Regional Market For Office Space Slumped in 2007

The Washington region's market for commercial real estate slowed notably in 2007, as the federal government cut back on leasing activity and an uncertain economy diminished the private sector's appetite for office space, brokers and analysts said.

About 23.4 million square feet of office space was leased in the Washington region during 2007, down 28.4 percent from 2006.

"Tenants are trying to figure out what is going on with the economy," said Robert Hartley, director of research for the firm CB Richard Ellis. "They are getting trigger shy."

The slowdown in both leasing and sales is troubling for the local commercial real estate industry as 129 buildings with 15.8 million square feet of space are under construction throughout the area. Much of the space is being built on speculation, according to real estate professionals.

In the District alone, traditionally the area's strongest market, only 18 percent of new office space under construction had been pre-leased by the end of 2007, a CB Richard Ellis survey found.

The region's average vacancy rate, which measures the amount of vacant space available to tenants in the market, climbed to double digits, 10.4 percent, for the first time in three years. The average vacancy rate was 9.4 percent at the end of 2006.

Average asking rent rose 5.6 percent, to $33.61 per square foot, by the end of 2007, according to CoStar, a real estate data firm based in Bethesda.

Some brokers said those figures could not be taken at face value because developers and building owners are offering more incentives, such as months of free rent and extra cash to build office interiors.

Technology company GTSI of Chantilly, for example, signed a deal for 104,000 square feet in a two-building complex in Herndon under construction by the developer Fifield of Chicago -- one of the largest deals in Northern Virginia during the fourth quarter.

Flourishes at the new building include a three-story atrium and a concierge service for workers, but the developer also threw in six months of free rent, valued at about $1.8 million, and included $7.29 million more to help GTSI build out the interior of its space, according to a filing with the Securities and Exchange Commission.

"This deal shows that the market is more competitive and aggressive than a year ago in terms of landlords chasing tenants," said Mark Roberts, a managing director with the Northern Virginia offices of Studley. "The coming 12 months will be a very competitive market."

In the District, one of the largest deals of the fourth quarter came in mid-October with the Chicago law firm Mayer Brown signing a deal to consolidate its Washington practice into a 12-story, corner office building being built at K and 20th streets NW. With about 200 lawyers, the firm plans to fill 243,000 square feet of the office building, leaving about 6,000 square feet for retail. Developer Vornado/Charles E. Smith is scheduled to open the building in the fall of 2009.

Other notable deals in the District included lobbying firm Bryan Cave signing for 88,000 square feet in an office building at 1155 F St. NW being built by the New York-based Tishman Speyer, according to CB Richard Ellis. The McKinsey & Co. consulting firm also took about 90,000 square feet at a building now under development by Texas-based Hines at 1200 19th Street NW, CB Richard Ellis said.

The Corporate Executive Board, a District-based company that advises businesses around the globe, will give the Northern Virginia market a boost in 2008 when the company moves into a new Rosslyn headquarters. But in the Reston and Herndon office markets, where 15 buildings totaling nearly 2.8 million square feet have risen since 2005, vacancy rates increased to 12.5 percent at the end of 2007 from 11 percent a year earlier.

In suburban Maryland, Comcast signed the largest lease of the fourth quarter, taking 92,000 square feet in a four-story building at 1301 McCormick Drive in Upper Marlboro.