First quarter Washington, D.C. area office market is restrained.

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Persistently higher vacancy rates, driven by contractions and unhurried tenant demand, restrained office markets in the Washington, D.C. region during the first quarter, according to preliminary first-quarter research reports released by CBRE Group.  Still, employment forecasts point to a brighter 2014 overall.

“Key sectors are forecast for growth, with office-using professional services and financial firms seeing improvements in 2014.  As some certainty returns to the market with a long-term budget deal, we are hopeful for modest improvement in future quarters,” John Germano, executive managing director of CBRE’s Washington-Baltimore region, said in a statement.

The CBRE reports reveal first-quarter market activity dominated by contractions, renewals, and sublets:

•         Washington, D.C. large government-related contractions dragged on net absorption numbers, with the vacancy rate increasing slightly to 10.8 percent. Tenant demand continues to be driven by professional services, including law and financial services firms.  About 35 percent of the tenants with more than 10,000 square feet in the market are professional services firms, compared to 25 percent at the same time last year.

Key transactions included in the first quarter included:
  The National Labor Relations Board contracting and moving into 143,000 square feet at 1015 Half Street SE in the Capitol Riverfront.
Millennium Challenge Corp contracting by 32,000 square feet and moving to 1099 14th Street in the East End.
The General Services Administration renewing 56,500 square feet at 1250 Maryland Ave. for the Federal Communications Commission.

The first of two CityCenterDC office projects delivered this quarter: 800 10th Street is 86 percent leased, primarily to Covington and Burling. Two other large office developments broke ground in Southwest DC:  400 6th Street (471,500 square feet) is scheduled to deliver in 2015 and The Wharf (225,000 square feet) delivers in 2017.

•        In Northern Virginia, the office market is set to deliver 1.7 million square feet in 2014, down from the 2 million square feet delivered in 2013.  Lerner Enterprises announced in January that it will press ahead with the office tower at 1775 Tysons Blvd. for delivery in 2015 or early 2016.

With few large deals being signed and an assortment of small- and medium-sized deals filling empty space, the vacancy rate remains flat at 16.3 percent.  Large move-outs in Arlington cancelled out positive growth along the Dulles Toll Road. To inspire additional business growth, the Arlington County Board is considering an expansion of tax breaks to technology companies with less than 100 employees.

The quarter’s largest move in Northern Virginia was by Marymount University, which signed a lease for 87,000 square feet at 4040 N. Fairfax Drive.

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