Commercial Rents Keep Rising

2nd-Quarter Vacancy Rates Tighten as Job Growth Continues

Vacancy rates dropped slightly and rents rose in the Washington area's commercial office market for the second quarter of this year, as one of the nation's strongest office markets continued to benefit from job growth in government contracting, law and service-related industries.

The area's vacancy rate for the quarter was 9.3 percent, down from 9.9 percent during the comparable period a year earlier, according to Bethesda-based research firm CoStar Group Inc. Asking rents were $31.11 a square foot, up from $29.98.

Most major markets around the country have had declining vacancy rates, but New York and the Washington region are among the tightest markets, researchers said. The vacancy rate in New York for the quarter was 6.7 percent, and rents were $45.42 a square foot. In Atlanta, which is more typical, the vacancy rate was 14.4 percent and rents were $18.95.

As always, there were fluctuations within the Washington area.

In the District, the vacancy rate was 7.6 percent in the quarter, down slightly from 7.9 percent a year earlier. Rents rose to $42.16 from $40.76.

In the first half of the year, 1.9 million square feet of space was leased in the District. That exceeds the average 1.4 million square feet of space that is leased annually, according to real estate services firm Jones Lang LaSalle Inc.

The federal government, which had not been leasing large chunks of space for the past few quarters, signed three big deals, totaling 280,000 square feet at Patriots Plaza on E Street SW, a building that had been nearly vacant since it was built last year. The Justice Department is consolidating to offices at 450 Fifth St. NW, the former home of the Securities and Exchange Commission.

"There was a worry before this flurry of government activity that spaces wouldn't fill up," said John Sikaitis, research director at Jones Lang LaSalle. "Now that's being dissipated."

There was also strong demand from service-related businesses and law firms.

Of the 5.1 million square feet of space under construction in the District, 45 percent is pre-leased, according to Cushman & Wakefield, a commercial real estate firm. That's a sign, brokers and developers say, of continued demand in the market.

"Big tenants now have options for new buildings, where a year-and-a-half ago there weren't a lot of options like that," said Tom Fulcher, executive vice president at brokerage Julien J. Studley who represents tenants looking for space. "You feel more comfortable that there's a lot out there. The pressure has been released of having to continue to pay more and more rent."

So landlords of new buildings may find it difficult to demand rents high enough to compensate for skyrocketing construction costs.