Propelled in part by its own monmentum and in part by the federal government's insatiable appetite for office space, Washington's commercial real estate business is rolling almost unimpeded through this dip in the business cycle.
Less than 1 percent of the office space in the District of Columbia is vacant now and more than half of the new offices that will be built next year are rented already, office leasing specialists say.
District developers will open more than 2.5 million square feet of new office space next year, but that growth will be surpassed by Northern Virginia's construction of almost 4 million feet of new corporate quarters -- twice as much as this year.
That explosive expansion is starting to soften the suburban office market, leasing agents concede, but is doing little to lessen the relentless demand for District offices that is rapidly driving annual rents toward $20 a square foot.
Only the staggering cost of financing the construction of new office buildings at today's 15 1/2 percent prime interest rate could slow down the commercial real estate roller coaster.
That isn't happening yet; most buildings now going up and many that will start in the next few months are being built with construction loans arranged before interest rates jumped. As a result, new office space will continue to open up through 1980 and 1981 before high interest rates have a serious effect. o
But a slowdown is likely two years from now for two reasons:
The low-cost construction financing is rapidly being used up. By the middle of next year, developers starting new office buildings will have to finance them at rates reflecting the record borrowing costs. Rather than pay 16 or 17 percent interest, some developers will defer projects until rates come down. That will delay construction of projects that would normally be completed in 1982 or after.
The shortage of office space could turn into a modest surplus, as the record pace of construction finally, catches up with demand. Veteran real estate men, such as foster Shannon of the Shannon & Luchs firm, expect new buildings to open somewhat faster than the market can absorb them over the next couple of years.
Shannon does not see the 1982 office, surplus lasting long. Walker & Dunlop, another big commercial real estate brokerage firm, suggests that there is the possibility of a space shortage in 1982.
In its fall analysis of the Washington market, Walker & Dunlop warned customers: "Don't look for a significant slackening of D.C.'s unprecedented tight office space market in the next two years."
The firm noted that "a crucial, but not entirely predictable factor that will help determine how tight space will be in 1981 and 1982 is the federal government."
Walker & Dunlop predicted that the General Services Administration could lease as much as a million square feet of additional office space in the next two years.
"GSA will seek moderate-cost, well-located 'secondary area' space convenient to transit nodes and the downtown business district, but not in the high-rent, high-prestige buildings going up along Pennsylvania Avenue, the West End and elsewhere," the company reported.
If GSA take that much space it will absorb almost one fifth of the District's new office capacity in the next two years, but the government is neither the prime tenant nor the dominant driving force in the Washington office market.
Lawyers and trade associations are the hot prospects, the ones whose leases can assure a building's profitability and prestige. The lawyer's and lobbyists don't demand space in the quantities that bureaucrats use, but they need a lot of room and are willing to pay for it.
For the District's prime office locations -- like the new Cabot, cabot & Forbes office buildings going up at Pennsylvania Avenue and 12th Street NW -- rental agents are asking $20 a square foot a year. Rents as high as $25 a foot are being discussed for new projects planned at Connecticut avenue and L Street and 17th and K streets NW.
In emerging downtown office neighborhoods such as Vermont Avenue near Thomas Circle, rents are running $17 to $18 a square foot, said Shannon & Luchs leasing specialist Fred Ball. Landlords are also begining to try to avoid the pinch of soaring utility bills by installing individual meters for their clients instead of including utilities in the rents as they have in the past, he added. Separate utility charges can tack $1 a square foot or more onto annual rents.
Despite rising rents, the problem for leasing agents like Ball is not finding clients: It is finding projects to offer. "It used to be that people were fighting for the tenants, now we're fighting for the space," he said.
The latest office space report from the Washington Board of Realtors indicates that half the new offices to be opened next year are already leased and as much as 40 percent of the space expected to become available in 1981 is spoken for.
Because of the low vacancy rate, many large tenants are signing leases for more room than they need now to be sure that they have expansion space in the future. Rents have gone up so fast, Ball noted, that some tenants have been able to sublease their expansion space at a profit, using the money to hold down their own occupancy costs.
Outside the downtown area, leasing agents are quoting rates around $11 to $12 a foot in the Tysons Corner area, $12 to $13 at Crystal City and Rosslyn, and $10 to $12 in Prince George's County.
Cheaper land has spurred the suburban office boom and lately the action has been concentrated in the Virginia suburbs. The 4 million square feet of new office buildings expected to be completed in Virginia next year compares with an estimated 2.5 million feet of space coming in Montgomery and Prince George's counties.
Leasing specialists say they expect the demand for office space for big corporate customers to remain strong in the next year or two.Big firms have the resources to ride out a recession, they note, but smaller customres are more vulnerable, especially the kind of little companies in the research and computer software business that form much of the suburban office market.
Vacancy rates could start to rise in small suburban office parks, the specialists predict, and the builders of small speculative office projects may begin to back off from starting new buildings.