Washington, DC 3rd Quarter 2008

FASTEN YOUR SEATBELTS

It may not be the worst economy since the Great Depression, but it certainly is the most unsettling era since the S&L Crisis. When financial markets are in turmoil, it may affect us all differently, but it does affect us all. Wildly gyrating stock markets, commodities, etc. leave us all wondering where the new “normal” will be. So far it appears that the fundamentals of our local economy are essentially good and Washington, DC will likely emerge as a prime beneficiary of Government intervention. However, the rest of the US and most other developed countries are trying to recover from a bad case of the flu. It’s as if our economy been fueled by pure sugar for the past 8 years and is now doubled over with its intestines twisted in knots. We’ll pull through, but it will take a while for the medicine to work its way through our system.

While the economy has not come to a screeching halt, most businesses are holding their breath before making any major decisions. Local market trends must be viewed from the perspective of being inside or outside the Beltway. For example, absorption for the Washington, DC Metropolitan Area was slightly positive, 48,000 square feet, and deliveries of new buildings drove the overall vacancy rate up to 11.5%. However, the District of Columbia recorded over 567,000 square feet of absorption and the vacancy rate actually dropped to 8.4%. Note that this activity was recorded before the sub-prime implosion and the demise of Lehman Brothers. At this time, we are seeing a significant slowing in leasing activity within the District, but there are still a number of significant deals alive and well.

Looking ahead, over 13 Million square feet of new space is still under construction. We may be going out on a limb here, but we have two predictions for the next 12 months: Vacancy rates will go up and rental rates will come down.

That being said, since most of the vacancy is in the suburbs, buildings outside of the Beltway will see the greatest drop in rental rates. Likewise, most of the vacancies downtown are in the “A” Building market where there’s also the greatest potential for lower rents.

But What Does It Mean?

As an exclusively tenant representation company, the slowing economy can create some very good opportunities for our clients. On one hand we expect to see increasing softness in the Class A market throughout the Metropolitan area. On the other hand, some business sectors may keep demand strong, especially for submarkets inside the Beltway. Washington should be one of the main beneficiaries of the “Rescue Plan” run by the Treasury. Although most of that money is being invested directly into financial institutions, Treasury will still be administering the program and additional regulations on our financial system is certain to arise. The result will be more legal and lobbying work as well as a greater presence by financial institutions in DC to interact with their new partners in the federal government.

McBride’s 2nd Rule for Softening Markets:

Lagging Demand+ Higher Vacancies =

Lower Rents.

More vacant space equals greater competition among landlords for tenants, which equates to greater leverage when negotiating leases.