Regional Office Leasing Activity Lowest Since 1995

Demand for office space in the Washington region continued its decline in the first quarter, with leasing activity dropping to its lowest level in more than a decade.

Despite high-profile deals in the District's NoMa neighborhood in Northeast, with National Public Radio announcing it will build a new headquarters there and the Department of Justice leasing a building under construction, the Washington area had its slowest leasing period since the second quarter of 1995, according to data from CoStar, a real estate research firm in Bethesda.

Analysts said companies were increasingly wary of committing to space in the midst of a slow economy.

"Market activity is dramatically slow," said Robert Hartley, director of research for the Washington office of the commercial real estate firm CB Richard Ellis. "People are just not stepping up, and not a lot is going on. . . . You have had some really exciting news from a handful of groups, but it still continues to be pretty uncertain."

In the first three months of 2008, 6.3 million square feet of office space was leased, compared with 7 million in the first quarter of 2007. That decline of 10 percent comes as developers are finishing projects financed in the years of the boom. Some 131 buildings with about 14.4 million square feet of office space were under construction in the region at the end of the first quarter, according to CoStar. The downturn in leasing combined with the developments in the pipeline could create a glut, analysts said.

"What I am wondering is, with supply coming online so much faster than demand, who is really going to step up and take that space?" Hartley said. "There are still a lot of people talking about continued development, and that is a little worrisome. We really need to see a lot more activity from all sectors. We need to see more government leasing, we need to see private-sector leasing."

The Washington area's vacancy rate at the end of the first quarter was 11 percent, up from 9.8 percent at end of the first quarter in 2007.

While average asking rents in the region increased by 2.1 percent in the first quarter, to $33.95 per square foot from $33.24 per square foot at the end of 2007, analysts said concessions such as months of free rent and extra money to build out interiors are increasingly common components of deals, lowering the true amount tenants are paying for space.

"Even in D.C., where free rent was not offered in the last five years, a new deal has anywhere between three to 12 months of free rent," said Scott Homa, research manager for Jones Lang LaSalle.

More companies in the area are also choosing to stay put rather than risk leasing new space, according to a report released last week by Jones Lang LaSalle.

The report analyzed leases bigger than 20,000 square feet that were completed in the District and Northern Virginia in the first quarter. It showed that 42 percent of those deals were renewals, compared with a historical average of 27 percent.

The report cited the increased cost of building out interiors due to rising commodity prices as a big reason tenants are staying put. The uncertain economy was another factor. The net result has been a slower market, said John Sikaitis, director of research for Jones Lang LaSalle and a co-author of the report.