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Office vacancies and construction up during the past year


Across the U.S., commercial real estate vacancies declined in 2011. Few new buildings were delivered, so expanding businesses moved into existing spaces, driving down vacancies.

In the Washington region, vacancies in industrial and retail properties declined because of the stabilizing housing and job markets. However, warehouse and flex vacancies are still well above the national average because the D.C. area does not typically attract many national distributors.

Contrary to the national trend, the Washington office market softened in 2011, and vacancies increased slightly. The region benefited from the expansion of the federal government and its contractors over the past decade, but that source of demand has slowed dramatically. In the fourth quarter of 2011, vacancies increased due to some move outs in Northern Virginia related to the 2005 Base Realignment and Closure Act (BRAC). CoStar Group expects the market to remain soft in 2012 due to weak federal spending growth.


Commercial real estate development remains limited in most markets. In the Washington area, commercial construction is relatively quiet compared to the 2000s but increased slightly in 2011. Multifamily development is especially active, with nearly 11,000 market-rate units underway.

Due to high levels of vacancy and low rental rates, there are very few speculative office developments underway in the U.S., but last year in the Washington region, two major projects broke ground without tenants committed. Monday Properties broke ground on 1812 N. Moore St. (580,000 square foot) in Rosslyn, and Hines began work on the first 495,000 square foot office space at its CityCenterDC mixed-use project in the East End.

Construction levels will likely stabilize this year as market players anxiously await the results of the 2012 election and monitor the direction of the region’s economy.

Sales volume

Washington remained in favor with investors last year, and commercial sales volume for all property types increased by 20 percent compared to the prior year. Multifamily properties were especially in favor, with more than $4.7 billion in transactions in 2011, a 35 percent increase in volume over the prior year.

However, there are signs that investor interest is cooling. Office sales volume declined steadily from late 2010 through 2011, although there was an uptick in the fourth quarter of 2011, mostly driven by Goldman Sach’s acquisition of Lehman Brothers’ stake in 10 Rosslyn office buildings, which were valued at $1.2 billion (nearly 45 percent of total volume in the quarter). Excluding that transaction, fourth quarter volume in 2011 would be less than half that in the final quarter of 2010. Most other property types, including multifamily, saw a decline in sales volume in the final quarter of the year.

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