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CoStar: Sustainability a factor in government leasing

By anthony guma,

Having celebrated Earth Day earlier this month, we thought it would be interesting to examine the impact that two different but related factors — cost and sustainability — are expected to play in attracting and retaining federal office tenants here in Washington.

Under a presidential executive order issued in October 2009, federal agencies are directed to reduce their overall environmental impact. As part of this initiative, at least 15 percent of the real estate owned or leased by federal agencies is required to meet government sustainability guidelines by 2015. The guidelines also make it more likely that federal tenants select office buildings with LEED or Energy Star certifications in order to meet this directive.

Of course, price will also play a major role. Rent for office space leased by most federal agencies (with certain exceptions) is legally capped at $49 a square foot for office buildings in the District, $38 a square foot in Northern Virginia and $34 a square foot in suburban Maryland.

New office buildings, which tend to account for the majority of energy-efficient LEED-certified buildings, also tend to have more expensive rents than older buildings. Given the pressures to reduce federal spending, it is unlikely that rent caps will be changed, which may preclude federal agencies from leasing high-quality space in some of the most desirable Metro-accessible office area, including the D.C.’s central business district, the the east end and the Rosslyn-Ballston corridor.

Under these two factors, it would appear areas with green buildings that offer available space at rent levels below the federal limits may be more likely to attract and retain federal tenants. Office areas offering less-expensive green space include NoMa, Capitol Riverfront and North Bethesda/Potomac

In fact, NoMa already has emerged as a hot spot for federal leasing in recent years, with the Justice Department, Education Department, Securities and Exchange Commission, IRS and the Department of Veteran Affairs all signing deals in excess of 150,000 square feet each since 2008. Also, a build-to-suit seeking LEED certification is under way for the Nuclear Regulatory Commission in North Bethesda near the White Flint Metro station.

On the other end of the spectrum, areas in which rents for green space typically exceed the federal rent cap, such as east end, central business district, Crystal City and the Rosslyn-Ballston corridor, may suffer if federal agencies shift from older properties in those locations to green buildings in cheaper areas in order to meet the sustainability levels called for under the executive order.

Anthony Guma is a research director with CoStar Group in Washington.

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