Federal government props up D.C. metro office market, but will it last? 

Posted: 12:42 pm Fri, July 9, 2010
By Tania Anderson

Empty office space in the Washington metro area is slowly filling up as government agencies and the contractors who work for them expand.

The District, suburban Maryland and Northern Virginia all saw available office space get absorbed by new tenants in the quarter, a sign of the region’s relatively stable job market, commercial real estate analysts say.

The future of the Washington metro office market will be closely watched by analysts as office construction slows down and government spending possibly changes. Employment numbers and consumer confidence will also play a factor in office space.

Nearly 1 million square feet of space was taken up in Washington during the second quarter, according to a report by the research department of Cassidy Turley, a commercial real estate services firm in Washington, D.C.

However, the District’s vacancy rate grew slightly from 11.5 percent in the first quarter to 11.7 percent because of completed construction of several new office buildings, some of which weren’t fully leased. Three of four completed office buildings totaling 1.4 million square feet were fully leased just as they opened their doors.

Still, researchers say Washington is one of the strongest commercial real estate markets in the country based on a comparison of current rental rates in major cities to rental rates in early 2008. Washington’s rental rates were down just five percent from 2008. Boston and Las Vegas were down 15 percent and New York was down 30 percent.

The second quarter was also a bright spot for suburban Maryland, as 138,000 square feet got absorbed, an improvement from the negative 82,000 square feet reported in the first quarter of the year. The vacancy rate dropped to 15.2 percent, a slight change from the 15.4 percent reported in the first quarter.

Northern Virginia also filled space, with nearly 607,000 square feet getting new tenants. The vacancy rate went from 14.7 percent at the end of the first quarter to 14.3 percent.

“Washington has some of the best employment numbers in the nation, so this quarterly report wasn’t a surprise,” said Jeffrey Kottmeier, vice president and director of research at Cassidy Turley. “We also saw a lot of government leases and government contractors completing leases.”

The Department of Veterans Affairs, for example, signed for 280,000 square feet of space in the East End submarket of Washington, making it the largest non-renewal deal of the quarter in the metro area.

The Maryland suburbs also attracted government interest, with the Food and Drug Administration’s leasing of 93,000 square feet in Rockville. The Department of Health and Human Services inked a deal for 70,000 square feet in Bethesda.

Virginia was the home of choice for government contractors. SAIC signed a lease for 110,000 square feet in Alexandria.

“I’m interested in what’s going to happen the next two quarters,” Kottmeier said. “We’re dealing with government space and government contracting and seeing if a lot of the dollars in government spending will stabilize or level out.”