D.C. Office Market Flat Despite Financial Chaos: Report

The modest second-quarter growth rates experienced in Washington, D.C., and Northern Virginia evaporated in the third quarter, according to a CB Richard Ellis Inc. report. The entire region saw an essentially flat market with slowing leasing activity.In D.C. the flattening market is stalling new development in emerging areas such as NOMA and Capitol Riverfront, which have seen a slowdown in new construction starts as owners focus on leasing current projects. Northern Virginia is coping with flat demand, as currently there is no economic driver such as the defense contractors in 2003-2006 boom years for leasing. And in suburban Maryland, financial services and home building firms are closing shop or downsizing, returning space to the market, which has not been offset by new deals. “Tenants are postponing real estate decisions when possible while waiting to see the results of the broader economic situation. As the pipeline of new product delivers, we expect vacancies to rise throughout the region and to see more consolidations and more space returned to the market,” Marianne Swearingen, Research Manager for CB Richard Ellis, said in a statement.  Net absorption in the Washington office market slowed in the third quarter, with 69,500 square feet taken off the market. Vacancy rates for Class A space jumped one percentage point to seven percent this quarter from the second quarter. Although the pace of absorption in the third quarter was on par with the very beginning of the year, it is off 14 percent from the same quarter a year ago. The space that was absorbed this quarter was the result of new government requirements by the Department of Veterans Affairs, FEMA, Secret Service and the Department of Homeland Security.The increase in vacancy rates, however, has not led to a decline in rental rates. In fact, overall rents for full service Class A space have increased approximately five percent from $53.30 last quarter to $55 in the third quarter. In Northern Virginia is experiencing flat demand much like the downturns of the early 1990s and 2001-2002. This quarter saw 179,600 square feet of net absorption. The largest transactions this quarter came from tenant consolidations that contributed to the modest levels of absorption. Tenants are negotiating harder and are more reluctant to take additional space, while landlords work to keep face rents steady. Northern Virginia’s overall net absorption is anticipated to remain below its historical 10-year average of four million square feet, in part due to the lack of significant tenant demand in the weak economy. Vacancy is expected to inch higher in the shorter term with additional consolidation expected through the rest of 2008. Suburban Maryland posted negative absorption for the second straight quarter, although not as much as in the second quarter. After 581,000 square feet came back to the market last quarter, only 93,000 square feet returned in the third quarter. New leasing requirements in the Pennsylvania Avenue/Upper Marlboro and North Rockville submarkets offset the negative net absorption seen elsewhere in the market.Vacancy rates rose 30 basis points from 11.5 percent in the second quarter to 11.8 percent in the third. Suburban Maryland vacancy rates have risen 250 basis or 2.5 percentage points from one year ago. For the future in the greater Washington area, net absorption is expected to be flat to negative as more firms downsize as a result of deteriorating economic conditions. Declining construction has helped to slow rising vacancy but not enough to offset other factors such as fewer large tenants in the market, a limited number of tenants seeking to expand and limited preleasing in product set to deliver in the next 18 months.