SOUTHEAST SNAPSHOT, JANUARY 2005

Washington, D.C., Office Market

Washington, D.C., has long been one of the top office markets in the U.S. As we enter 2005, one could credibly argue that the Washington, D.C., office market is overall the most stable, fundamentally sound and growth-oriented market in the world. The reasons are so well known, so simple and so obvious that it is easy to overlook and underestimate their value.

However, the unique and rock-solid fundamentals of the D.C. office market are not newsworthy. Also not newsworthy are the short-sighted quarterly statistics: vacancy rate (declining); sublease vacancy (declining); absorption rates (increasing); rental rates (increasing); new construction (increasing); D.C. office employment growth (increasing); and the highest sale price per square foot ($493).

The real story in the D.C.-area office market involves savvy real estate developers that are adapting to market conditions and capitalizing on the smart growth principles that the market is demanding. Traffic congestion, changing demographic factors and the other ill effects of sprawl have caused politicians, the business community and the general public to demand with increasing force how and where development should take place. Astute real estate players have realized that resisting this tidal wave of sentiment is foolish, and that embracing the principles of smart growth in earnest is allowing them to move projects forward. More importantly, these leading edge real estate firms have realized that incorporating smart growth principles results in not only significantly better projects, but also significantly greater financial rewards — both in the near term and over the long term.

Smart growth in D.C. involves redeveloping underutilized or vacant land around transit areas with mixed-use developments, which incorporate walkable design principals so as to create pedestrian-friendly, 24/7 vibrant communities. Such projects also allow developers and architects to incorporate unique design and architectural features that further enhance the projects. Another interesting and enjoyable result of some of these smart growth projects has been the partnering of larger developers with smaller real estate specialists to effectively and prudently complete these mixed-use projects.

Considerable mixed-use development opportunities are available in the D.C. area. The D.C. transit authority is aggressively seeking public/private partnerships to develop the land it owns next to Metrorail stations. Such opportunities are available at Metrorail stations in D.C. and Maryland. In addition, the new Metrorail station opened at New York Avenue in late November that will be the foundation of city’s economic development initiative for the area north of Massachusetts Avenue (known as NoMa).

While there are smart growth opportunities and projects throughout D.C., the biggest and most exciting is the Anacostia Waterfront project. The massive and comprehensive redevelopment of the city’s waterfront is one of America’s largest waterfront transformations, with at least 40 percent of its land area currently subject to redevelopment. The Anacostia Waterfront project is considering several transit system expansions, and it is planned to be home to Washington’s new major league baseball team. Within this waterfront project:

• Historic Carrollsburg, which, as a model of 21st century planning, will be an active, transit-oriented neighborhood combining offices, mixed-income housing and waterfront destinations.

• The Washington Navy Yard and the U.S. Department of Transportation headquarters will host more than 18,000 workers and foster new private-sector jobs.

• Canal Blocks Park will lead to a great waterfront park at Southeast Federal Center, providing neighborhood access to the river for the first time in more than 100 years.

The value creation bonanza from smart growth projects is not confined to D.C. Urban-oriented, mixed-use, smart growth projects — both large and small — are emerging in the inner suburbs around D.C. The Reston Town Center in Reston, Virginia, has become both the hub of the Dulles Toll Road corridor and the mixed-use model to emulate. Metrorail West, a 70-acre, high-density mixed-use project adjacent to the Vienna Metrorail station is an excellent smart growth redevelopment, even though a small group of neighbors opposes it. Old Town Village in the city of Fairfax is an excellent example of a smaller office, retail and residential project with a very qualified team of real estate operators.

The Washington, D.C., metropolitan area office market has enjoyed virtually an ongoing economic boom for over 20 years, save the early 1990s debacle from a confluence of macro events and the tech-wreck in Northern Virginia in early 2000. The D.C. office market’s robust activity has and will continue to significantly outpace the country’s slow office market recovery. The current smart growth, mixed-use developments in and around D.C. may also highlight what other metropolitan areas around the country can expect when their markets recover and development begins. The rapid and sprawling growth in many metropolitan areas around the country in the 1980s and 1990s came with a cost — which politicians, citizens and the business community now realize. With their watchful influence, projects (both large and small) that adhere to smart growth principles will quickly become the favored projects, and will fare better from conception to completion — both politically and financially.

— Terrell Marsh, principal, Trimark Corporation

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