- The Washington Times - Friday, February 21, 2003

New office space in the District and a glut of inexpensive, top-notch space in Northern Virginia are making life difficult for landlords of older properties.

Call it the B and C Blues.

With more than 20 million square feet of new office space under construction or proposed in the District, and about 3.1 million square feet set to deliver this year alone, older buildings, known as "Class B" or "Class C" properties, are getting squeezed out of the picture.

Class B office space is generally regarded as any recently renovated building that is more than 20 years old without a steel-and-concrete construction. About 890,000 square feet of this space was made vacant in the District last year, according to Grubb and Ellis. The vacancy rate of Class B space is at the highest level in three years, and landlords, facing competition from new Class A space, are offering concessions and perks such as free rent, technology upgrades and furniture. Class B rent rates fell about 1.2 percent in 2002, Grubb and Ellis said.

The main pressure on Class B and C properties comes from the massive amount of new space being built in the District and, with redevelopment projects planned in nearly every corner of the city, the construction pipeline appears to have no end.

But there are other factors affecting Class B and C buildings. For one thing, new Class A space can be found in Northern Virginia for as much as $10 per square foot less than in the District.

"Class A space is so cheap," in Northern Virginia, said Kathryn Schmitt, research manager for Grubb and Ellis. "There's so much sublease space out there."

Real estate analysts said this year will be characterized by heavy concessions such as free rent and furnished offices on Class B properties. One positive for Class B landlords, though: The difference in rent rates between Class A and B properties in the District is still about $5, meaning that only a handful of tenants in the District have migrated from Class B to Class A space.

"The difference in rent rates is still too far, but you are seeing some tenants moving on the cusp," said Bruce Pascal, executive managing director of Insignia/ESG's District office.

Meanwhile, Class C space, or any older space that has not been recently renovated, is starting to disappear. In the Central Business District, there is almost no Class C space left. The buildings at 1700 and 1703 K. St., the last two prominent Class C buildings in the submarket, were demolished and are now under redevelopment as Class A properties. In the Southwest and Southeast portions of the District, all Class C space is located in three buildings slated for demolition this year.

The gradual elimination of Class C space could force many low-revenue or nonprofit businesses to either leave the city, or fill up cheaper Class B space.

"There are plenty of groups, like nonprofits and lobbyists, and they don't want to pay top dollar," said Mary Peterson, senior vice president at Cassidy and Pinkard.

In other news

•Atlantic Realty bought 41 acres of land in Ashburn, Va., for construction of a 300,000-square-foot retail, office and hotel complex. The office portion will consist of four, two-story condominium-style buildings comprising 62,000 square feet.

•Insignia/ESG said it secured $36.7 million in financing on behalf of Quadrangle Development Corp. and ING Barings for the 225-room White Flint Marriott Hotel and Conference Center in north Bethesda. The financing included $21.5 million in construction financing and $15.2 million in joint-venture equity.

Property Lines runs Fridays. Tim Lemke can be reached at [email protected] or 202/636-4836.

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