Leasing Slows in D.C. Office Market as Developers Add 3.2M SF

In the first quarter of 2008, developers delivered about 3.2 million square feet of office space in the Washington, D.C., metropolitan region but managed to lease only 1.3 million square feet.  Most of the absorption was the result of pre-leasing activity that occurred several years ago, according to Rob Hartley, CB Richard Ellis’ research manager for the Washington-Baltimore market and the author of a CB Richard Ellis report, released today, on the Greater Washington Office Markets. “Looking back to 2005, the absorption rates were double and that’s when developers were breaking ground on those buildings,” Hartley (pictured) told CPN today. “They were developing for a market that was growing two or three times as fast as it is today.” Even so, Hartley believes the office market in the region remains in “pretty good shape.” Tenants are consolidating, continued Hartley. The American Red Cross moved from Merrifield to Ashburn in Loudoun County into a smaller space. Verizon gave space back in Merrifield and Arlington, while consolidating on the corporate campus in Ashburn.  Despite those kinds of moves, D.C.’s Central Business District and the East End submarket are tight. Available space in the city lies in the developing areas north of Massachusetts Avenue and in the Southeast around the new stadium. “Before these areas came on line, price sensitive tenants would leave the city,” Hartley said. “Now they can choose a lower-priced alternative and still have a D.C. address.” While there is space available, the vacancy rate in the city is a healthy 6.79 percent. The close-in suburban markets of Bethesda, Alexandria’s Old Town, Rosslyn, Ballston, and Silver Spring have remained tight as well. Further out in the I-270 corridor, Prince George’s County, Reston Herndon, and along Route 28 south, tenant demand has slowed. “It’s still growing, but more slowly,” Hartley said. “And competition for tenants is rising.” Reston Town Center just brought three buildings on line and has another on the way, Hartley added. Those buildings are 70 percent leased. Six new buildings are going up in the Dulles Corridor. Hartley believes competition will heat up in this area. “Where we go from here will depend on what the economy does,” he said.