D.C. office rents top those in New York City

By V. Dion Haynes
Capital Business Staff Writer
Monday, October 18, 2010; 2:35 AM

While the commercial office market is in a slump across most of the country, owners of District buildings are finding this year they can command higher rents from tenants.

Asking rents at two dozen buildings rose sharply from the third quarter of last year to this year, according to CoStar Group, a real estate data firm.

Several, including America Square in Northwest Washington, the Victor Building on 9th Street NW and the CNN Building near Union Station, experienced double-digit increases, CoStar said.

The rise has been so dramatic that for the first time in five years, the average asking rent in D.C. is higher than in New York City, according to CoStar and a new report of third-quarter activity by commercial real estate firm Cassidy Turley.

Metropolitan Washington is benefiting from the expanding federal government, whose demand for more space in commercial buildings is helping to boost prices.

The government's appetite for space in the private market is illustrated by a recent transaction involving the Securities and Exchange Commission, which recently agreed to lease about 1 million square feet in the newly renovated Constitution Center in Southwest. Other agencies that recently acquired commercial space include the Department of Defense Medical Command, 655,000 square feet in Fairfax County; and the Department of Veterans Affairs, 284,974 square feet in downtown Washington.

To be sure, office buildings in midtown Manhattan are still commanding top dollar, many surpassing $100 a square foot. Still, average asking rents in the District in the third quarter soared nearly 4 percent to $48.96 a square foot, according to Cassidy Turley, compared with $48.53 in New York City.

"During the recent real estate boom, rents in New York were an average of $15-20 higher [a square foot] than in D.C.," said Kevin Thorpe, Cassidy Turley's chief economist.

"The federal government has created a smooth but slow rise in rents [in D.C.], as opposed to New York's roller coaster," Thorpe added. Rents in New York "surged during the boom, but the ride down was much steeper during the recession."

Average asking rent is what landlords charge tenants, not counting givebacks such as the cost of renovating the space.

Unlike other parts of the country, the Washington office market is also fueled by a growing job market. The region has the lowest unemployment rate, 6.2 percent in August, among major metropolitan areas in the country.

Metropolitan Washington has added a net of 20,000 public and private sector jobs during the past year, according to the government. Growing payrolls often prompt employers to look for more space.

Still, some experts say several looming factors could put the brakes on the sector's recovery in the region.

The Obama administration's plan to shift some Defense Department work in-house could force some contracting firms currently doing the work to downsize. An impending change in accounting rules to require companies to show leases as debt on their balance sheet could prompt them to rent smaller spaces for shorter terms.

Moreover, the government is starting to scale back hiring.

"New hiring has gone down and will continue to go down with the [government's] focus on reducing spending," said Tim McManus, vice president for education and outreach at the Partnership for Public Service, which helps the government find workers.

Across the country, larger markets, including the District, New York, San Francisco and Boston, fared better than secondary markets, according to Cassidy Turley. Only 21 of the 80 markets the firm follows showed increases from the second to the third quarter.

The national average for asking rents in the third quarter was $21.25 a square foot, less than half of D.C.'s. While the average asking rent rose 4 percent in D.C., it dropped 1.8 percent nationally.

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