Q1 DC Office Market Snapshot from Grubb & Ellis

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Following is a brief overview of the Washington, D.C. metro office market during the first quarter of 2010 from Grubb & Ellis:

REGION

Office vacancy increased to 15.7 percent in the first quarter of 2010, up 30 basis points from the fourth quarter of 2009, largely due to 1.1 million square feet of new construction that was delivered to the market.
Overall net absorption was positive 342,500 square feet, while the Class A average asking rental rate increased $0.43 to $40.06 per square foot.
The area also posted a decrease of nearly 900,000 square feet of available sublease space.

Analysis:
The deceleration in vacant space coming to the market, positive net absorption and decrease in available sublease space are all very promising signs that the market is heading toward stabilization. Though there is still a significant surplus of Class A space, large blocks of it will become less readily available as the year progresses, potentially spurring tenants to make a decision earlier as they consider the options available in the market. Though the signs are positive, the market hasn't fully begun its recovery yet - "blend and extend" lease renewals will be the norm until job growth returns.

WASHINGTON, D.C.

The vacancy rate in the District office market increased 40 basis points to 12.0 percent from the fourth quarter of 2009.
The market had overall positive net absorption of 324,434 square feet in the first quarter.The federal government signed five of the top 10 leases executed during the quarter, which will provide additional positive absorption in the near future.
Class A average asking rental rates decreased by $0.48 to $53.83 per square foot for the first quarter. Despite the decrease, rates are still relatively high due to recently delivered buildings with above-average asking rental rates.
Construction levels are down from their highs in 2009 to 3.6 million square feet, much of it preleased.

Analysis:
While the Washington, D.C. , market has fared better during the recession than most cities in the nation, the lower levels of positive absorption and upward-trending vacancy rates illustrate a softening in the market. As a result, landlords are still offering generous concession packages and reduced rental rates. Going forward, the federal government is likely to continue to be the driving force in the market, with overall recovery not expected until 2011. In the meantime, tenants will continue to seek to restructure existing leases by employing methods such as "blend and extend" lease agreements.

NORTHERN VIRGINIA

Vacancy crept to 15.2 percent, an increase of 30 basis points from the previous quarter, though strengthening market conditions in submarkets bordering the District, such as the Rosslyn-Ballston Corridor, Crystal City/Pentagon City and the I-395 Corridor, helped vacancy rates there to remain in single-digit territory.
The market saw 250,000 square feet of negative net absorption, offset by several new leases and expansions by federal government agencies, which will bring positive absorption in the coming quarters.
Northern Virginia has a total of 3.2 million square feet under construction. This includes 1.7 million square feet at Mark Center in Alexandria , which is 100 percent preleased to the Department of Defense.
First quarter average Class A asking rental rates in Northern Virginia stood at $32.97 per square foot, unchanged from year-end 2009.

Analysis:
While overall commercial real estate fundamentals continued to soften in Northern Virginia , submarkets closer to the District fared well as federal government agencies contributed to an increase in leasing activity. With much of the area's construction restricted to high-demand areas inside the beltway and some of it preleased by the government, the fallout of new construction deliveries will be minimized. Job growth is expected to return to the area earlier than elsewhere in the country, and as a result, vacancy will decrease as companies take more office space.

SUBURBAN MARYLAND

Suburban Maryland 's first quarter overall vacancy rate was 15.9 percent, up 20 basis points from the previous quarter.
Overall negative net absorption was just over 11,000 square feet, a significant reduction over levels posted during previous quarters.
Suburban Maryland saw some uptick in first quarter average asking rental rates, with the average asking Class A rent increasing by $0.08 to $30.56 per square foot and the overall average asking price edging up $0.04 to $27.06 per square foot.
Just 123,000 square feet of new construction is underway, boding well for recovery as tenants look to existing vacancies for new space.

Analysis:
Class A and C space saw positive net absorption during the quarter, indicating that a recovery may not be far off as leasing activity continues to pick up. Landlords are still making rent reductions and offering attractive lease packages, however, and will likely continue to do so until significant demand for space re-enters the marketplace. The construction pipeline has emptied for the most part, indicating the market is in a good position to recapture tenants in existing space before breaking ground on new developments.

To access the full Washington, D.C., Metro Office Trends report and other Grubb & Ellis research publications, visit www.grubb-ellis.com/research.