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Uncle Sam a big client in Washington’s office market in the first quarter

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Strong leasing activity from the federal government continued to drive Washington, D.C.’s office leasing market in the first quarter of 2011.  In response, the availability of prime office space in areas traditionally favored by government agencies — such as the Southwest and NoMa (short for North of Massachusetts) —  are declining to historically low levels, according to a report released Monday by international commercial real estate services firm Studley. 

While demand from Uncle Sam has remained strong, the private sector’s appetite for space remains sluggish.  According to Studley, the District’s availability rate has changed little from the fourth quarter, declining less than one percent in the first quarter to 11.3 percent.  In the Central Business District (CBD) and East End — home to many of the city’s private-sector companies — rates have remained nearly static during the past several quarters.  For instance, the CBD’s availability rate, currently at 13.5 percent is among the highest of any area in the District. 

There are some encouraging signs:  A handful of law firms, associations, and startups such as Living Social are leasing space. In fact, Skadden, Arps, Slate, Meagher & Flom LLP just signed the largest private-sector deal so far this year. The law firm agreed to a 15-year lease renewal/expansion for nearly 214,000 square feet in the historic Commercial Bank Building owned by Tishman Speyer. The deal, according to Citybizlist, was done in conjunction with Skadden’s simultaneous renewal/expansion agreement for 200,957 square feet at 1440 New York Ave. NW. It’s a separate building, owned by ING Clarion Partners, that is directly connected to the Commercial Bank Building. 

Federal leasing has reduced options for some of the largest tenants in the market. “We’re seeing that tenants with 150,000-plus square-foot requirements considering non-core submarkets have decidedly fewer options to choose from given the recent federal leasing activity, while tenants looking downtown have many more choices” said Christian Volney, research manager for Studley’s DC office. 

The future outlook is less certain.  “If government leasing activity slows, the District will need to rely on a broad-based recovery in the private sector to support the commercial real estate market,” said Studley Executive Vice President Tom Fulcher.  “While substantial changes to spending and entitlement programs will be unlikely to affect the market until after the 2012 election, we will experience a bit of a lull in the number of large tenants with lease rollovers in the next several years which could impede rent growth and limit demand for new space.”


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