More than half of the new office space completed in the Washington area this year remained unoccupied at the end of last month, helping drive the office vacancy rate to 16.1 percent from 13.4 percent a year ago, according to Cor/Net, a Rockville market research firm.
The rising vacancy rate is yet another reflection of distress in the local economy and the commercial real estate industry. After years of overbuilding, the real estate industry is being wracked by layoffs, foreclosures and bankruptcies, and its deterioration has weakened many banks that financed the development boom.
As recession gripped the local economy this year, sapping demand for office space, developers still were putting the finishing touches on more than 200 buildings that they began to build when the business outlook was brighter.
The supply of office space in the area has grown by 18.9 million square feet during 1990 -- almost twice the total office space in Alexandria -- but only 45 percent of the new office space has been leased, Cor/Net said.
Despite a banner year for the volume of office leasing in the District of Columbia, the D.C. vacancy rate climbed to 11.1 percent from 8.4 percent. Vacancy rates rose to 17.7 percent from 15.4 percent in the Maryland suburbs and to 18.6 percent from 15.6 percent in Northern Virginia, Cor/Net reported.
If office leasing were to continue at the pace of the past year, and if no more buildings were added to the market, it would take about three years to fill all the vacant office space in the Washington area, Cor/Net said.
"It's going to be a long, slow recovery," said Randall W. Byrnes, an executive vice president in the Northern Virginia office of Spaulding & Slye, a national real estate firm based in Boston. Some real estate executives have been predicting that the D.C. market will recover relatively quickly because little money is available for new construction and few additional buildings are being started. The Northern Virginia market, the most overbuilt, could take considerably longer to stabilize, real estate executives said.
Nathan Isikoff, chairman of the Carey Winston Co., a commercial brokerage in Chevy Chase, said the situation in the Persian Gulf has further dampened the real estate market, making businesses hesitant to sign major commitments. "There's a malaise over the market right now that probably can't begin to dissipate until after" the gulf crisis is resolved, he said.
During November, Montgomery County, with a vacancy rate of 16.3 percent, and some other parts of the Washington area suffered what real estate analysts call "negative absorption" of office space: There was less space under lease at the end of the month than at the beginning because businesses moved or contracted.
Although precisely comparable statistics are not available, commercial real estate analysts said the beleaguered District of Columbia real estate market still may be the healthiest of any major city on the East Coast when both vacancy rates and volume of office leasing are taken into account. The Washington suburbs, in contrast, are typical of depressed suburban real estate markets across the country.
In Frederick, Loudoun and Prince William counties -- outer suburbs where developers built on the assumption that the rapid outward expansion of the Washington area during the 1980s would continue unabated -- vacancy rates hovered near 30 percent, Cor/Net said. The Loudoun vacancy rate declined slightly in the past year, to 29.2 percent from 30.5 percent.
Those rates approximated vacancy rates in Austin, Tex., and other Sun Belt cities still climbing out of the oil bust of the 1980s, according to other real estate firms that compute the vacancy rates differently.
The vacancy rates and leasing figures tell only part of the local real estate story. Generally, the leases that are being signed entail deep rent discounts and other costly inducements that can erase developers' profits.
In this highly competitive climate, some businesses have moved from buildings that are less than five years old to take advantage of good deals, and others have won valuable concessions from their landlords in return for staying put.
"People are moving to glitzier buildings for the same price," Byrnes said. "They might leave and go across the street into a new building because the landlord is desperate to cut his losses."
Although a large volume of new leases have been signed in the District during the past year, many of them involved firms moving from one building to another and leaving vacant space in their wake, said broker J. Fernando Barrueta. Average annual rents vary widely, but Cor/Net said advertised, "full-service" rents range from a low of $12.50 per square foot in Frederick to a high of more than $31.50 in part of downtown Washington. Actual negotiated rents tend to be lower.