Demand for Office Space Down Slightly

Despite this summer's credit-market turmoil and a virtual halt in new government leasing, commercial real estate in the Washington area continued to command higher rents.

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But with the local economic engine moderating and the construction pipeline delivering new buildings without any signed tenants, the once hot office market is also showing signs of a slowdown.

Businesses continue to look for space, particularly in the region's core markets inside the Beltway. But analysts said demand could decline if the woes of the debt market drag the economy into a recession next year.

"Given the uncertainty that the volatility in the credit markets has caused, the Washington, D.C., metro area is doing pretty well," said Robert Hartley, director of research for the Washington office of CB Richard Ellis, a commercial real estate services firm. "Investors are cautiously optimistic, and I think tenants are slightly wary and everyone is just going to wait and see."

The average vacancy rate for area office buildings was 10.2 percent at the close of the quarter ended Sept. 30, up from 9 percent during the comparable period last year, according to the Bethesda research firm CoStar. Average rents increased 6 percent, to $34.19 per square foot.

In the District, tenants continue to gravitate toward centrally located, high-quality office space, pushing rents up to $47.94 a square foot.

Big law and financial services firms remain hungry for room. Moving trucks arrived last month at the front of the newly completed Columbia Center, 1152 15th St. NW, bringing the law firm Orrick Herrington as the major tenant. Merrill Lynch signed a Columbia Center lease for 73,000 square feet.

Northern Virginia, traditionally reliant on government contracting and generally more susceptible to the ebbs and flows of the regional economy, continued to cool, with vacancies rising to 11.2 percent from 9.9 percent a year ago.

"We are now settling into what is now going to be the norm over the next several years," said Brian McVay, a broker for Cushman & Wakefield in Tysons Corner. "We won't be up to snuff to where we've been over the last four years."

Volkswagen of America agreed in September to occupy all of Tishman Speyer's Woodland Pointe building in Herndon. The CIA moved into the Culpepper Building in Tysons Corner. And the Aerospace Corp. took 60,000 square feet at the Penrose Center in Chantilly.

In Maryland, where the overall vacancy rate rose to 11.3 percent from 10 percent, the completion of Corporate Center I added nearly 200,000 square feet of space, while Raytheon signed up for 99,000 square feet at 5700 Rivertech Ct. in College Park.