Rents Rise With Falling Vacancies

Job Growth Drives Office Demand

Office vacancy rates fell and rents rose in the Washington area last year, as law firms gobbled up space in the District's downtown, government contractors added jobs in Northern Virginia and federal agencies signed some of the largest deals for space in Maryland.

For the region, the vacancy rate was 9.1 percent at the end of last year, down from 10.6 percent at the end of 2004, according to CoStar Group Inc., a Bethesda research firm. The average asking price for office rentals rose to $30.49 per square foot from $29.60.

The area benefited from continued strong job growth, as total space leased grew by 2.4 million square feet last year, double the increase in 2004. The region remains one of the strongest in the country. For example, vacancy rates for the year ended at 13.8 percent in Atlanta and 16.1 percent in Chicago.

In the District, the vacancy rate was at 7.6 percent at the end of last year compared with 8.1 percent in 2004. Asking rental rates edged up to $40.89 per square foot from $40.05.

"We've seen just a slow steady edging up of rental rates and a slow edging down of vacancy rates," Gregg Otten, an assistant research manager at CoStar, said of the District's real estate market. "There's nothing jumping off the page making you scratch your chin."

Among the biggest leases signed last year in the city: Chemonics International, a development consulting firm, took 250,000 square feet at 1717 H St. NW; and LeBoeuf, Lamb, Greene & MacRae LLP agreed to take roughly 113,000 square feet at 1101 New York Ave. NW, which is under construction and expected to be completed in 2007. The Department of Homeland Security leased more than 700,000 square feet of space last year in the District alone.

In Southwest and Southeast Washington, the vacancy rate jumped to 9.6 percent from 5.2 percent a year earlier, according to commercial services firm Cassidy & Pinkard. About 750,000 square feet of new space, about the size of 13 football fields, sat empty.

Some developers and brokers said they are worried that there is close to 7.1 million square feet of space -- only half of it pre-leased -- under construction in the District, mainly in Southwest, Southeast and the East End. The space is coming on the market at a time when some tenants are looking to the Maryland and Virginia suburbs for cheaper rents.

There is also concern among developers and brokers that the recent move by the federal government's real estate arm -- the General Services Administration -- to postpone action on roughly 1 million square feet of space it was planning to lease could leave office buildings that were counting on a federal tenant empty-handed.

"GSA is the primary driver in the market, and obviously its slowdown in demand is something you're going to feel in the market," said Sigrid Zialcita, research director at real estate services firm Cushman & Wakefield Inc.

The price of buildings in the District continues to be among the highest per square foot in the country. Overseas investors, pension funds and real estate investment trusts flush with cash to spend are buying D.C. property.

The average price for an office building in the District was $428 per square foot last year -- a 30 percent increase from 2004, according to Cushman & Wakefield. The average price for office space in New York and San Francisco -- two of the most expensive real estate markets in the country -- was $400 and $314 per square foot, respectively.