Land for office buildings is a hot commodity in D.C.

As a colleague recently pointed out, you can’t build more land, but you need land to build more. That certainly has proven to be the case in the District, where the availability of very few undeveloped sites, coupled with strong demand for new office space, provided an opportunity in 2012 for owners of lower-quality offices to unload their properties to enterprising developers eager for tear-down opportunities.

Indeed, while total office sales volume of about $3.5 billion in 2012 was down by 11 percent from 2011 levels in D.C. proper, the $200 million spent on office properties purchased for redevelopment was the highest on record.

It should come as no surprise that more Class B office owners are ready to sell. At the end of January, more than 4.8 million square feet of average-quality office space stood vacant in the District, and current vacancy rates of 9 percent are nearly double the low of 5.3 percent in 2006. Although the vacancy rate for Class A properties is even higher, at 10.5 percent, this upper echelon of properties actually lowered rates since peaking in late 2009, even as more than 4 million square feet of new Class A space was added to the market.

Replacing unwanted or obsolete office space with new office space supports the thesis that land, which is becoming increasingly precious in the District, should be used at its highest and best use. And removing old space from the inventory before new space is added helps keep the supply and demand balance in better check during a time when most leasing activity is a result of musical chairs among tenants, rather than net new demand.

What is surprising are the eye-popping price tags for some of these sales. MRP Realty paid more than $33 million to pick up the 0.3 acre below the now-demolished building at 624 Ninth St. NW, at a cost equivalent of $113 million per acre. A joint venture between Mitsui Fudosan America and Akridge paid $43.7 million, or nearly as rich a rate, for the former National Restaurant Association headquarters site at 1200 17th St. NW. The existing building, which will be razed to make way for a new 170,000-square-foot, LEED-certified asset, sits on 0.4 acres, which puts the price per acre at $112 million.

Whether these purchases ultimately yield the kind of return buyers are seeking, they do indicate how hot a commodity a well-located office site in the District has become in the current market.

Erica Champion is a real estate economist with CoStar Group in Washington.

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