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Fed Budget Questions Impacts DC Rents

Just three years after reigning as the top national office market, government cutbacks have pushed back leasing in Washington, D.C., placing tenants in full control.

First quarter 2013 results from a few commercial real estate companies show Washington, D.C. rents have stayed flat for eight straight quarters, and concessions remain high. Of the major markets CBRE tracks, Washington, D.C. had the highest increase in its vacancy rate in the first quarter, 40 basis points. The office vacancy rate now stands at 14.2 percent, according to CBRE. "Strength has definitely switched in the past 18 months in favor of tenants," says Jeff Kottmeier, director of research and analysis with CBRE's Washington, D.C. office.

The slowdown can be directly traced to both the uncertainty with the federal budget, and to public and private tenants looking to reduce size for efficiency reasons, says John Germano, an executive managing director with CBRE. "I don't think we really saw a hit from sequestration," he says. "It's mostly firms such as General Dynamics and Northrop Grumman who have just decided not to move forward with expansions until they understand more what the federal cutbacks will mean."

On the public side, along with drops in personnel, the Office of Management and Budget has frozen all further leasing plans, and is requiring all federal tenants to come up with a three-year plan to reduce occupancy, with the report due by mid-May. "While many large tenants are being proactive and entering the market today well in advance of their 2015-2017 lease expirations, near-term tenant demand is limited," says Mike Ellis, mid-Atlantic market director for Jones Lang LaSalle.

Thomas Fulcher, an executive vice president with Studley in Washington, D.C., says the law firms in particular are looking to cut back, he says, and a number of large firms are looking at lease expirations in the 2016-17 timeframe, including Sidley Austin and Venable. "It's going to be an interesting time to see where everybody lands," he says. "Where 10 to 15 years ago, all the law firms thought 750,000 sq. ft. was a good size to be in, now everybody's getting tighter and looking for probably around 550,000 to 600,000 sq. ft."

More significant, Fulcher says, is that with a current tightness of large blocks, there is a glut of small space. "We did a space report recently on the 40,000-sq.-ft. range, and there were about 50 options," he says.

However, both Germano and Fulcher agree that the region is still a stable, top-shelf market, regardless of the current slowdown. Buyers still outnumber sellers of office buildings, and development is starting to crop up in choice markets.

The CityCenterDC project, a four-block mixed-use property being developed by Hines along New York Avenue, is expected to be finished by the end of the year, but the 520,000-sq.-ft. office portion will be complete in June. Covington & Burling anchors the project at 420,000 sq. ft., the American Hospital Association recently agreed to lease 40,000 sq. ft. and two other tenants have committed to leases to bring the offices to 95 percent occupied, says Howard Riker, managing director of Hines in Washington, D.C.