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Country’s political/economic troubles slow recovery of D.C.’s office market

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The economic and political turmoil during the third quarter exerted a massive influence over the Washington, D.C., leasing market, according to Jones Lang LaSalle.  The Washington office of the Chicago-based real estate firm cited mid-term elections, a divided Congress, the rising budget deficit and the pending election as factors that have slowed the recovery of the Washington region office market.
Jones Lang LaSalle said in a report Tuesday that leasing activity — particularly among federal agencies and government contractors — slowed considerably during the third quarter as tenants became more cautious in making real estate decisions. An unclear regulatory environment, a push for government austerity and a deteriorating economic environment created uncertainty for a number of sectors.

Overall, the federal government accounts for 23 percent of the leased tenant space in the Washington region. After expanding more than 5 million square feet in 2010, this largest occupier of space moved to the sidelines in 2011. JLL noted that so far this year, more than 3 million square feet of federal requirements have been cancelled. Although leases signed in previous quarters by the Federal Bureau of Investigation and Department of Veterans Affairs — among others — helped in the first three quarters of 2011, it said this engine of growth has come to a halt.
“Although leasing activity throughout 2010 was brisk, the market lost considerable velocity in the first three quarters of 2011,” said Scott Homa, vice president of research, for Jones Lang LaSalle.  “This quarter we saw average deal sizes shrink as tenants worked to be more efficient in their use of space and reduce operating costs. We also saw an increase in renewals as tenants looked to save on moving costs and renegotiated more favourable rents with owners.”

A number of government contractors are consolidating operations or placing excess space on the market for sublease as they wait to see what happens with the federal government. Within the Washington, D.C., Metro Center market,  a total of 1.3 million square feet of second-generation Class A space is set to be vacated over the next 36 months. Most of these relocations are a result of companies downsizing. Similarly, JLL said the regional suburbs also are facing rapidly rising vacancy rates within the class B and C sectors as tenants continue their migration to newer, more efficient spaces.

According to the report, leasing activity at new developments, such as 900 N. Glebe Road and 6348 Walker Lane in Northern Virginia, continued to flourish and took large blocks of recently delivered space off the market. Pricing pressure across the region may intensify due to the growing split of market conditions based on location and asset quality. Within a relatively limited volume of new leases signed during the third quarter of 2011, average deal terms showed little fluctuation from previous quarters. Concessions remained high, with new 10-year deals in downtown Washington, D.C., commanding six to nine months of free rent and improvement allowances often in the $70- to $90- per-square -foot range.

While the development pipeline is slowing with the falloff in tenant demand, JLL predicts that the wave of second-generation space hitting the market will likely push vacancy rates upward over the near term, before falling gradually over the long term based on the slowdown in new construction.

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