Despite Headwinds, Washington, D.C. Office Market Continues to Shine
June 28, 2011
By Michele Lerner, Contributing Writer

The Washington, D.C. office market experienced a "phenomenal" year in 2010, in the words of Ernest Jarvis, senior vice president of First Potomac Realty Trust.

Total office space absorption in 2010 within the city limits was a record-breaking 4.3 million sq. ft. CB Richard Ellis (CBRE) reports that 78% of the growth in 2010 came from the government sector, which occupies 40% of the city's office space. While that may be difficult to repeat, experts believe real estate fundamentals are in place to keep the local office market healthy for the remainder of 2011.

Leasing activity was higher in the first three months of this year than in the first three months of any year since 2006. More than $1.5 billion of properties traded hands in the first three months of 2011 compared with a total of $2.6 billion for all of 2010

Washington, D.C.'s office market has long been the beneficiary of the presence of the federal government, which not only leases space for its agencies but also drives private sector tenants such as lobbyists, associations and attorneys to take space near the seat of power. Office space in all classes within the city limits totals 123.5 million sq. ft.

...Local experts say the office market is still healthy, despite an uptick in the vacancy rate from 9.7% in the fourth quarter of 2010 to 10.1% in the first quarter of 2011. Gains in Class-A and trophy markets in the District in the first three months of 2011 were offset by tenants leaving Class-B office space. In spite of this slight rise in the vacancy rate, it is still an improvement over the first quarter of 2010 when the vacancy rate stood at 12%.

...Thomas Fulcher, executive vice president and Washington, D.C. branch manager for tenant representation firm Studley, says that he is not seeing a lot of activity on the tenant side.

"Law firms are the biggest driver of the Class-A market, so they are watched very carefully," says Fulcher. "For the most part, none of the big law firms will be making any moves until 2015." ...Fulcher says everyone is playing a wait-and-see game to determine the impact of a drop in government spending.

"There will be winners and losers, and it's possible that some law firms, associations and lobbyists will be busier because everyone will be going after more limited funds," says Fulcher. "Last year, the government propped up the local market but now the private sector is stepping in," he adds.

Fulcher says that some of the larger law firms are opting to leave their big spaces and move into places with plenty of amenities such as 1000 Connecticut Avenue, which has a downtown location next to a Metro station and a glass exterior with city views.

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