Commercial Real Estate, Come On Down

But in the future, if the only financing available is for interest and principal loans at 75 percent of the market value, with an interest rate a percentage point higher than before, the price that investors would be willing to pay for a building, given the same market conditions, could be 20 to 25 percent less.

Unfortunately, market conditions are not the same as six months ago.

As the Federal Reserve acknowledged last week, the turmoil in financial markets is likely to cause a slowdown in economic growth and raise the risk of recession.

And in markets like Washington, the pace at which buildings have been leasing has slowed even as a large number of new buildings are about to come on line.

According to the latest data from CoStar Group, for example, office vacancy rates along the I-270 corridor have risen to 11.6 percent from a low of 9.7 percent a year ago. Buildings under construction will add another 5 percent to supply over the next two years, with roughly a third of it pre-leased.

The market in the Dulles corridor is also beginning to weaken. There, the vacancy rate is up to 14.2 percent from 13 percent in the past year, with nearly 4 million square feet of space under construction, equal to about 8 percent of current supply. After four years of steady growth, rents are beginning to flatten out.

For the moment, the District's office market remains strong, even as developers struggle under a glut of unsold condos. But it's hard to imagine that the market will be able to absorb all the exciting development that is now slated to rise out of the ground over the next five years, from Union Station to the old convention center site and areas along the Potomac and Anacostia waterfronts.

Over the past year, local real estate types have tended to dismiss suggestions that the market was overheating. Their story was that the Washington economy is relatively immune to downturns, and a global savings glut would keep interest rates low. Moreover, with a large number of low-rent leases set to expire in the next couple of years, they were counting on big spikes in rental income.

However convincing that story was six months ago, it sounds a lot less convincing today.

Steven Pearlstein can be reached atpearlsteins@washpost.com.