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Bailout Raises Demand For Square Feet in D.C.

By Dana Hedgpeth
Washington Post Staff Writer
Monday, November 10, 2008

No matter what the economic climate, greater Washington has long been able to rely on at least one major tenant to lease up space: the federal government. The coming year will likely be no different as federal rescue efforts add to the demand for new office space.

Between 2 million and 4 million square feet of office space could be gobbled up over the next three years as new regulatory agencies take shape and as lobby shops, accounting firms, consultants and asset managers position themselves to take advantage of government intervention efforts.

Several major real estate firms, including Jones Lang LaSalle and CB Richard Ellis, said they've been contacted by Treasury Department officials to help look for more office space to lease close to the department's headquarters on Pennsylvania Avenue.

Tim Hutchens, an executive vice president at CB Richard Ellis who runs a unit specializing in government leasing, said the Government Services Administration, the real estate arm of the federal government, is looking for 60,000 square feet of space in close proximity to the White House for Treasury's Troubled Asset Relief Program (TARP).

"They've contacted a number of brokerage firms including CBRE," he said.

Brookly McLaughlin, a Treasury spokeswoman, said the agency is "looking for additional office space to house some of the additional employees we're bringing on board."

In addition to Treasury, some brokers expect interest in office space around the Securities and Exchange Commission's offices near Union Station and the Federal Deposit Insurance Corp. in Rosslyn.

"There is a relationship between money and the number of bureaucrats," said Greg Leisch, chief executive of Delta Associates, a real estate analysis firm. "The bigger the budget of an agency, the more people they tend to have or contract out. If that holds true, the financial rescue bill will create substantial demand for workers and office space."

To be sure, it is not determined how much office space these new regulators and their affiliates will need or when they will need it.

Leisch based his estimates of the government's needs by looking at historical precedents.

After the SEC drew up the Sarbanes-Oxley accounting rules, around 1 million square feet of office space was leased by the agency and related companies, according to Delta Associates. Around 4 million square feet of space was leased in the region in the 1990s following the creation of the Resolution Trust Corp., which the U.S. government formed to help it liquidate assets after the savings and loan crisis.

"The government is taking on an increasingly big role in the marketplace," said Richard Bradley, executive director of the Downtown Business Improvement District, an industry trade group. "It's taking positions in community banks and sorting assets. Once the federal government steps in to regulate, all kinds of people will want to be around that marketplace.

"It means being near Pennsylvania Avenue becomes the place to be," Bradley said. "There's got to be more bodies brought in, more regulation, and that's going to create a demand for office space."

Not willing to wait, the local commercial real estate industry, already grappling with vacancy rates that are topping 10 percent, is setting the marketing wheels in motion.

"If Treasury is looking for space, we'd definitely be looking at what they need," said Bobby Schwartz, a managing director at Cassidy & Pinkard, an area commercial real estate firm. He's trying to lease 110,000 square feet of empty space in a newly renovated building at 901 15th St. NW, two blocks from the Treasury Department. "Landing the U.S. Treasury as a tenant is great for a landlord," he said. "We're looking at all deals."

Some prospective tenants -- law firms, accountants, contractors and the like -- are adopting a wait-and-see attitude.

Take Holland & Knight, a firm with 1,200 lawyers at 21 offices around the country. The firm expects to expand its lobbying practice this year with a new administration in the White House. And it has formed a group to go after work from TARP.

But Holland & Knight said it is not expecting to enlarge its office footprint in the D.C. area -- at least not in the next year -- as much as it has in the past.

"People are expanding conservatively," said David Silver, a lawyer who oversees the firm's real estate needs. "Now they're being more conservative than ever because we're in a more unpredictable environment than we've ever been."

Each year, the GSA has about 5 million square feet of space that come up for lease renewals. Next year, with the change in presidential administration, that figure is expected to double to 10 million square feet.

Among the big agencies looking for new space: the Department of Health and Human Services wants 935,000 square feet in Montgomery or Prince George's counties, the National Institutes of Health is looking for 575,000 square feet in Bethesda or Rockville, the Department of Agriculture is seeking 300,000 square feet to consolidate offices in several locations, and the FBI wants 180,000 square feet in the D.C. region, according to real estate brokers in the industry who are trying to lure the agencies or help them find space. "We're thinking -- and hoping -- that their velocity is picking up," said Hutchens of CB Richard Ellis.

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