Demand for Mid-Size Office Areas Drops
washingtonpost.com
By Neil Irwin
Washington Post Staff Writer
Monday, July 22, 2002; Page E03
There's a divide in the market for office space in the District.
Big law firms and government agencies keep signing pre-leases for spaces they plan to occupy in 2004, 2005 or 2006. But in the here and now, some in the industry report there has been precious little new activity among small and mid-size tenants. That means that buildings around town with an empty floor or two are, in many cases, staying that way.
"The market is F-L-A-T," Tom M. Fulcher Jr., a senior broker at Julien J. Studley Inc., said of the market for mid-size office space.
"It's not completely flat, but it's pretty close to flat," said Jay B. Olshonsky, who heads the Washington area practice CB Richard Ellis.
New numbers are out for the office market's performance through the second quarter. In the District, those numbers aren't as bad as they could be, but they aren't very good, either.
In the first half of the year, 2.5 million square feet of space were leased in the District, off 39 percent from the same period in 2001, according to a report from Cushman & Wakefield.
Meanwhile, direct absorption (the amount of space newly leased minus that returned to the market), a strong indicator of the office market's momentum, was essentially flat in most parts of the city in the first half of the year.
The only part of the city with large gains in net absorption was Capitol Hill, where the opening of new buildings drove absorption up to 1.1 million square feet.
Real estate executives say the flat statistics reflect a bifurcated office market in the District. Big law firms and other tenants who have leases expiring a few years down the road realize their options are limited and are pushing to seal deals for big spaces.
So, for example, earlier in the year, Finnegan, Henderson, Farabow, Garrett & Dunner LLP signed a lease for 2005 for 250,000 square feet of space in a new building at 901 New York Ave.
But landlords with a floor or two sitting empty right now are having a harder time finding tenants.
"In the 5,000- to 30,000-square-foot range, the current stuff isn't moving as quickly as anyone would like it to," Olshonsky said.
Stephen F. Lustgarten, executive vice president of developer Blake Real Estate Inc., said there has been interest in buildings where he has vacancies, such as the newly renovated 1425 K St. NW.
The only problem is that the tenants in the market aren't solid, mid-size types, but rather are on the small end.
"I would love to have 30,000- or 40,000-square-foot tenants, but instead we're getting a lot of 4,000- and 10,000-square-foot," he said.
The situation is even tougher for organizations that have extra space on hand that they are trying to sublease.
While direct rents in Washington have been quite stable, particularly compared to those in parts of Northern Virginia, a law firm that has fewer people on staff than it expected would have a hard time unloading the extra space.
"The sublet space out there is representative of demand going down," said Fulcher, of Studley.
Direct-leasing rates have been stable, those in the industry say, because landlords are more inclined to wait out the slump with empty space than to get locked into a long-term deal with low rents.
But that hasn't stopped organizations wishing to sublet space from dropping their rents.
Industry sources say it is not uncommon for sublet tenants to be able to get short-term leases at rates $10 per square foot below the rate that the primary tenant is paying. (The average asking rate for Class A space in Washington was $44.78 per square foot at the end of June, according to Cushman & Wakefield).
Nonetheless, some see signs of life. Even as a summer lull sets in, and cautious companies are made all the more so by a continually dropping stock market, there is activity.
Lustgarten said that although he has been disappointed with the size of the tenants that have been interested in space, he has been pleasantly surprised at the level of interest.
"We're getting pretty good volume, and pretty good pickup in activity," he said. "We all got spoiled around here for a while, with two or three tenants competing for every space. Now it's just one tenant negotiating for a space at a time."
"It has surprised us how busy we've been in just the last few weeks," said Audrey Z. Cramer, an executive vice president at Cushman & Wakefield.
"People were holding back on their requirements because of uncertainty, but are starting to realize you can't wait forever.
"Usually, summer is a very quiet time in this town's commercial real estate market. We joked you could get more deals done in Nantucket than in Washington. But we've found we're very busy lately." |
