Vacancy rates for office space in the Washington area continued to fall in the third quarter, and the rental rates sought by property owners rose slightly. Law firms and lobbyists took space in downtown Washington, defense contractors flush with money signed leases in Northern Virginia, and the National Oceanic and Atmospheric Administration committed to a 269,000-square-foot building in Prince George's County.
The vacancy rate for the area was 9.6 percent for the third quarter, according to CoStar Group Inc., a real estate research firm in Bethesda. That compared with 10.9 percent during the same period a year earlier. Rental rates were up slightly to $29.97 per square foot from $28.85.
There is 14.5 million square feet of space under construction in the region, compared with 11.6 million square feet in the third quarter last year. In pockets of Northern Virginia developers are putting up a number of buildings without tenants signed up because of expected demand from government contractors.
"The metro area has been very robust," said Brian T. McVay, a director at Cushman & Wakefield. "Leasing activity has been particularly strong in Northern Virginia, and the sales activity in D.C. and Northern Virginia has been off the charts in terms of pricing and volume."
In the District, vacancy is down to 7.8 percent for the third quarter, compared with 8.3 percent a year earlier. Law firms signing leases for large chunks of space included LeBoeuf, Lamb, Greene & MacRae LLP, which committed to 113,000 square feet at 1101 New York Ave. NW. The building is under construction and will be done in the first quarter of 2007.
In Southwest, the Federal Protective Service agency leased about 74,000 square feet, and NASA took close to 50,000 square feet.
Rental rates in the District hovered around the mid-$50s per square foot for newer, downtown buildings and were on average $41.14 a square foot for the entire city.
In Maryland, vacancy rates dropped to 10.2 percent from 11.2 percent a year earlier. Rental rates were up slightly to $24.25.
There is little activity in the Maryland suburbs, brokers say, because the main drivers -- the National Institutes of Health and other agencies such as the Department of Health and Human Services and the Food and Drug Administration -- are not expanding substantially.
"Since 9/11 the major federal agencies that were so instrumental in driving demand here are on the sidelines," said Brendan F. Cassidy, a senior vice president at Cassidy & Pinkard. "There just aren't a ton of deals lined up for every block of space."
Among the top deals signed in the third quarter, for example, is Enterprise Leasing Co., the car rental company, which leased 42,500 square feet in North Rockville for its corporate offices.
"If you compare it to Northern Virginia, it's ridiculous," Cassidy said.
There, defense contractors continue to gobble up space, including Halliburton Co., which leased 155,000 square feet in Crystal City.
Agencies were expanding too. The Department of Homeland Security leased 50,000 square feet in Rosslyn. And the Federal Emergency Management Agency took 102,000 square feet in Crystal City shortly after Hurricane Katrina hit the Gulf Coast.
Still, some brokers said they sense that leasing is slowing.
Herbert A. Mansinne, a senior vice president at Jones Lang LaSalle, said tenants are expected to lease about 5 million square feet of space in Northern Virginia this year. But that's down from 7.2 million square feet last year.
"It doesn't feel as good as it sounds," he said. "There are very select deals across all sub-markets, but there's not a flurry of tenant activity."