To see the gaggle of construction cranes towering on 10-story legs over downtown Washington, you'd think the District's office boom was continuing unabated.
While new buildings continue to rise, office rents are falling for the first time in nearly a decade.
How fast rents are coming down and how far they will slip below last year's peak is impossible to calculate at this point. Landlords definitely aren't advertising their mark-downs and tenants, too, are reluctant to talk about the leases they are signing.
But whether you ask a big national office realty firm like Julian J. Studley Inc. or a local leasing specialist like C. Duke Brannock Associates, you'll get similar assessments of the situation.
"Negotiation is the name of the game in the District of Columbia," said the Studley firm in its latest report on big city office markets.
Observes Brannock: "The price war in the office-space market has started."
Commercial rents are falling for the obvious reason that the vacancy rate is rising. But the number of offices that are empty now is nothing compared to the space that is going to be available as the new buildings now under construction are completed.
Renters can see that glut coming and are beating landlords over the head with the threat of new competition. A few months of recession has produced a 180-degree turnaround in rental trends. It used to be that every time a major new building opened, it set another new high in office rentals. Now every new building piles more pressure on property owners to accept a lower rate.
On the condition that neither landlord nor tenant be identified, office leasing experts offered these examples of what's happening:
* A major law firm that signed a lease some time ago to move into a prestigous downtown corner threatened to walk out on the $29-a-square-foot lease. "We can get a better deal -- in just as hot a location," the lawyers told the developer. To keep the big client, the developer agreed to pay for interior finishing and offered allowances for other accouterments that are normally the tenant's responsibility. The discounts dropped the effective rent per foot by better than 10 percent, from $29 a year to $26.
* A Georgetown office-building owner agreed to waive the first six months' rent on a 10-year lease at $20 a foot, and threw in $25,000 worth of extras to solidify the deal.
* A landlord scratching for tenants to fill the last two floors of a new building in the old downtown area has slashed the base rent for the first five years of a long-term lease. Barely three months ago comparable space was worth $20 to $22 a foot. Now you can have the two floors for $15 a foot.
Most people familiar with the local office market contend the situation is due not to overbuilding by zealous developers, but to a sudden, stunning drop in the demand for space. Washington is "underconsumed rather than overbuilt," said Brannock.
But the extraordinary number of new buildings now under construction are likely to be hard to swallow unless demand makes a roaring comeback.
The threat of overbuilding is greatest in the old downtown -- the area east of 15th Street NW -- where more than a dozen buildings are in various stages of completion. With everything east of 15th Street officed-up, the wave of development has been rolling eastward for the last couple of years, threatening to transform 14th Street from the sleaziest strip in town to the slickest section of new offices since K Street was redeveloped.
Among the first buildings on the new frontier of downtown are two just south of Thomas Circle on Vermont Avenue that are conspicuously unfilled. The ladies of the evening are doing more business on that block than the leasing agents.
Also yearning for occupants are the recently closed-in office block at 14th and K and the structure at 13th and L that's a little farther away from completion. Several other buildings that are a year or so away from completion would--in better days--have signed up several major tenants by now, but not in this market.
Ironically, developers of many downtown office buildings have been hurrying to get them finished, figuring that the sooner the structure is done, the sooner the owners can start collecting rents.
The high interest charges on construction loans gave the developers an added incentive to get the buildings built as quickly as possible. With interest rates dropping, the cost of construction financing is coming down and that's providing some relief to developers.
With the office market soft and interest rates softening, the pressure to hurry construction is off. Several big office projects are slipping backward on the completion timetable, as developers stall for time, hoping the market will improve before they have to sign leases.