Washington, DC 3rd Quarter 2005

The Streak Continues

After taking a slight breather at mid-year, the office leasing market quickened its pace again with a very strong 3rd quarter. By any measure, our metropolitan area economy was working in sync: vacancy rates declined (for the 9th straight quarter), absorption increased and rents rose. With 27 consecutive months of declining vacancy rates, the market wide vacancy rate is now a tight 9.5%.
For those of you interested in stats, the 3rd Quarter saw 2,583,000 square feet of total absorption, with 650,000 square feet in DC, 1,330,000 square feet in VA and 600,000 square feet in MD. Local vacancy rates were 7.8% (7.0% direct and 0.8% sublet) in DC, 10.5% (9.1% direct and 1.4% sublet) and 10.1% (8.9% direct and 1.1% sublet) in MD.
Despite much conjecture about the housing market, we do not perceive a “bubble” around the office leasing market. At this time, we do not forecast any significant changes to the metropolitan area market. All indicators show that demand should remain strong and there’s no huge oversupply of space poised for release. However, there is a significant amount of un-leased space 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. Thus, we believe that the vacancy rate should continue to edge downward through the end of the year, but may increase slightly in 2006.

The only “looming dark cloud”* for our region has been in the form of Base Realignment and Closure (BRAC) recommendations from the Department of Defense. Because the majority of the affected jobs are being reshuffled amongst the local jurisdictions, the net effect for the metro area is minor. However, many DOD contractors are still watching this process unfold and several submarkets, particularly the R-B Corridor, could be significantly affected by BRAC over the next few years.

But What Does It Mean?

Competition is the key to getting the best lease terms. Whether your organization is planning to renew or relocate, it’s imperative to find ways to include competitive opportunities. If you’re located in a particularly “tight” submarket, the best way to create more competition with your existing location is to start the process earlier or consider space in different submarkets. For example, if your organization requires less than 20,000 square feet in the District, there are still numerous 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.