Local Office Vacancies Soar, Driving Down Rent

Rate Hits 10.2 Percent in D.C.; Tops 13 Percent in Virginia, Maryland Suburbs

The office vacancy rates in the District, Northern Virginia and suburban Maryland rose substantially in the second quarter, forcing building owners to push down rents to fill empty space, according to an analysis released yesterday.

The District, which benefited for years from a building boom, hit a double-digit vacancy rate for the first time since 1997, according to the study by CB Richard Ellis. Real estate experts attributed the soaring rates to declining demand from companies seeking new space and a growing inventory of newly constructed properties entering the market.

Numerous Washington-area firms have been cutting staff and putting off expansions to save money, postponing or canceling plans to lease bigger quarters. Excess space is rising with some companies contracting and others closing offices and going out of business. While several new buildings are expected to be completed in coming months, developers have drastically curtailed future construction projects.

The result is that the vacancy rate rose to 10.2 percent in the second quarter from 8.5 percent in the first quarter in the District, to 13.9 percent from 12.9 percent in Northern Virginia; and to 13.9 percent from 13.1 percent in suburban Maryland.

"This is a symptom of the economic condition we're in when companies start to downsize," said Ernie Jarvis, managing director of the CB Richard Ellis D.C. office.

Still, the region's vacancy rate is well below the national second-quarter average of 17 percent projected by commercial real estate firm Grubb & Ellis.

According to the report, rental rates dropped to $48.59 a square foot from $49.13 in the District; $29.19 from $29.79 in Northern Virginia; and $26.53 from $27.30 in suburban Maryland.

"We're working as advocates for our clients to reduce rates," said Mary Lynch, vice president for property management at Akridge, which manages 35 commercial properties in the region. "At our Homer Building, we've reduced energy costs by 34 percent," a savings that is passed on to tenants.

The District appears to be best poised to emerge from the commercial real estate slump the quickest, Jarvis said. As contractors gear up to take advantage of work coming their way through the Obama administration's stimulus funds, building owners in the city are receiving more leasing inquiries. In the past 90 days, he said, at least 10 contractors working with the Department of Transportation have begun negotiations with owners of properties in the Capitol Riverfront area.

"We're seeing a number of large-scale DOT contractors seek real estate office space within proximity to the DOT headquarters" near Nationals Park, said Jarvis, who declined to disclose the names of the companies because they are still negotiating the leasing deals.

Nicola Y. Whiteman, vice president of government affairs at the Apartment and Office Building Association of Metropolitan Washington, said buildings in the city's central business district in general are experiencing much lower vacancy rates than buildings in areas such as NOMA north of Massachusetts Avenue. Brad Flickinger, managing director of CB Richard Ellis's suburban Maryland and Northern Virginia offices, said that in general, areas within the Beltway are experiencing lower vacancy rates than those farther out.