Washington, D.C. Commercial Real Estate on Track for Robust Recovery


The nation’s capital is also its strongest national commercial real estate market, according to Jones Lang LaSalle, and it continues its track to recovery propelled by federal government activity during the second quarter of 2010. Vacancy rates reduced in Washington, D.C. – from 16% in Q1 to 15.6 % in Q2 – after a decisive uptick in demand coincided with the continued thinning of the development pipeline.

The catalyst for growth was broadly distributed among various government agencies, with IRS, Securities and Exchange Commission (SEC), Veterans Affairs and Health and Human Services among the most aggressive tenants in the market. The widespread growth of the government impacted the District of Columbia, Northern Virginia and suburban Maryland alike, a unique trend given the tendency for administrations to fund only select interests in particular locations.

In addition to government activity, the investment sales side picked up as five buildings traded in the second quarter, an increase over the first quarter when only two buildings traded.
Even President Obama’s dictum that the GSA reduce enough space to save $8 billion should benefit the DC region, according to Jones Lang LaSalle researchers, as government offices outside the region will most likely be transferred locally to meet the new requirement.

Other Washington, DC Highlights and Outlook:

  • Asking rents increased for the first time since the second quarter of 2008 when rents began their initial tumble – up 1.7 percent from the previous quarter, reaching $46.40 per square foot.
  • Asking rents are expected to remain flat throughout the remainder of the year in the core DC markets as there are 15.4 million square feet of vacant space that will prevent landlords from raising rents by any significant amount.
  • With more than 1.0 million square feet of federal requirements in the market, the government will continue to drive demand in the District and continue to lease up buildings in NoMa, Southwest and Southeast at competitive rates.
  • Private sector leasing activity and absorption are unlikely to grow in the short term.
  • Right-sizing of law firms will leave large blocks of older Class A product on the market coupled with an abundance of Class B options, which will take time to lease the excess 15.4 million square feet of vacant space.

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Northern VA Highlights and Outlook:

  • Direct Class A rates in Arlington County increased 5.0 percent in the second quarter. This trend is expected to continue given Arlington’s 7.2 percent direct vacancy rate and continued levels of strong demand.
  • Rental rates in Fairfax and Loudoun Counties were generally flat, and are expected to continue along that path until consistent levels of positive net absorption can reduce vacancies to below 12-13 percent.
  • Given the limited development cycle, existing supply constraints inside the beltway, a continued reduction in sublet inventory and consistent federal demand, the overall market is well positioned to experience further improvements over the next twelve months.

Maryland Highlights and Outlook:

  • Rental rates for Class A properties remained largely stationary in the first two quarters of 2010, posting only a very modest increase from $28.64 to $28.75.
  • Vacancy rates will likely drop slightly and stabilize alongside modest rent increases.
  • Government demand will continue to drive the overall market in Suburban Maryland while the private sector continues to proceed along its slow recovery process. This recovery will be characterized by tentative expansions and small-scale transactions in the short term, with the potential for growth in the already dynamic biotechnology sector in the long term.
  • Large requirements from tenants in the market should also help bolster Suburban Maryland’s market supply and demand in the long term.
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