U.S. government a big commercial real estate player

By V. Dion Haynes
Washington Post Staff Writer
Monday, April 5, 2010

Evidence of the federal government's growing influence on Washington area commercial real estate is illustrated in big deals it is working on both sides of the table: auctioning a 127,000-square-foot Bethesda building previously occupied by the National Institutes of Health and moving to snatch up vast spaces in buildings on the private market that have been vacant for months.

The General Services Administration is seeking to unload the 10-story building that the NIH vacated in 2002 when it consolidated offices into other buildings in Bethesda. The recommended opening bid for the online auction, which runs from April 30 to July 2, is $14 million.

At the same time, federal leasing activity is expanding, according to Jones Lang LaSalle, the real estate firm representing the government. The government signed deals for 750,000 square feet of space in the District in the first quarter of 2010, compared with 670,000 square feet in the city for all of 2009.

The government is taking advantage of the abundance of space in newly constructed buildings going for bargain prices. As leases are up and the government embarks on renovation projects, it is moving agencies into offices in such areas as NoMa, a neighborhood near Capitol Hill that was up and coming before the financial crisis ratcheted down demand for space.

"This is an example of how the government is giving space back in one area while absorbing space in others," said Rob Hartley, research manager for CoStar Group, a real estate research firm based in Bethesda. "The government is an economic driver" in the commercial real estate market.

The GSA decided to sell the 46-year-old former NIH building at 7550 Wisconsin Ave. in Bethesda eight years ago. "We have a process we have to go through before we sell a building. We have to offer it to homeless housing, to local government," said Bob Peck, commissioner for the GSA's Public Buildings Service.

Bethesda's vacancy rate has more than doubled during the recession, to 14 percent in the first quarter of 2010 from 6.6 percent in the first quarter of 2007, according to Jones Lang LaSalle. It has lost Chevy Chase Bank's headquarters and Hanger Orthopedic Group, and will lose CoStar later this year when it relocates its headquarters to the District.

The Bethesda business district's high vacancy rate will probably push any new owner of the former NIH property to offer substantially reduced rents to draw tenants, experts said.

Expansion of the government's role in the nation's financial markets, increased defense spending and the new health-care law are driving its demand for more space. The government is expected to increase its Washington area payroll by as many as 100,000, according to Partnership for Public Service, a nonprofit group that helps the federal government find workers.

"The government spent 2009 planning for the growth. We're going to see the growth materialize in 2010," said Scott Homa, research manager for Jones Lang LaSalle.

The government also is overhauling many of its buildings, making them energy efficient. As a result, several agencies will need to lease space in the commercial market for five years or so during renovations.

For instance, real estate officials said, the GSA plans to lease about 300,000 square feet in the Constitution Square building in NoMa. Several defense agencies will likely need swing space when they begin making security upgrades to their buildings. The Securities and Exchange Commission is expanding next to its headquarters in NoMa, and the FDIC signed a lease in Arlington.

"This is a good time to expand leases," Peck said. "The rates are as low as they're going to be for a while."

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