- The Washington Times - Monday, October 23, 2000

Rising rental rates and dwindling develop-ment opportunities could push big office tenants out of downtown Washington and into the su-burbs, changing the decades-old dynamics of the region's real estate market.

The District's improving eco-nomy has given the city its strongest office market in decades, with a vacancy rate of 3.4 percent, the lowest since at least 1970, according to Alexandria-based real estate research firm Delta Associates.

But brokers predict that market forces could eventually force some big tenants in the District to pull up stakes and head to the suburbs, where rent is cheaper and developable land is more plentiful.

"Eventually, one of the D.C. law firms is going to move to Northern Virginia. When that happens, the doors will open," said Eric H. West, a partner at West, Lane & Schlager Realty Advisors LLC, a D.C. brokerage and consulting firm.

Such statements would have been unthinkable five years ago, brokers say. Law firms have driven the commercial real estate market in the District for decades, and many have clung to prestigious K Street NW and Pennsylvania Avenue NW addresses even as a new generation of lucrative clients technology companies have sprung up in the suburbs.

Mr. West said there will not be a mass exodus of law firms from the city, but he said the market could make it harder for at least some big-ticket tenants including law firms and accounting firms to stay in the District.

D.C. rents are growing between 10 percent and 14 percent annually, with some landlords asking for more than $50 per square foot, about $10 more per square foot than the asking rate in the suburbs, according to Delta Associates.

There are also fewer oppor-tunities to develop new land in the District than in the suburbs. Delta said the city is home to 101.6 million square feet of office space, with an additional 7.5 million slated to be built through 2002.

By comparison, Northern Virginia alone is home to 125.7 million square feet of space, with an additional 19.7 million in the pipeline through 2002.

The combination of higher rents and fewer opportunities to develop new property in the District has inspired developers to build sophisticated or "trophy" offices in the suburbs, according to Lois A. Zambo, an executive vice pres-ident for D.C. brokerage Julien J. Studley Inc.

Ms. Zambo said the Waterview, a $250 million project in Arlington that will feature two towers of 24 and 28 stories apiece, is one suburban project that could appeal to tenants who favor a D.C. address.

The buildings were designed by famed architects Pei Cobb Freed and Partners. They will sit across the Potomac River at the foot of the Francis Scott Key Bridge in Rosslyn.

Construction on the Waterview is tentatively scheduled to begin in mid-2001.

When it is completed, Ms. Zambo said the complex will provide big-ticket tenants like lawyers and accountants with the kind of downtown-style signature office space they crave, while also giving them close proximity to the District.

"It isn't inconceivable" to think the first major law firm to leave the District will move to the Waterview, she said.

Cushman & Wakefield, the leasing agents for the Waterview, said rents will be around $40 per square foot. The average rent for office space in Rosslyn is $28.95 per square foot, according to Delta.

Suburban outposts

Few D.C. law firms will discuss their real estate plans publicly. Likewise, brokers are not willing to speculate on firms that may be interested in chucking expensive digs in the city for cheaper space in the suburbs.

But the notion of major D.C. office tenants setting up shop outside the city's borders isn't new.

Accounting giant Arthur Andersen opened an office in Tysons Corner in 1982, but has kept its regional headquarters in the District. Last year, sister firm Andersen Consulting moved its regional headquarters and about 2,000 workers from the District to Reston Town Center. Virginia provided Andersen with more than $2 million in incentives to relocate.

Law firms on the move include Brobeck Phleger & Harrison, which has an office downtown but has also leased 55,000 square feet in Reston, while Pillsbury Madison & Sutro plans to shift its regional headquarters from New York Avenue NW to Vienna.

Pillsbury's operations director, Bjarnie R. Anderson, said his firm will move the bulk of its employees, including 90 lawyers, to five floors in the Tysons Corner-area building now under construction. It will also keep about 10 lawyers in a small office in the city, Mr. Anderson said.

"We certainly aren't going to be abandoning D.C.," Mr. Anderson said, adding that the firm wants to keep a presence in the city, even though rents are rising.

Mary S. Petersen, research chief for the D.C. brokerage Cassidy & Pinkard Inc., said the explosion of technology companies in Northern Virginia has lured away lawyers and accountants from the District.

"These firms have to service their clients, and the client growth is in the suburbs," Mrs. Petersen said.

Mr. West said firms like Pillsbury that expand outside the city may pave the way for other tenants to leave the District altogether.

"What this comes down to is an expansion of the D.C. market," Mr. West said, adding that the lines that once divided the city from neighboring suburban markets like Bethesda, Tysons Corner and Reston have become blurred.

What that may mean for the District itself is not clear. Officials for the D.C. Office of Planning and Economic Development declined to comment for this article.

But developers and brokers point out that big tenants who drift out of the District and into the suburbs cost the city in lost tax revenue and a smaller employee base.

Riding the wave

Developers say they are ready to ride the wave of tenants who may abandon the District in favor of the suburbs.

Thomas D'Alesandro, vice president of Terrabrook, the lead developer of Reston Town Center, said his project appeals to tenants who want to be in a neighborhood setting, with a mix of offices, shops and restaurants.

"These clients are not interested in suburban office buildings. They want to be in a high-density, mixed-use environment near a transit stop," Mr. D'Alesandro said.

Delta Associates said the hottest office submarkets in the D.C. area are in Northern Virginia, particularly the Tysons Corner and Reston areas. More than 12 million square feet of space is under construction in Northern Virginia, compared with 5 million in the District and 3 million in the Maryland suburbs, Delta said.

Developers say fewer building opportunities exist in Maryland because its suburbs are older and more established.

Bethesda and Chevy Chase, the toniest submarkets in Maryland, are, for the most part, built out, developers say. According to Delta, the combined Bethesda-Chevy Chase submarket is home to about 9 million square feet of space, of which 1.9 percent is vacant.

"Absence of zoning changes, you can't do [large mixed-use projects] in those markets," said Brian P. Coulter, a partner at the JBG Cos., the firm building the Waterview.

Like Terrabrook, JBG is focused on new development around transit stops. Mr. Coulter said his firm is also planning Arlington Gateway, a 1-million-square-foot, mixed-use project in Ballston that will feature 335,000 square feet of office space and a 336-room hotel.

Jeffrey S. Abramson, developer of the Tower Building under construction in Rockville, said his project could become a destination for the same kinds of tenants flocking to Northern Virginia.

The 10-story Tower Building will be the centerpiece of Tower Oaks, a 2.5 million-square-foot, 200-acre project along Interstate 270 that mixes homes, offices, hotels and parkland.

Mr. Abramson said the building will be marketed toward a range of companies, including law firms and technology companies.

"We think it is easier to create this kind of total environment for employees in the suburbs," he said.



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