C., range from $43 to $49 per square foot (psf); Rosslyn/Ballston, $33 to $36 psf; Tysons Corner, $39 to $41 psf; Reston, $33 to $39 psf; Bethesda/ Chevy Chase, $32 to $35 psf; and Rockville, $31 to $33 psf.

"People will keep their eyes on different submarkets for different reasons as we go forward," notes McEvilly. "With D.C. and Arlington County enjoying high occupancy rates and significant tenant demand, these submarkets will be watched to see if supply is adequate over the next few years to accommodate the leases that are expected to be signed. From Tysons Corner and west, however, people are waiting to see if the high tech consolidation has finally run its course. People will also be interested to see when the sublease space inventory, which has grown over the past year from 2 million square feet to its current level of 6 million square feet, will finally reverse direction. This will give developers hope that new development can again be considered. The Tysons Corner and Reston submarkets especially have been weakened by the recent recession.

"Northern Virginia enjoyed the greatest amount of growth during the recent technology boom," McEvilly continues. "It is now suffering the greatest amount of pain in the current down market. Inside the Beltway still has a good story to tell because it was a small participant in the tech boom. Inside the Beltway contains the Metro and the Pentagon. These two major factors will allow that part of Northern Virginia to be popular with federal agency tenants and defense contractors."

McEvilly adds, "D.C. has stopped bleeding tenants since Anthony Williams became mayor. Government agencies and law firms continue to grow in this restored environment. However, September 11 is causing some major D.C. tenants to consider locating some of their operations in Northern Virginia in the event of further terrorist activity."

John McEvilly is a principal with Millennium Realty Advisors.


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