Washington, DC 1st Quarter 2005

The Price of Success

For all the success the Washington, DC metropolitan economy enjoyed in 2004, it seems that our region was merely flexing its muscles before beginning the real workout. With 85,000 new net jobs projected to be added in 2005, our metropolitan area is poised to double its rate of job growth compared to the past two years. Although there isn’t a perfect correlation between job growth and absorption, it’s fairly safe to say that doubling the amount of job growth should have a significant impact on the already high demand for office space.
In the first quarter of 2005, the DC Metro area recorded 3,340,192 square feet of net absorption. The breakdown was 1.32 Million square feet absorbed in the District, 1.55 Million in Virginia and 467,000 square feet in Maryland. The overall vacancy rate has dropped to 10.3% (from 10.8% YE2004). All three jurisdictions have had a significant decrease in vacant space, with vacancy in the District down to 7.9% (6.9% direct and 1.0% sublet), Northern Virginia at 11.7% (10.1% direct and 1.6% sublet) and Maryland vacancy lowering to 11.0% (9.6% direct and 1.4% sublet).

Over the last 4 quarters, Metropolitan Washington, DC absorbed almost 13 Million square feet.

Given that vacancy rates throughout the region have already tightened, we believe that our market is poised for a spike in rents in several key markets. For tenants, the good news is that demand for space tends to trail job growth. That is, most employers will hire and “double-up” before they venture out for new space. Therefore, we believe that the market will not be significantly affected for at least 6 months (3Q2005). However, we are already seeing signs of rapidly tightening markets and significantly reduced tenant concessions in the R-B (Rosslyn to Ballston) Corridor.

Northern Virginia rents may spike due for 2 reasons: “Room at the Top” and “Pressure from Below.”

Room at the Top is defined by a continued, strong demand for new buildings in Washington, DC, at rents in the mid $50’s to low $60’s psf. Historically, there has been a 10% – 15% discount between Trophy quality space in DC and the premium Virginia submarkets (Rosslyn and Reston). It is therefore likely that a trophy building in Rosslyn and/or Reston could command rents approaching $50/sf within the next four quarters.
Pressure from Below refers to the shrinking number of options for mid to large size tenants (50,000 to >100,000 sf). As previously stated, concession packages are being significantly reduced in several leading submarkets. Of the 12.7 Million square feet of new office space under construction throughout the region, only 5.3 Million square feet remains available. If absorption for the remainder of 2005 simply keeps pace with the rate of absorption for the last 2 years, supplies of space will shrink and rents will rise throughout the region. If demand for space follows the employment forecasts, rents should spike. Northern Virginia will be most acutely affected because its companies have the greatest potential for growth and excluding the Federal Government, they tend to drive our regional economy.

But What Does It Mean?

Growth is a challenge that accompanies success. If your company is growing or its lease expiration occurs within the next 18-24 months, we recommend planning a growth or renewal strategy. If properly managed, growing a company in an escalating real estate market may result in significant savings, rather than burdensome expenses. Some growth strategies include expansion options, subleasing future growth space and IT solutions (hoteling, telecommuting, etc.).