Still Strong, but for How Long?

The office market in the District remained, by many measures, the strongest nationwide in the third quarter, though there was some reason to question how the market will perform in the near future.

The vacancy rate was 8.4 percent in the third quarter, compared with 8.9 percent in the same quarter a year ago, according to CoStar Group. Asking rents for full-service properties rose to $39.41 per square foot from $38.97. Demand is being driven largely by law firm leasing and big government agencies.

"The D.C. market just continues to be incredibly strong," said Brendan R. Owen, a senior vice president at commercial brokerage CB Richard Ellis.

Less encouraging for the state of the market is a large amount of office space under construction -- about 5.7 million square feet, according to CoStar, more than at any time in the past decade. Some industry experts believe the vacancy rate will edge up as some of that office space is completed because it is on average only 58 percent leased. There are already hints of the problem: Franklin Square, for example, a speculative building developed by Monument Realty at the corner of 13th and L streets NW remains empty about six months after completion.

"In the short term, we could see a small tick up in vacancy," Owen said. "But it's going to go away real quickly because of strong demand."

The biggest new lease for District office space in the third quarter was Pension Benefit Guaranty Corp., which renewed its 336,000 square feet of space at 1200 K Street NW. Ernst & Young leased 132,000 square feet at 1101 New York Ave. NW, the next largest.

-- Neil Irwin


Space at a Premium for Large Tenants

Arlington County's market got a huge boost after Corporate Executive Board Co. last month completed its lease for 625,000 square feet at Waterview, a project on the waterfront in Rosslyn.

The deal is among the region's largest commercial real estate transaction this year. The publicly traded company is moving its office from the District and plans to move into its new headquarters in mid-2007.

In the Arlington and Alexandria markets, large tenants looking for space are finding fewer spots available, brokers and developers said, so they are having to go into new buildings that will be designed specifically for them.

"We're running out of the easy sites to develop so people are having to find pieces of land and put them together," said Marty Almquist, a senior vice president at Grubb & Ellis Co.

Still, few developers are planning to build large buildings without first lining up major tenants to take the space because there is 5.3 million square feet of vacant space on the market, virtually unchanged from the same time last year. The vacancy rate for the quarter was 10.4 percent, compared with 11.1 percent a year earlier.

"For the smaller tenant, there's still a decent amount of space available," said Malcolm C. Schweiker, a senior vice president at CB Richard Ellis, "although the good alternatives are getting taken and rates are starting to inch up."

-- Dana Hedgpeth


High Vacancy Rate Eases

Fairfax County had the highest percentage of vacant office space in the Washington area in the third quarter of this year.

For some landlords, the 14.2 percent vacancy rate was a huge step forward.

Office vacancies in Fairfax have fallen 24 percent, from 18.7 percent a year ago, according to data from CoStar Group Inc.

More offices are being rented because more companies are hiring more employees, said Sandy Paul, a vice president and mid-Atlantic research director of Delta Associates, an Alexandria-based real estate consulting firm.

"Firms that had been shedding jobs and putting unneeded space back on the market are now ramping up their hiring," Paul said. "Some are leasing the sublet space [in their buildings] or taking that space off the market and using it themselves."

Government agencies and defense contractors have dominated the Fairfax office market in recent years. But space also is being snapped up by firms in other industries, such as financial services, said Michael P. McCarthy, a senior vice president at the Cassidy & Pinkard brokerage firm. "Diversification is a key market indicator of a return to a healthier environment," he said.

The double-digit vacancy rates have kept office rents fairly stable. The average asking price in the third quarter was $23.38 per square foot, compared with $23.18 in the same period last year.

-- Bill Brubaker


A Small Market Starts to Grow

Loudoun County has the fastest-growing population in the United States, but it remains the smallest commercial real estate market in the Washington region.

The largely rural county had 9.9 million square feet of office space in the third quarter of this year, up from 9.8 million in the same period last year, according to CoStar Group Inc. That compares with 98.8 million square feet in neighboring Fairfax County.

But Loudoun is on the move, with 1 million square feet under construction, up from 930,050 last year. Loudoun's largest project, by far, is the Howard Hughes Medical Institute's 750,000-square-foot Janelia Farm Research Campus, which is scheduled to open in 2006.

Office rents in Loudoun have edged down from $21.78 per square foot in the third quarter last year to $21.57 this year. That mostly because of the county's 13.4 percent office vacancy rate, the area's second highest after Fairfax.

Since last year, though, Loudoun's vacancy rate has fallen 22.5 percent. "In large part, we have AOL to thank for that," said Michael P. McCarthy, a senior vice president of Cassidy & Pinkard, a District based brokerage firm.

In August, America Online leased 154,000 square feet in the Loudoun Gateway office buildings, not far from AOL's 1.2-million-square-foot Dulles campus.

