Office construction is expected to drop by 20 percent this year in most of the Washington area after five years of nonstop commercial building, according to real estate analysts and economists.
The slowdown, which has been brought on by overbuilding of commercial space in the local market, will give developers a chance to rent some of their empty space. But vacancy rates will remain high as office buildings that were started in the past two years become ready for occupancy during 1988.
Despite the oversupply of space, however, the area's commercial real estate market continues to be one of the healthiest in the nation. Vacancy rates in the District and the suburbs are lower than the national average.
Land prices are rising in downtown Washington to as much as $1,500 a square foot for prime locations, as the supply of available property dwindles, analysts said. Rents are going up in new buildings in desirable locations after several years of a buyers' market created by the space glut.
The construction decline follows a national trend that began two years ago, according to economist Michael Sumichrast. Some of the biggest drops in building, he said, are expected in Los Angeles, San Francisco, Seattle, Dallas and Denver.
The District's vacancy rate could drop back to a single-digit level from an estimated 10 percent now, but may rise again toward the end of the year as buildings are completed.
Office building vacancies in Northern Virginia are expected to rise, despite a decline in construction this year, according to a 1988 forecast prepared by Real Estate Research Corp. The Virginia suburbs ended 1987 with a vacancy rate of 15 percent, a rate that will rise to 17 percent this year, according to the forecast.
Meanwhile, construction in suburban Maryland will plummet by 88 percent this year, as the vacancy rate holds steady at the 1987 rate of about 10 percent, said the research firm. The causes are overbuilding and antigrowth sentiment that has curbed development, the report said.
Metropolitan area landlords are expected to sign leases on about 13 million square feet of space during 1988, according to estimates by the D.C. Association of Realtors. "However, a lot more space is coming on line" to be added to the already vacant offices, said David Strachan, executive director of the realtors' association. If construction were to halt altogether, "I suspect we have enough space to satisfy demand for two or three years. But the building goes on," he said.
About 6.1 million square feet of space was completed in the District in 1987, and another 3.2 million feet will be ready for occupancy this year, according to a forecast this week by Coldwell Banker Commercial Real Estate Services.
More than 6.8 million square feet of space will be completed this year in Northern Virginia, down from 7.3 million last year. In the Maryland suburbs, 3.2 million square feet of space is to be completed this year, down from 4.3 million in 1987.
Developers signed new leases on about 6 million square feet in Northern Virginia in 1987, but are not expected to match that level in 1988. Coldwell Banker believes that the Northern Virginia vacancy rate could go as high as 20 percent before the end of the year.
The most vacancies are in the Herndon and Tysons Corner areas, said Jack Schneider, manager of Julien J. Studley Inc.'s McLean office. He said 19.8 million square feet of space is available in Northern Virginia. Landlords will rent this space during the next 18 to 24 months by "offering tremendous concessions," Schneider said, typically a year's free rent and a complete interior finishing at no cost to the tenants.
In Maryland, 3.8 million square feet of space was leased last year, and that absorption rate also is expected to drop slightly this year. Coldwell Banker analysts say the Interstate-270 corridor in Montgomery County is doing particularly well, both in building completions and in filling new space.
The federal government, which already rents 30.2 million square feet of office space in the metropolitan area, plans to lease another 3 million square feet during 1988, according to Dale Bruce, a General Services Administration spokesman. In addition, leases on about 2.5 million square square feet of offices occupied by federal agencies will expire this year and new leases must be signed. The GSA now is required to ask for competitive bids when a rental agreement expires, rather than renewing an old lease or renegotiating its terms.
From 1989 through 1993, leases will expire on approximately 18 million additional square feet of government space. The GSA, working to consolidate federal agencies, has leased big blocks of space and, in some cases, entire buildings. By the end of 1988, the agency hopes to gather Navy workers now scattered in several Crystal City buildings into 2.7 million square feet in one location. Similar consolidations are underway or planned, Bruce said. GSA plans to put federal workers into less space per person, but make it higher-quality space, according to Bruce.
The government now requires that new office space leased or purchased for federal agencies be near Metro subway stops and have child care and physical fitness centers available, he said.
Federal leasing decisions in recent years have had a major impact on the Washington office market. Without the GSA's leasing activity in the past few years "there would be some real bloody noses" among developers, said Justin Hinders, a commercial leasing agent and investor.
"The government is taking first-class properties and paying competitive prices, " said William C. Smith, an executive of the John Akridge Co., a large local developer. The 3 million feet of new space GSA plans to lease this year would "significantly tighten" the downtown Washington market if the agency decides on properties in that area, Smith said.
Decisions have been made for about one-third of the 3 million feet of new space GSA plans to lease this year, with about 500,000 to be rented in the District and about 500,000 going in the suburbs, Bruce said. Bruce said he could not give details because leases have not yet been signed.
Some commercial leasing agents said one segment of the local commercial real estate market already is tightening. There is an "actual shortage of first class space ready for 1988 occupancy," said Stephen B. Goldstein, Washington senior vice president for real estate broker Julien J. Studley Inc. The shortage comes in large blocks of new downtown space because much of the empty office space in the District is in smaller blocks and in areas outside the downtown business district, such as upper Wisconsin and Connecticut avenues and Southwest Washington, he said.
The increasing demand and higher land costs are pushing up rents downtown, in the booming market east of 15th Street that tenants were avoiding only a few years ago and in the older central business district to the west, Goldstein said. Owners are asking for $33 to $40 a square foot, and getting from $33 to $37, but are continuing to offer generous "concession packages" they used to use to attract tenants when more space was available and many did not want to move east of 15th Street.
Two years of rent-free occupancy and a generous cash contribution toward the interior construction and decoration of offices are the most common incentives offered to prospective tenants, Goldstein said. Rents will continue to rise, but concessions will remain in most cases because leases showing high rents are important to landlords as a basis for borrowing money, he said.