Washington's once high-flying market for office space is taking a nose dive, and developers are scrambling to contain the damage by offering reduced rents and other attractive deals to lure tenants.
"The market is dead right now," said Lew Rumford of JBG Associates, a major office building development company, speaking more bluntly than most of his peers, who use words like "soft" to describe the current market.
As late as a year ago, most developers could expect to lease the majority of space in their projects before buildings were even complete. The immigration of hundreds of law firms, accounting firms and national trade associations to Washington triggered an intense demand for space at a time of low supply, pushing rents steadily upward.
Now, however, there is more space than there are would-be tenants, demand has slowed, and developers are struggling to adjust. JBG Associates, for example, has reduced rents 10 to 20 percent to entice tenants into its two newest downtown office buildings. One building has no tenants yet and only a third of the other is rented.
At One Thomas Circle, a huge new office building developed by the Prudential Life Insurance Company of America, only one floor and part of another has been leased. More than 80 percent of the building is tenantless after more than a year's search for renters.
The Oliver T. Carr Co., the city's foremost office building developer, has reduced rents (the company would not say by how much) and offered other incentives to lure tenants to its two newest downtown buildings. The company has also taken the unusual step of spending $10,000 to $15,000 for a flashy slide show to highlight the amenities at its Metropolitan Square building and to improve leasing there.
The market's troubles became apparent last fall when developers and their leasing agents started tallying up all the office space due to come on the market in late l982 and early l983. The numbers showed an unprecedented 3 to 4 million square feet of new office space would be built before the end of 1982. Even at the height of the office boom, only about 3 million square feet of new space was rented annually, meaning an excess supply this year of perhaps a million square feet, experts said.
Another 4 million is under construction for delivery in 1983 and will simply exacerbate the oversupply unless there is a dramatic increase in rentals, according to experts.
"Two years ago, you couldn't find 5,000 square feet of space and now there is plenty," said Hal Bowles of Coldwell Banker, a large leasing firm.
Mirroring a nationwide trend toward higher vacancy rates, the city's rate of empty available space has grown from 0.5 percent six months ago to 3 percent today. Atlanta has a 20 percent rate and San Franciso, 1 percent, according to a recent 17-city survey by Howard Ecker and Co., a Chicago-based real estate firm.
Several experts said Washington's vacancy rate is actually higher because some law firms and associations that signed leases early last year took more space than they needed with an eye toward subleasing the extra space and perhaps making a few dollars. Now some of that space is also going begging and tenants are competing with developers to lease space in the same building.
Rents that had been shooting towards an unheard-of $40 a square foot leveled off in December and since then some have declined as developers scramble for tenants to avoid the prospect of paying high interest rates on millions of dollars in construction loans for largely vacant buildings.
The changed market "is causing developers to consider strongly less than the asking rentals," said Ron Agababian, assistant vice president at Julien Studley Inc, a large leasing company. "Before, they would laugh at tenants who proposed rentals for less than the asking rent."
Today, "developers are asking $28 to $32 a square foot but will take $24 to $26 for a half floor or more," he said.
For the first time, some developers such as JBG are offering to sell tenants part ownership in their buildings. Others are offering several months free rent or additional carpeting, wall coverings, better doors and more partitions for free.
"The cost to get a tenant in includes some rental waiver from three to six months and some upgrade in carpeting," said James L. Eichberg, president of Smithy Braedon Co. "But even with these extras, it is difficult to get some commitments out of the clients. . . . It's not a depressed market but a slow market."
The transformation from frenzy to languor resulted largely from the recession and from the decline in federal government activity under the Reagan administration, according to leasing agents.
A lot of firms are searching for space but, uncertain about the economy and federal policies, are still "looking around and kicking the tires," Rumford said.
Other leasing agents cite a second reason for the scarcity of commitments: Tenants, long at the mercy of the developers, realize they are now in the driver's seat.
Joe Moravec, senior vice president of Leggat, McCall Werner, another leasing company said, "There is a lot of tenant cyncism. They feel that things will get worse and therefore the deals will get better."
Moravec and his fellow leasing agents said they are advising tenants that deals are very good now and that rents probably will not go lower because developers must be able to at least pay their mortgages. But developers admit the critical rate is different for every office building, depending largely on the interest rate of the permanent financing.
The older buildings have suddenly become the competitors of their new glass and concrete neighbors. According to several experts, owners of these older buildings, understanding that tenants are now reluctant to move, are offering more attractive prices to keep them as tenants.
Coldwell Banker reported that during March and April old buildings captured 49 percent of the 402,960 square feet that were leased city-wide, up from 33 percent in the preceding two months.
The office buildings located east of 15th Street NW have been hardest hit by the leasing slowdown, according to experts. This area, long eschewed by developers because of its rough and rowdy image, was just gaining in popularity when the downturn struck.
The two JGB buildings, One Thomas Circle and one of the Carr buildings are situated here.
But even at the new John Akridge building at 17th and K streets NW, which is widely regarded as a premiere location, the space "is leasing slower than we would have thought," said company vice president Henry Bowden.
"We'll see a couple of years of excess space," predicted Hal Bowles of Coldwell Banker.