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Vacant Office Space Soars; Competition for Tenants Grows

Constitution Center, which boasts 1.4 million square feet, is to be completed in November but has no tenants, according to Delta Associates.
Constitution Center, which boasts 1.4 million square feet, is to be completed in November but has no tenants, according to Delta Associates. (By Jonathan Newton -- The Washington Post)
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By V. Dion Haynes
Washington Post Staff Writer
Monday, September 14, 2009

With amenities such as blast-resistant curtains, an environmentally friendly heating-and-cooling system and sweeping views of city attractions, Constitution Center in Southwest Washington seems the ideal place for a federal agency or security-minded company to locate. So says an online sales pitch.

But property managers for the 1.4 million-square-foot building, which is scheduled to be completed in November, have yet to land any tenants, according to data compiled by Delta Associates, an Alexandria-based real estate and economic research firm.

Constitution Center is just one of several dozen existing, newly constructed or soon-to-be-completed office buildings in the Washington region that had vacancy rates in the 80 to 100 percent range as of midyear.

A lack of tenants in the late stages of a project was rare during boom times but is becoming more typical now, commercial real estate experts say, as businesses retrench operations and reduce their need for additional office space. In June, according to Delta's analysis, the amount of vacant space in the region soared nearly 24 percent, to 47 million square feet from 38 million during the same month a year earlier.

"We have 14 million square feet [of office space] vacant," said Jerry Gordon, president and chief executive of the Fairfax County Economic Development Authority. Gordon said that numerous agencies have cut their budgets because the county is losing tax revenue as housing values decline. "We need more revenue from the commercial side of real estate" to make up for shortfalls on the residential side, he said. "That revenue comes from new construction, which won't happen until we fill the old space."

The seeds for the current glut were planted after the terrorist attacks of Sept. 11, 2001, when commercial real estate collapsed in New York. Investors began pouring money into commercial real estate in the Washington area, where the economy was growing as the government ramped up its war on terror.

But many buildings that were financed through the subsequent boom are entering the market now, during the worst economic slowdown since the Great Depression.

"The ramp up in supply delivered in 2007, 2008 and 2009 [happened] when there was a downturn in demand. The combination of the two created the problem," said Gregory H. Leisch, chief executive of Delta Associates. "It's going to get worse before it gets better."

Government May Help

Throughout the region, gleaming new office towers have sprouted, but with few or no tenants: a 275,000-square-foot building at 55 M Street SE in the emerging Capitol Riverfront area of the District; the 230,700-square-foot Piedmont Pointe II and 208,000 Redlands projects in Montgomery County; and the 215,000-square-foot Parkridge Center 6 and 178,000-square-foot Dulles View North in Fairfax County. Many other projects have been put on hold.

As bad as it is, experts say it could be much worse without the federal government and contracting firms, two sectors that have been adding jobs. The region has the fourth-lowest vacancy rates in the nation among other metropolitan areas.

Still, the remaining two-thirds of the region's economy not associated with federal government spending faltered -- law offices cut staff, nonprofits and trade associations lost funding, and corporations experienced sales slumps -- forcing many firms to cancel expansion plans or reduce the space they already occupied.

With many commercial real estate loans coming due soon, some foresee trouble for the region's properties. "We may see the commercial version of the subprime situation," said Steve Silverman, director of the Montgomery County Department of Economic Development.


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