Office Vacancies Creep Upward

Supply Outpaced Demand in Some Areas

Vacancy rates inched upward in the Washington area commercial office market for the fourth straight quarter, ending in December, as new buildings opened and demand eased slightly.

Experts said the market overall remained strong, propelled by a steady infusion of new jobs and the federal government's continued hunger for space. But some raised cautionary notes about such areas as Capitol Hill and Northern Virginia's Dulles corridor, where vacancy rates top the region's average, and large chunks of additional office space are under construction and about to come on the market.

"The supply is ahead of the demand in those markets. I think over time it will be absorbed. I think it just may take more time than people hope," said Tom Fulcher, executive vice president at Studley Inc., a commercial real estate brokerage that represents tenants.

Overall, the Washington office market, which includes the District, suburban Maryland and Northern Virginia, recorded a vacancy rate of 9.6 percent in the final quarter of 2006, compared with 9.3 percent in the third quarter, 9.2 percent in the second and 8.9 percent in the first quarter, according to Bethesda-based research firm CoStar Group.

Sigrid Zialcita, research director at Cushman & Wakefield, a commercial real estate firm, said the creeping vacancy rate in 2006 represented a normal fluctuation in the market, and was probably caused by the influx of new buildings and "a moderation of demand for office space."

"It's no cause for concern, it's a very healthy market," Zialcita said. "The market is one of the healthiest in the U.S."

During the fourth quarter, 22 buildings totaling 3.5 million square feet were completed in the region, compared with 33 buildings totaling 2.6 million square feet in the previous quarter, according to the CoStar report. The bulk of new buildings were in the District and Northern Virginia.

The change in occupied space -- known as the net absorption rate, a measure of the market's health -- grew in the fourth quarter from the third. Tenants occupied 1.7 million more square feet of space in existing buildings, up from 1.4 million, according to the CoStar report.

The District had a positive net absorption rate of more than 1 million square feet in the fourth quarter, compared with a positive rate of 926,267 square feet in Northern Virginia and a negative figure of 219,560 square feet in suburban Maryland, which is normally considered the softest of the three markets.

The fourth quarter had its share of buying, selling and general movement.

Giant Food vacated 192,000 square feet of office space in the Landover area; United Airlines moved out of 120,000 square feet in the Route 28 corridor in Fairfax County; and FEMA moved out of 121,404 square feet in Hyattsville in Prince George's County.

On the up side, Northrop Grumman, the global defense and technology company, moved into 242,000 square feet in the Dulles corridor; National Cable and Telecommunications Association moved into 52,911 square feet in the District; and the law firm of Venable, Baetjer, Howard & Civiletti took over 38,200 square feet in Tysons Corner.