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Optimism Rules as Vacancies Ebb

By Kenneth Bredemeier
Washington Post Staff Writer
Monday, August 9, 2004; Page E01

Last September, developer Meridian Group watched as vacancies swelled to a quarter of the 365,000 square feet of space in its 3 Bethesda Metro Center, a 15-story office building atop the Bethesda Metro station.

"We had a few tenants go bankrupt on us, and a few didn't renew," said Bruce S. Lane, executive vice president at Bethesda-based Meridian.

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But now leasing has picked up, cutting the vacant space by nearly half.

"We've seen a whole lot of new tenants being optimistic about expanding," Lane said. "Last year people were more pessimistic."

Office vacancies in suburban Maryland fell to 11.8 percent in the second quarter from 12.6 percent in the second quarter of 2003. That is close to the average for the region, which as 11.6 percent, said the real estate research firm CoStar Group Inc. of Bethesda.

But the strength of its office market is at the same time suburban Maryland's weakness. While it didn't suffer as much as Northern Virginia during the economic downturn of the last few years, Maryland's stability means it has less upside than the much bigger Virginia market across the Potomac. Northern Virginia's vacancy rate is usually lower than suburban Maryland's.

Even though it was 14 percent in the second quarter -- more than 2 percentage points higher than suburban Maryland's -- Virginia's vacancy rate is dropping just as fast. And Virginia's office market seems more likely to boom in the next year, brokers and developers said.

"Maryland is holding its own, but it looks like Northern Virginia is starting to see more activity," said David A. DiNardo, a senior vice president at Grubb & Ellis Co. "In Maryland, we've got some submarkets that are picking up, like in Greenbelt and Lanham. But then along the Interstate 270 corridor in Montgomery there's not as much happening as people would like."

Suburban Maryland's mix of businesses -- civilian government institutions such as the National Institutes of Health and the generally smaller contractors that serve them -- make a relatively more steady economy and a stable office market.

In Northern Virginia the tech crash that began in 2001 wreaked havoc on information technology companies, and the telecom bust put thousands of people out of work at phone companies such as WorldCom Inc., sucking tenants from buildings all over the area.

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