Washington’s office leasing market had big drop in first quarter

Washington’s office leasing market has slipped from leading the real estate industry’s recovery nationwide to being a yoke around its neck.

By the end of the first quarter this year, Washington office users occupied nearly 1.5 million square feet less than they did at the start, the biggest drop of any of the country’s 45 top office markets, according to Jones Lang LaSalle.

Over the past year local leasing activity — which fuels the brokerage and research firms — has also fallen off. Compared with the first quarter of last year, the Washington area in the first quarter of 2012 showed a 65 percent drop in leasing activity, from 10.7 to 3.7 million square feet. The next closest drop by percentage was in New York City, where leasing volume fell 42 percent when comparing the first quarters of 2011 and 2012.

Researchers say the collapse is largely because of political gridlock on Capitol Hill. Leasing by the General Services Administration, which manages real estate decisions for federal agencies, had buoyed Washington real estate and the regional economy shortly after the recession but has now slowed considerably. The GSA has since landed in the center of a scandal because of a lavish 2010 conference for 300 employees that cost $823,000. GSA Administrator Martha Johnson resigned and Public Buildings Commissioner Bob Peck was fired; Dan Tangherlini and Linda Chero have replaced them on an acting basis.

“Government leasing has essentially been at a standstill since November of last year, the mid-terms. Once Republicans took control of the house, nothing from a legislative standpoint has made much progress on the Hill,” said John Sikaitis, director of research at Jones Lang LaSalle.

The GSA’s woes and the upcoming November elections have caused private sector firms to put off real estate decisions, Sikaitis said. Some companies are waiting to see whether health care reform, currently being reviewed by the Supreme Court, will be fully implemented. Others are waiting on proposed Defense Department cuts or on whether Dodd-Frank legislation regulating the financial industry will be enforced.

Government contractors, Sikaitis said, are shedding space in the meantime.

“They don’t know how to plan for the future business prospects over the next 24, 36 months,” he said.

Waiting on Dodd-Frank has also contributed to leasing paralysis in the New York market, where tenants leased only 5.8 million square feet in the first quarter, down from 10 million the year before. Along with Washington, New York has gone from a leader to a laggard. “The country overall saw about a 25 percent decline in [first quarter] leasing levels. If you strip those two out, it’s only about 8 percent,” Sikaitis said.

Jonathan O'Connell has covered land use and development in the Washington area for more than five years.
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