CITY HIGHLIGHT, OCTOBER 2005

WASHINGTON, D.C. REMAINS STRONG ACROSS THE MARKET

The commercial real estate markets in Washington, D.C., are all seeing positive trends resulting from vast population growth and one of the strongest economies in the United States. The office market is seeing a rush for occupancy because land is not getting any cheaper, companies are expanding and so is the entire push for new space. The industrial market, while slowing a little bit this past quarter due to constrained supply, still currentlyis seeing a solid bit of construction . The retail market has remained strong because of the city's solid economy and consistent tourist draw.

Office

The psychology of the market is shifting in the Washington, D.C., metropolitan area. Tenants are realizing that now is the time to lock in space, because it probably won't get any cheaper. What's driving the improvement in occupancy? One big factor is renewals that include space expansions by existing tenants that are anticipating bigger space needs as their businesses expand. Job gains are also helping to turn the tide on vacancy rates and lower rents. The increase in population is another factor. The Washington area added 84,500 new residents last year, according to census population estimates. One in four residents lives in Loudoun County, Va., which grabbed a growing share of those new arrivals and is one of the nation's fastest growing jurisdictions.

Office vacancy rates in the Washington, D.C., metropolitan area are running about 9.6 percent, compared with 13.6 percent nationally. The office vacancy rate has remained relatively stable over the last quarter, but has decreased from a 10.9 percent vacancy as of 12 months ago. Accordingly, rents have increased over the last year as professional services firms and the federal government and its contractors continue to lease space. Development activity continued at a steady pace with 11 million square feet under construction at the close of the second quarter. The majority of the tenants looking for large blocks of space during the first half of 2005 opted to move into new buildings, which has aided in keeping average rents high and speculative activity on the rise.

The local investment market remains extremely active with numerous investors flush with cash searching for real estate to buy. The Washington area is attractive to investors due to the stability of the federal government, real job growth and the scarcity of quality sites for development.

The most noteworthy announcement thus far in 2005 was the Pentagon's recommendation to cut thousands of jobs from the area as it moves its activity away from the Capital to various military bases. The reasoning behind the Base Realignment and Closure (BRAC) process is to enhance military efficiency and to increase operational readiness. Defense contractors could follow, potentially putting local job losses in the tens of thousands. The impact on Virginia's Arlington and Fairfax counties from BRAC could be major, and will gradually increase vacancy rates and decrease rental rates in those markets for many years to come. In the short term, tenants will be looking for shorter lease terms to enhance their mobility. And, in the long term, new and more stringent security guidelines for government facilities mean that many existing buildings will no longer be viable space options for government agencies. The good news is that the implementation of those requirements could take several years, which will at least allow time for the market to adjust. Despite impending vacancies by the government and their contractors over the next several years, economic growth is expected to continue.

— Tonya Ginter, CCIM, director of research, Advantis Real Estate Services Company/GVA's Washington, D.C., office

Industrial

Overall, the Washington, D.C., metropolitan area is a supply-constrained industrial market — many companies would like a warehouse or distribution facility here, but there is extremely limited product due to high land prices. The cost per square foot simply cannot support the return on investment (ROI), thus forcing office and office/ flex to emerge in its place. Because of this, the majority of the restricted industrial market for Washington, D.C., is located in the outer suburbs of Northern Virginia and suburban Maryland. At the end of second quarter 2005, the industrial vacancy rate in the Washington market area increased to 10.3 percent from 9.8 percent at the end of the first quarter 2005. In Northern Virginia, the most active areas are Newington, Manassas and the Dulles Corridor, while Prince George's County and the Frederick area of suburban Maryland remain steady.

The average rental rate for available industrial space, inclusive of both warehouse and flex, was $10.08 per square foot, triple net, at the end of the second quarter 2005. So far this year, the largest industrial lease was the General Services Administration's 130,000-square-foot facility in Prince George's County, which is considered a large deal for this market.

Of the 1.96 million square feet of industrial space that was under construction at the end of the first quarter 2005, 1.26 million square feet was in Northern Virginia and 705,814 square feet was in suburban Maryland. Current construction is concentrated in Northern Virginia's Dulles Corridor and suburban Maryland's Southern Prince George's County. One of the largest developments is the 200,000-square-foot Eastgate Business Park — Building 2 in Prince George's County. Active developers include ProLogis, OPUS and Boston Properties. Due to the scarcity of industrial zoned land, there is limited future development in the Washington, D.C., area. Therefore, regional industrial development will continue to shift to the Fredericksburg and Hampton Roads areas in Virginia and run north of Columbia, Maryland.

— James Clarke, senior vice president, The Staubach Company's Virginia office and manager of Staubach Industrial/ Development Services; and John Childs Jr., vice president, The Staubach Company's Baltimore office and a leader of the Industrial Services Practice Group.

Retail

Washington, D.C., arguably has the strongest economy in the nation and ranks third in tourism. Coupled with the highest education levels of any other market, Washington has a wealthy, well educated consumer, and a great tourist economy.

The District of Columbia is experiencing a renaissance. The condo market is exploding and the influx of wealth has heated up an already hot market. The D.C. retail engine has been fueled by a strong, dense, wealthy office market made up of lawyers and lobbyists as well as tourism. Tourism is driven by the national monuments, the Smithsonian museums, as well the new 2.3 million-square-foot Convention Center.

The two hottest submarkets in Washington are Georgetown, an elegant urban village shopping destination, and Downtown, which is the “larger than life” entertainment district.

Georgetown is relentlessly reinventing itself and its historic townhouse real estate. Most recently, EastBanc's Anthony Lanier has completed Cady's Alley, a design district within Georgetown featuring 100,000 square feet of high end design and furniture stores. EastBanc, in conjunction with Millennium Partners, developed the Ritz Carlton Georgetown, an all suites hotel and exclusive condominium residences project with a 14-screen Lowes Theaters at its base.

Downtown is surrounded by activity with the Smithsonian and its 20 million visitors, the new Convention Center, the MCI Arena and a thriving theater district, making it is easy to see why Downtown is on a roll. Most recently, Gallery Place, a project developed by the Akridge Company and Herb Miller, opened next to the MCI Arena with an AMC Cinema, Bennetton, Aveda, Urban Outfitters as well as a 20,000-square-foot Clyde's restaurant and Lucky Strike Bowling under construction.

As Washington's strong economic engine drives growth, traffic and congestion have driven much of that growth into the District reinforcing the fact that city living is the ultimate “lifestyle center.”

— Bill Miller, senior vice president and director of retail leasing, Transwestern Retail Services

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.