Commercial Real Estate Enjoys Renaissance in D.C

Article excerpt

The global financial markets may be swinging wildly, but the regional real estate market is gliding along, according to third-quarter reports from area brokerages.

Leasing and construction are up and vacancies are down in the District, which in some ways is doing better than even the thriving Northern Virginia market, analysts said. Even commercial real estate in Maryland continues to have a strong year, despite mixed reports about the economy.

"[Space] is really getting tight," said Scott Price, director of research for Delta Associates, an Alexandria-based real estate research firm. The District "is one of the tightest markets in the country."

An expanding economy has been propelling the District's real estate market, analysts agree. Businesses, especially law firms, are expanding, so vacancy rates have fallen to their lowest level in 15 years, according to Delta Associates.

Tenants have absorbed more than 3.6 million square feet of space in the District this year, despite a shortage of the best, Class A space, where vacancy rates remain at a low 4 percent, Delta reported.

The shortage of Class A space has fueled development of such projects as 1201 F Street NW, the U.S. Mint offices at 801 9th St. NW and a mixed-use project of stores, offices and residences at New York and Florida avenues. Tenants have pre-leased about half of the construction now under way - which encourages speculative developers who don't have tenants lined up, brokers said.

Demand is strong enough that analysts think the current boom in construction won't catch up to the space shortage during the next year or two. Delta forecasts the District's overall vacancy rate of 6.8 percent to drop to 5.7 percent, and said in suburban Maryland, it's expected to drop from 7.8 percent to 6.5 percent.

But while demand for space remains strong, global financial disruptions mean money for construction has become scarcer. Analysts say that's particularly true for real estate investment trusts and commercial mortgage-backed securities, two markets that have become important for financing real estate in recent years.

"People are turning off the spigot," said Thomas Fulcher, corporate managing director and co-branch manager of Julien J. Studley Inc.'s D.C. brokerage.

In Virginia, where lenders have most noticeably reined in plans for future development because of fears about the financial markets, the picture is less clear. If developers build at the pace of the past year, the overall vacancy rate should return to a more normal 9 percent, Mr. …