- The Washington Times - Friday, January 24, 2003

News that the Department of Homeland Security would, at least for the time being, be located in the District was good news for those who feared a mass emptying of office space in the city.

And it couldn't come at a better time. Analysis of the office market in the District shows that the office vacancy rate has reached its highest level in three years, at just over 5 percent. In some places, rental rates are beginning to fall, and concessions offered by landlords are increasing.

The vacancy rate in the District rose 1.5 percent last year, according to the 2002 year-end report from Spaulding and Slye Colliers, a District real estate services firm.

Sublease space, or extra space not needed by tenants, rose 8 percent in 2002. What's more, there is nearly 5.9 million square feet of office space under construction or planned in the District, which some analysts said could lead to an oversupply.

"The increase in projected new space may be slightly more than the level of anticipated demand," Spaulding and Slye Colliers said.

But the news isn't all bad. More money is expected to be spent this year for contractors working with Homeland Security and the war on terrorism. And thanks to the hefty amount of spaced leased by contractors, the District is already one of the most stable office markets in the nation, trailing only New York and Los Angeles in most surveys.

And within the region, the District is clearly the most solid submarket. Consider: the vacancy rate in Northern Virginia is nearly 15 percent, about three times that of the District. In Montgomery County, the story is only slightly better. The county reports a vacancy rate of about 13 percent.

Bargain hunting

While many commercial real estate investors have thrown eye-popping chunks of money at big buildings around the area, First Potomac Realty Trust is banking on getting a solid return from an inexpensive investment.

The Columbia-based firm paid $27.5 million for two office and flex properties, comprising eight single-story buildings. The two sites, called Snowden Center and Rumsey Center, total more than 270,000 square feet. Each is more than 90 percent leased. The total per-square-foot cost is just under $100, or less than half the average price for office space in the region.

"I think we're able to do this because other companies are paying high prices," said First Potomac President Doug Donatelli. "We think that for us, there are more properties out there."

Mr. Donatelli said the properties his company purchasesit now has 11 in alltend to be management-intensive. But it's a great market to pursue because there are few big players cornering the market, he said.

The fundamentals of owning higher-maintenance properties might differ from tasks facing companies spending upwards of $250 per square foot for top-tier high rises. But certain things are the same, particularly when looking for tenants. Most of First Potomac's leases are signed by government agencies and contractors, which are viewed as more stable and credit-worthy tenants.

In other news

•Law firm Blank Rome LLP said it will lease 79,577 square feet at 600 New Hampshire Ave. NW., part of the Watergate Complex. The firm will eventually occupy the top three floors of the 12-story building, plus about 12,000 square feet of space on the ground floor.

•Buchanan Partners , a Gaithersburg-based developer, broke ground on Phase II of the Euclid Business Center in Manassas. The 59,000 square-foot, two-building project will sit next to Phase I of the Euclid Center, which has 86,500 square feet and is 85 percent leased.

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

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