-- Bill Brubaker


Limited Space for New Business

A few years ago, space was so tight in Prince William County that real estate broker Dennis Flynn put part of the big defense contractor General Dynamics Corp. into what had been a huge consumer-electronics store.

So the third-quarter office vacancy rate of 6.3 percent in the third quarter, down from 7.4 percent a year earlier, is both good and bad news. It means the local economy is healthy, but that there's not much space for new businesses to choose from.

"Inventory is tight," said Flynn, an executive vice president at real estate services company Transwestern Commercial Services. "And I don't see it changing much over the next year."

Attracting more companies is urgent for this exurban county of 340,000, Virginia's second-most populous after Fairfax. About half its workforce must leave the county each day for work, which means tangled traffic and long commutes.

There's little more than 4 million square feet of office space in the entire county. And that has increased by 150,000 square feet, little more than 20 tennis courts' worth, since the beginning of the year.

Still, there is more choice than there was several years ago, said Martin J. Briley, the county's chief recruiter of companies as executive director of the economic development department. Counting all the office buildings planned and approved, Briley said another 2.2 million square feet may be built. "If I get that out of the ground, I'll be happy," he said.

-- Mike Flagg


Expanding Companies Consume Space

Vacancy rates for top-flight office space in Montgomery County dipped to 10.9 percent during the third quarter, compared with 11.8 percent in the third quarter of 2003.

That is still well above the 7 percent vacancy rates Montgomery saw in 2000, during the tech boom. But brokers said it's a solid indicator of steady growth.

Companies are expanding, said Lawrence E. Thau, managing director of CB Richard Ellis's Bethesda office. Westat, the Rockville statistical research form, for example, leased additional space on Gaither Road. Montgomery is also attracting tenants from the District, Thau said, such as the American Nurses Association, which in September moved from Southwest into two floors in a new mixed-use high-rise in downtown Silver Spring. Association officials said the group is paying a lease rate of slightly less than $30 per square foot.

Lease rates in Silver Spring are less expensive than in downtown Washington, averaging $25.78.

Brokers said they expect vacancy rates for Montgomery office space to decline again next year and lease rates to increase slightly because there is less space under construction than there was during the third quarter last year -- 613,000 square feet compared with 1.5 million. "We expect to reach equilibrium, a 7 percent to 8 percent vacancy rate by the second quarter or third quarter next year," Thau said.

Anticipating a tighter market, Rockville developer Opus East is building an office tower on Rockledge Drive, close to where I-270 and I-495 split. Brokers said they expect it to be substantially, if not fully, pre-leased when it is completed in late 2005 or early 2006.

-- Annys Shin


Government Contracting Boosts Demand

The office vacancy rate in Howard County dropped to 10.53 percent in the third quarter from 13.6 percent a year earlier, driven in part by growth in government contracting inside and outside the county.

The National Security Agency in neighboring Anne Arundel County recently started dangling cash in front of government contractors with cutting-edge technologies to sell. Some firms rushed to set up shop at NSA's doorstep, while others chose to locate in Howard.

At least one landlord, Corporate Office Properties Trust in Columbia, nudged some of its Anne Arundel tenants with no ties to NSA to move to Howard to make room for companies with direct ties.

Office space construction in Howard surged 362 percent in the third quarter to 364,009 square feet from 78,860 a year earlier. Rental rates were relatively stable at $20.58 per square foot, compared with $20.41 a year before.

"I'm confident the rental rates for buildings under construction will be significantly higher because costs of steel, land and other development expenses have increased," said Cole Schnorf, senior vice president and director of development at Manekin LLC in Columbia.

Schnorf also said much of the sublet space made available when companies shrunk during the recession a few years is now filling up, including some space previously leased by Corvis in Columbia. The communications company had about 350,000 square feet of space in 2001. Corvis now leases less than half of that space.

-- Dina ElBoghdady


Activity Could Pick Up

The office market in Prince George's County remains slow and steady but could pick up as the federal government makes its 2005 contracting decisions, according to real estate experts.

Government spending is a major driver in Prince George's County commercial real estate, said Niel J. Beggy, a first vice president in the suburban Maryland office of real estate brokerage CB Richard Ellis. "A lot of government contracts have been delayed," he said.

Prince George's vacancy rate was 12.2 percent in the third quarter, down from 13.1 percent in the same period a year ago. Nearly 389,000 square feet of office space is under construction. The average rent rose to $19.40 per square foot, up from $18.73.

Beggy said he expects those numbers to rise in the first quarter of 2005. At that time, government contractors, which are among the largest tenants in Prince George's, will know how much space they need for the year.

At least one developer is already planning for growing interest among government contractors to locate in Prince George's. Jeffrey Ludwig, a senior vice president at NAI Michael Cos., said the company is focused on building more office space for contractors in the homeland security sector. About half of the 8 million square feet of office space that Michael and its partners are planning at the Rosewood mixed-used project in Upper Marlboro will be targeted at security contractors.

-- Krissah Williams