Large amounts of prime office space have opened up in the District over the past two months, more than doubling the vacancy rate in once-tight downtown area between 14th Street NW and West End and on Capitol Hill. This is the highest level in recent years, preliminary figures from Coldwell Banker commercial leasing brokers show.
The survey shows that in the next three months 1 million square feet will be available, about as much space contained in the 12-story International Square complex that covers the city block between 18th and 19th and K and I streets NW. This is about half the new space requirements of the city in an average year and is the equivalent of about 1,000 typical three-room office suites.
Cutbacks by the federal government are largely responsible for the sudden jump in empty space, as government agencies and contractors vacate offices or curtail expansion plans, said George Voris, of Coldwell Banker's office leasing and sales division.
Another significant factor in the increases is a rapid growth in the amount of sublet space being offered by expansion-minded tenants who had purposely leased more space than they initially needed, other commercial leasing experts said.
The city's vacancy rate now stands at about 2 percent, up from 0.8 percent at the end of September, according to the Coldwell Banker figures. The rate -- for prime business areas of the city only -- has never before gone above 1 percent since the company began compiling figures five years ago. From the end of 1978 until September, the rate hovered between 0.1 percent and 0.4 percent, reflecting one of the tightest office markets in the country.
The 2 percent figure does not include another estimated 310,000 square feet of sublet space also currently being offered. There is generally demand for an average of 2 million square feet of new office space in the District each year, several leasing experts said, though that figure fluctuates widely. For example, in both 1978 and 1981 about 3.2 million square feet were leased, but in 1979 the figure had dropped to 934,000 square feet.
Local commercial leasing experts, including some who have predicted that the office market would open up substantially in 1982 and 1983, were stunned at the 2 percent figure and were initially at a loss to explain such a huge, sudden jump.
Some commercial leasing specialists have predicted that a looser commercial market in the District next year will result in rents leveling off after a meteoric rise over the past few years. But Coldwell Banker's Voris said that it is unlikely there will be much tempering of rents.
"There is still a lot of competition for this space. . . . I haven't seen any price cutting," he said. The space increase reflects an accumulation of many small offices throughout the business district rather than big chucks, with the exception of some space being vacated by the federal government, Voris said. It is still difficult to find large spaces in prime downtown areas, he added.
In addition to currently available space, the figures include new offices becoming available in the next three months, Voris noted. This consists of four new buildings with a total of 35,000 square feet of available space left and government-leased space totaling about 250,000 square feet.
Stephen Goldstein, vice president of the Julien J. Studley Inc. realty firm, also argued that the new vacancy figure still does not mean there is an oversupply of space in Washington.
"I don't think it's a true indication of a softening of the market, and it doesn't represent a long-term situation," Goldstein predicted. He also said that 2 percent is still "far below what one would consider a soft market," which would be closer to 5 percent.
But other commercial leasing experts say that rate may understate what is available and cited a recent survey by the Washington Board of Realtors that shows offices of all sizes and in all parts of town being offered in increasing numbers.
Planned agency moves include that of the Department of Energy, which will vacate 2000 M St. NW by the end of March, and the Securities and Exchange Commission, which is moving from 500 North Capitol St. NW to government-owned space in Judiciary Square, a spokesman for the General Services Administration said.
In addition, many government contractors and consultants have held off making commitments for space until budget decisions have been made and they know how much business they will have, leasing agents said. The Northern Virginia market has been torporous, but could pick up fast when defense contractors that tend to locate there get new contracts once budget decisions are made, some predicted.
The suburban market also affects the District commercial picture. A new analysis by the Braedon Companies said Northern Virginia seems to be "fairly balanced," with 3 million square feet of office space leased in 1981 and the same amount available in 1982. Suburban Maryland has about 1.9 million square feet leased in 1981 and 2.2 million will be available in 1982, creating some continued softness there, the analysis said.
The firm also noted that some suburban rents have been rising to more than $20 a square foot--compared with more than $30 in some new downtown projects--and that this eventually could slow a movement of businesses from downtown to the suburbs and retighten the District market.
Still, the downtown market generally "could be classified as soft for 1982 and 1983," the Braedon Companies study concluded. " . . . The current oversupply of sublease space, the government's reductions in force, the cutback in social program funding, and the delay in the expected increase in defense contracts are all contributing to the current malaise in the market," it said.
"Overall, space is plentiful and activity is strong, but the hot market of the past two years has cooled," it added.
James Eichberg, president and chief executive officer of the Braedon Companies, after checking his firm's latest data, said he could not argue with the 2 percent vacancy figure but that he believes it is misleading because that space could be entirely leased and occupied in a matter of months.
The seeds of today's sprouting sublease market were sown over the past few years when office rents started to skyrocket and vacancy rates in the District went near zero. Commercial tenants decided to protect themselves for expansion in the future: typically they would sign contracts for about 25 percent more space than they thought they would need, planning to sublet the excess and make their own profit as sublandlords.
Now they have started cashing in on this plan, and it is making a difference in the market.
"The subleasing is done in bits and pieces that don't amount to anything by themselves . . . but cumulatively it amounts to a good bit of space," said Joseph Moravec of Leggat, McCall & Werner Co. Inc., commercial real estate brokers. "It's a sub rosa market" that doesn't show up in most vacancy statistics collected by the industry, he added.
"I think the sublet market has always been there, it's just more prominent at this point," Eichberg said. "People are more aware of it now because there is more total space available."
The extent of the practice can be illustrated by figures provided by one major office building developer in the District, who asked that his company not be named. Of 241 tenants in his buildings, 102 currently are subletting space to others. Out of a total of 3 million square feet in the buildings, 477,000 square feet were offered for sublease in the five months between July and November.
Figures from the Braedon Companies also show that sublet rent prices recently have dropped by between 50 cents and $1 a square foot, a decline that is "not dramatic but noticeable," Eichberg said.
But there also are signs that the subleasing boom may have leveled off as the market has softened and large tenants are not overcompensating as much as in the past for the tight market and high rents.
"It the sublease market is remaining constant, like a large cloud," said Moravec of Leggat, McCall & Werner. "We now know the full extent of the problem. . . . It's correcting itself. People who are attempting to sublease space are aware it is a problem, and they are not so willing to jump in as they were this spring."
Leggat, McCall & Werner is in a position to know how the sublease strategy works. The commercial brokers leased four times the space it needed for its own operations, under the theory that "if we couldn't lease the space, we shouldn't be in business," Moravec said.
But while over the past few years the firm has advised other tenants to do the same, the market has changed so that "now this company can't in good conscience say that this is a good risk in every case," Moravec added. "You can't say that across the board anymore."