D.C. Market Slowed In Q3

The D.C. leasing market, traditionally fairly stable, is reacting to the market turmoil. Scott Johnston, Principal at Newmark Knight Frank, the global real estate investment firm told CPN, “The volatility exists in the economy in general, so what you’re seeing in D.C. in particular is people taking a wait and see approach to things. Across the board from an economic standpoint, everyone is nervous. Nobody knows what is going to happen. “With the economic crisis global in nature, it has a significantly large impact on the business community as a whole, and that’s why people are in such a state of uncertainty as to what they should be doing. Growth plans are being put on hold. A lot of companies are looking at their space needs, and even those with a lease expiration coming up, are considering short-term extensions to ride out the storm. That’s definitely happening, with big and small tenants.”The statistics show the lessening in leasing activity. The third quarter was down 58 percent compared to last year, and this decline will probably lead to a further decline in net absorption, because of the lag time between leasing transactions and occupancy dates. The net absorption in Washington, D.C., now is above 500,000 square feet, which is robust. But that is lower than the five-year average of approximately 2.4 million square feet per year, and the year-to-date level is just half that, at 1.2 million square feet. The fourth quarter is unlikely to change that downward trend.Construction and acquisitions in the area are almost at a freeze, due to lack of capital. Some sales transactions have failed at the last minute, due to the inability to get financing. Lenders are not willing to fund vacancy ventures. Plus, to add to the challenge, currently 7.7 million square feet of construction is already underway in Washington, D.C., which is a record high for the area.However, while the office vacancy rate has remained at 8.7 percent in the District, asking rents actually climbed about 1 percent to $48.14 per square foot and in the surrounding metropolitan went up just a bit less than 1 percent reaching to $36.21 per square foot. Johnston explained that increased concessions that have crept into the market, actually show up as increased tenant improvement dollars, and the appearance of free rent into the deals.“The good news about D.C,” added Johnston “is that rents are stable. Washington is not following other parts of the country, for example in places like New York City, where you are already seeing rental rates starting to decrease. In D.C. rents we haven’t seen that yet. And I think that has a lot to do with the strength of the ownerships in the area. A majority of landlords are very well heeled financially and able to weather the storm. The big question is how long that storm will last.” How will the elections and the bailout affect the real estate leasing in the area? Typically, one will see a redistribution of wealth as it relates to the federal government in an election year. A democratic administration favors the more social health and human services types of issues, typically more beneficial to growth in the Maryland suburbs, whereas a republican administration tends to favor defense, and intelligence spending that would continue to favor the Virginia suburbs. The effect of the party in power tends to be kind of neutral in the District, according to Johnston.But what will definitely have an effect is the $700 billion bailout, depending on what kind of agency is formed. Related companies added jobs and servicing will be required for whatever agency is formed. When the Resolution Trust Corporation was set up in the early 90’s, there was a definite expansion. They took up about 600,000 feet, and after 9/11, the Department of Homeland Security, at a time when the tech bubble had just burst and when the majority of the country was not in a great economical shape, took significantly more space. Said Johnston, “Washington D.C. ended up the beneficiary in a backwards way. We will see if we are fortunate again.”