Washington Region Office Market Is Still on Top

The numbers tell the story. The region's direct vacancy rate, currently at 8.2%, is down all around, with the District reporting a low 5% vacancy. The figure in suburban Maryland is 10.3% and in Northern Virginia vacancies are at 9.7%. All three areas of the region have shown a marked improvement over the year-end 2003 numbers of 5.9%, 11.2% and 12.7%, respectively. Additionally, positive net absorption for the year totaled about 7.4 million sf; deliveries totaled 6.9 million sf. With demand on the upswing, the region's average class A office leasing rate increased from $27.50 in the fourth quarter of 2003 to $29.25 in the fourth quarter of 2004; class B numbers remained relatively stable, declining slightly from $26.75 to $26.50.

An increasingly strong job market appears to be the backbone of the region's office market success. The federal government has continued to take on office space as it enhances homeland security and defense efforts, leaving the region in a better position than most other areas across the country during the last few years national economic strife. And private sector demand for space is picking up, as well.

The consistently hot metropolitan office market has continued to catch the eye of investors, both domestic and international; however, the property pickings are slim and the price tags are high. "Investor interest and capital flow into the Washington region continues to exceed the supply of buying opportunities, driving prices higher and cap rates even lower," Advantis concludes in the report. Still, the competition to buy in this market continues at a feverish pace.

Advantis is not at all alone in its assessment of the area. "The Washington market is exceptional," Margaret Donkerbrook of CB Richard Ellis tells GlobeSt.com. "The year ended with strong leasing activity and new construction." And law firms, she says, are a driving force behind much of the new construction. "When formulating their strategy and plans for occupancy, law firms look at the same horizon we do. We have tight market conditions and we're not overbuilding; it's in balance with demand." Indeed, some of the District's largest lease transactions in 2004 involved law firms; such as Piper Rudnick's preleasing of 200,000 sf at a 315,000-sf building being developed by Boston Properties, and White & Case LLP's take of 118,000-sf at One Metro Center.

The region's place at the top of the national office market ranking will, more likely than not, remain stable for the rest of the year and for some time beyond. Having recently compared the performance of 50 metropolitan markets, Grubb & Ellis has ranked the Washington, DC-Maryland-Virginia market number one on its Office Market Strength Forecast as the top region for the strongest investment prospects from 2005 thorough 2009.