behalf of seller Broadway Partners, is
expected to close in August.
“There are a couple of deals in the market right now being handled by Eastdil
that are going to price in the next couple
of weeks,” says Friedman. “It will be
interesting to see the level of demand that
they receive.”—Cynthia J. Hoffman
WASHINGTON, DC
Even a sizzling market can cool down a
bit in the face of economic uncertainty. Such is the case with the nation’s
capital. Although still healthy by most
measures, Washington, DC has witnessed
a more temperate office leasing and sales
climate in recent months.
“Downtown Washington, DC is still
very strong, although probably moderating from the very hot market of the last
two to three years,” suggests Phillip
Thomas, managing director and principal in the local office of Cassidy &
Pinkard Colliers.
With or without a gloomy economic outlook, tenant options are rather limited.
Cassidy & Pinkard Colliers reports the city’s
vacancy rate increased four basis points
from the first to second quarters, but is still
under 10%, at 7.9%. Net absorption reached
281,700 sf, a positive number and up from
212,500 sf in the prior quarter. The District
is on track to absorb a million sf this year
and although this reflects positive growth, it
is below the 1. 9 million sf averaged over the
past 10 years, according to the firm.
Average asking rental rates increased
over the first to second quarters, from
$50.38 to $50.84, and there continues to
be a push for triple-net rather than full
service leases, according to CB Richard
Ellis. Although the CBD and the East End
rank near the top in terms of pricing, the
emerging market of Capitol Hill/NoMa
had the highest rates in the District due to
the low availability of prime space, the
firm relates.
In Capitol Hill/NoMa, the Department
of Justice snared 521,000 sf at Two
Constitution Sq., while National Public
Radio acquired a development site at
1111 N. Capitol St. NE, with plans to
build a 400,000-sf headquarters. Also on
the rise is the Southeast/Southwest sub-
market, where the Federal Aviation
Administration inked a 99,600-sf lease at
950 L’Enfant Plaza SW, as did the DC
Housing and Community Development
Agency, which signed for 63,000 sf at
1800 Martin Luther King Ave. SE.
The cost of space is having a definite
impact on the leasing patterns of the
District’s most well-known tenant—the
federal government. “As rents have risen
in the core markets over the last 10 years,
GSA tenants have been priced out of
those areas,” Thomas says. “Government
agencies still want to be in the District, but
they’re leaving the traditional center for
these emerging markets because of cost.”
In comparison to previous years, however, leasing activity by the GSA has been
down as federal money has shifted to
other priorities, such as Katrina relief and
the Iraq war, Thomas states. Yet another
office-using staple—law firms—have been
as active as ever, particularly Downtown.
“In good or bad economic times, corporate America needs what DC law firms
offer, which is help with regulatory practices, taxes and bankruptcy laws,” he says.
“We’ve seen some big law firm leases in
the past 12 months that have been at
record rates.”
The cost of space is
having a definite
impact on the leasing
patterns of the federal
government.
Leasing activity by those law firms and
other corporations is heating up the top
tier of the market, says Thomas, recalling
a recent lease he did at Market Square, a
20-year-old Downtown trophy property.
The deal was for $50 a foot, triple net, a
number usually only achieved in new
buildings, he notes.
“At the same time, we are doing deals
in B buildings for close to $50 a sf, full service,” Thomas continues. “As properties
have been taken out of supply to be renovated or torn down, there is less low-rent
space. And since we’ve had good net
absorption at the top end of the market,
the bottom has pulled up. The high tide
floats all boats, so the active parts of the
market are deals that are priced under $50
a foot, full service, and the trophy space.”
Currently, Thomas reports, there is
about six million sf under development,
which is evenly split between the CBD and
the East End and the non-core Capitol
Hill/NoMa and Southeast/Southwest submarkets. While that amount of new construction is not a concern in the CBD or
East End, where it represents about 4% of
the existing inventory, it could pose a problem in Capitol Hill/NoMa and the
Southeast/Southwest. “That three million sf
represents about 13% of those markets and
there is about 2. 6 million sf available,”
Thomas says. “There isn’t as much preleasing, so it’s going to take a while to lease that
space up.”
As office leasing velocity wanes, investment sales in the District have likewise
slowed. “The first quarter of 2007 was
probably a record quarter, with all the portfolio sales. The market was flying at that
point in time,” says Gerry Trainor, managing director of investment services at
Transwestern in Washington, DC.
“Obviously today, there is much more caution in the market and less capital available.
A lot of transactions are falling out because
the pricing is not being achieved.”
Transwestern affiliate Delta Associates
reports that $1.4 billion in property sales
closed during the first half, compared to
$3.2 billion for all of last year. The average sale price has risen to $614 per sf versus just $460 per foot in ’07.
Trainor asserts that superior office assets
in the CBD and the East End are highly
sought after and aggressively priced. “It’s
the weaker product in the fringe markets
that has been affected on the pricing side,”
he says. “There hasn’t been that much
decline or erosion in pricing and demand
for good core product, but it has been substantial with weaker product.”
Whatever the economic climate in the
US, overseas investors are still flocking to
the District. “Foreign buyers have stronger
buying power today due to the decline of
the dollar,” Trainor says. “I wouldn’t say
we necessarily have more international
investors looking, it’s just that they are
winning more bids.”–Maria Wood
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