The pace of activity in Metropolitan Washington picked up in the second quarter of 2005 after tepid leasing activity during the first quarter. The market rebounded with positive net absorption of nearly 1.7 million square feet. Across the region, the vacancy rate fell from to 10.7% in the first quarter to 10.2% at the end of the second quarter. Sublease space declined as well from 7.5 million square feet to 7.2 million square feet, causing the availability rate to drop from 13.3% to 12.5% in the second quarter. The Northern Virginia market accounted for much of the region’s growth during the second quarter, as the amount of available space decreased approximately 5.4% and average asking rents increased to the highest level in three years. In the District, demand remained strong and average asking rents continued to exceed all time highs.
Washington, DC
Demand remained strong in the Washington, DC market as government agencies, law firms and non-profits/associations continued to account for the vast majority of the activity within the District. Tenants absorbed 444,622 square feet during the second quarter. Despite the positive net absorption, the vacancy rate increased from 5.9% to 6.6%, the highest level in nearly six years due to several recently completed projects. Washington, DC’s vacancy rate, however, remained the lowest of all metropolitan area markets in the country.
Due to continued demand and still relatively few space options, rental rates continued to grow to all time highs throughout the District. The average rental rate increased from $40.87 per square foot to $41.46 per square foot with the average asking Class A rental rate increasing more than 13% over the past year to $46.95 per square foot. The trophy market has experienced the largest rental rate increases over the same time period with average asking rental rates in some trophy buildings reaching the mid-$60.00’s per square foot level.
The pace of development activity remained frenzied with four buildings delivered to the market in the second quarter. The four buildings, which totaled 1.5 million square feet, had healthy preleasing activity; 68.3% of the space was preleased. An additional 5.2 million square feet is under construction and scheduled to be completed by 2007 with 50.8% of the space preleased. By the end of 2007, supply of the Washington, DC market will have grown 18.6% since the beginning of 2000, an astonishing figure representing the health and vigor of the District’s market compared to other markets around the country. In comparison, the Manhattan market will have grown by 2.7% over the same time period.
Northern Virginia
The Northern Virginia office market experienced an up-tick in leasing activity in the second quarter, despite the DOD’s issuance in May of the BRAC Report, which could have enormous effects on the Arlington and Alexandria markets. The market posted positive net absorption of 1.3 million square feet, causing the vacancy and availability rates to fall; vacancy decreased from 10.7% to 10.2% and the availability rate dropped from 13.3% to 12.5%. Despite supply increasing by more than 3.6 million square feet over the past six quarters, nearly 6.5 million square feet have been absorbed in the market, shifting the availability rate downward from 14.8% in the first quarter of 2004 to 12.5% at the end of the second quarter 2005.
After nearly three years of negative rental rate growth in Northern Virginia, rental rates gained momentum the past three quarters. Average asking rent rose from $26.74 per square foot in the first quarter to $27.27 per square foot and increased 8% over the average asking rent at the same time last year. Nearly all of the Northern Virginia submarkets posted rental rate growth gains over the past year, with the Rosslyn and Herndon submarkets posting the largest gains. The average rental rate in Rosslyn increased 11% year over year, from $29.61 per square foot to $32.89 per square foot and Herndon asking rents shot up as well, with the average asking rent increasing from $23.56 per square foot to $26.31 per square foot over the past twelve months.
The market remains strong with demand sprouting from the existing Northern Virginia tenant base, but also from the Class B tenant base in the Washington, DC market. Washington, DC taxes and operating expenses are more than double those in Northern Virginia in some cases. Due to this, tenants have begun to consider the Northern Virginia market as a significantly more reasonable and viable alternative for their space requirements. Several DC tenants are actively looking for space in the Northern Virginia market, a trend we expect to continue as long as the cost difference continues.
Suburban Maryland
Inconsistency amongst the various Suburban Maryland submarkets characterized the market for the second consecutive quarter. While the Bethesda and I-270 markets of Germantown and Rockville experienced increased vacancies, space options decreased in the Silver Spring, Chevy Chase and Greenbelt submarkets. The hot Silver Spring CBD posted market gains once again as vacancy fell from 10.5% to 8.7% in the second quarter.
Overall, vacancy inched up from 11.5% to 11.6% in the second quarter, but remained significantly below last year’s level of 13.2%. Meanwhile, the availability rate dropped slightly from 14.5% to 14.4%, and remained 260 basis points below last year’s availability rate of 17%. The market experienced negative net absorption of 87,152 square feet during the quarter. Despite two consecutive quarters of minimal negative net absorption, the market has absorbed 2.2 million square feet spanning the past six quarters. The large quantity of space removed from the market in that time period contributed to owners pushing asking rents upward. The average asking rental rate jumped 4.5% from the first quarter, from $23.21 per square foot to $24.25 per square foot.
Development activity slowed from 2004, despite improving market conditions and increased demand the past year 408,582 square feet of new supply has hit the market so far in 2005, with an additional 701,550 square feet scheduled to deliver over the next 18 months, 71.6% preleased. Speculative development accounts for only 26.3% of all development projects. Of the 184,650 square feet of speculative development, a mere 19.5% is preleased.
Contact – John Sikaitis, Research Manager
