Washington, DC Mid Year 2005

Stronger, But Cooler

Like a middle-aged muscle man, the Washington, DC market continued to enjoy great strength last quarter, but at a slower pace. The metropolitan economy continues to be pumped up, for instance, we’re the 8th most populous market in the nation. Additionally, we rank 4th in job growth and vacancy rates continue to decline, but for the moment, rents have flattened and even lowered in some submarkets.
By any measure, the 8th consecutive quarter of a decreasing vacancy rate is impressive. At mid year, the overall vacancy rate was 10.0% (down from 10.3% 1Q2005). We believe that the vacancy rate may continue to edge downward for the next quarter or two, but will likely increase again in 2006, given current levels of demand, combined with a significant number of new buildings under construction in 2006. Around the region, mid year vacancy rates are: 8.0% in the District, 11.1% in Virginia and 10.8% in Maryland.
In the second quarter of 2005, the DC Metro area recorded 2,213,338 square feet of net absorption. The breakdown was 600,000 square feet absorbed in the District, 1.3 Million in Virginia and 300,000 square feet in Maryland. Demand remains strong, but a significant amount of un-leased space is about to be delivered over the next several quarters. Approximately 4 Million square feet of new space will deliver during 2006 in the District alone. Only about half of that space is currently leased. Major vacancies in Crystal City have sent that submarket‘s vacancy rates spiking from 15.2% last quarter to over 26% at mid year. The close-in Maryland submarkets remain tight, but the vacancy rate in Germantown is over 20%.

In some ways, it’s as if the market is poised to take a breather between sets of heavy lifting. The market’s next workout will be tackling the huge spike of vacant space in Crystal City and other submarkets resulting from the relocation of major government agencies and base closures.

But What Does It Mean?

If your organization is looking at a real estate decision within the next 18 months, the key is finding ways to include competitive opportunities…

provided that you are willing and able to consider space in different submarkets. For example, if your organization requires less than 20,000 square feet in the District, there are still a plethora of opportunities in the Central Business District. If your needs are significantly larger, especially if you’re currently located in Northern Virginia, considering Crystal City as an alternative will greatly increase your options and bolster your leverage to negotiate with many landlords. Case in point, the Bureau of National Affairs recently decided to sell its campus on 25th Street, NW and move to Crystal City. Simply demonstrating the willingness to consider a move to a more competitive submarket will add significant traction in negotiations.