Monday, April 16, 2007

Vacancy rates continued to creep up in the Washington area commercial office market for the first quarter of the year, but rents increased.

A report by Jones Lang LaSalle, a commercial real estate firm, said vacancy rates rose from 9.5 percent in the last quarter of 2006 to 9.6 percent in the first quarter of 2007.

"We expect vacancy to increase gradually throughout the remainder of 2007 and into 2008 due to the new space coming on to the market," the report said.

Despite the vacancy rate, rents are expected to increase about 3 percent this year, said John Sikaitis, research director for Jones Lang LaSalle.

Rents in the first quarter, which averaged $31.90 per square foot, were up about 4 percent from the first quarter last year, the result of steady demand in the market and the sale of CarrAmerica Realty and Equity Office Properties Trust portfolios, the report said.

The report noted that rents have risen between 5 and 25 percent at both Carr's portfolio, which was acquired by Tishman Speyer Properties, and at Equity Office properties, acquired by Beacon Capital Partners.

"While these increases appear significant, the majority of the above-mentioned buildings rents were well below market," the report said. Rents were also increased to pay for renovations.

The forecast was not cheery news for tenants, said Thomas Fulcher, executive vice president at Studley Inc., a commercial real estate brokerage firm that represents tenants.

"There's not a whole lot of relief coming down the pike for tenants," Fulcher said. "There's not a large block of space out there, and the large tenants are getting hit. And I think the highest-quality spaces continue to be scarce."

The suburban Maryland market was the big surprise of the first quarter, according to the report. "While not unheard of, it is rare that suburban Maryland displays the tightest market fundamentals for any given quarter," the report said.

-- Allan Lengel