WASHINGTON, DC-The metro area’s 303-million-sf office market is in solid shape on vacancy, net absorption and investment sales, but there is increasing competition for tenants between the Southwest and Capitol Hill submarkets in DC and Northern Virginia areas, according to a second-quarter analysis by the Washington office of GVA Advantis.

The race to snare big-user tenants is specifically noted in the 8.9-million-sf, 31-building Southwest submarket and the 12.6-million-sf, 66-building Capitol Hill corridor. In Southwest and Capitol Hill, “developers have built large buildings in recent years, expecting to fill them with federal tenants,” explains Tonya L. Ginter, research director at GVA Advantis. “Some of that space has remained largely vacant,” including 500 12th St. SW, developed by JBG Cos. and 25 Massachusetts Ave. NW, developed by Republic Property, Ginter says.

“One of the reasons is that agencies dealing with defense and homeland security are expanding, but mostly in Northern Virginia. That has left some vacancy in these markets, which are home to agencies such as NASA, the Department of Education and the Department of Agriculture,” the researcher says. The Southwest submarket is also facing competition from Crystal City in Northern Virginia. Crystal City is luring government tenants with lower rents and new shopping centers and restaurants.

“Still, that is not stopping developers from putting 739,000 sf of space under construction in Southwest and another 225,000 sf under renovation, with only 26.9% of it preleased,” Ginter points out. Full service, class A asking rent in Southwest averages $48.41 per sf; class B is at $42.05 per sf. Capitol Hill asking average rent for class A space is $38.61 per sf; class B, $32.22 per sf. Northern Virginia average asking class A space is $29.74 per sf; class B, $25.62 per sf.

Second-quarter overall vacancy in metro’s 303-million-sf market, including sublet space, is 9%, up from 8.6% in the first quarter but down from 9.2% in second quarter 2005. Southwest vacancy with sublet space is 7.9%. Capitol Hill vacancy is at 7.5%. Northern Virginia vacancy, including sublet space, stands at 10.4%.

A total 15.8 million sf of new construction is in the pipeline, with 7.3 million sf in Northern Virginia; 6.6 million sf in the District; and 1.8 million sf in suburban Maryland.

On the investment sales side, buildings in the District are averaging about $400 per sf; $243 per sf in Maryland; and $297 per sf in Northern Virginia. GVA Advantis’ Ginter calls the prices “some of the highest seen in recent memory.” However, she says “that may change, in select markets, if vacancy rates go up and rents soften, as a glut of new buildings come on the market.”

Ginter adds, “Investors still want a piece of the stability of the Washington, DC market because it typically has not suffered the up and down swings of, say Boston and San Francisco, where rents spike and then fall back to pre-spike levels.” Conversely, in Metro Washington, “there has historically been a steady upward climb” in rent rates, she says.

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