- The Washington Times - Thursday, July 12, 2007

The nation’s war footing and solid corporate earnings bolstered office rents in the Washington area, but the demand for space is slackening.

Rents for large office buildings put up since 1985 are up 3.2 percent halfway through this year compared with one year earlier, according to the real estate research firm Delta Associates.

As office rents rise, “It means we’ll become more of a professional services headquarters than we are,” said Tim Priest, executive director of the Greater Washington Initiative, a business research group.

More employers are keeping their lower-paying jobs in other towns where rent is cheaper but putting their most highly skilled workers in Washington, he said.

Rents have been rising steadily in Washington since 2003 as defense spending has compelled the federal government to hire more employees, rent more buildings and give out more contracts.

Now that most of the employees and contractors that need to be hired already are on the payroll, real estate firms say government expansion can no longer be counted on to keep demand for office space high.

“Federal procurement spending has leveled off,” said Elizabeth Norton, Delta Associates‘ Mid-Atlantic research director. “Federal procurement spending really drives the economy and drives jobs in the Washington area.”

Of the 10,600 government jobs added to the Washington region’s economy in the past year, 80 percent were hired by municipal and state agencies. Only 20 percent were for the federal government.

Federal employees are predicted to make up 9.6 percent of the region’s work force by 2012, down from 10.4 percent now, according to the Greater Washington Initiative.

Lighter demand from the government does not mean the office market is going away, only that factors such as construction costs, zoning requirements and industry growth are becoming as important as federal procurement in determining rents.

Only 7.5 percent of Washington’s office space is vacant, compared with a nationwide average vacancy rate of 12.7 percent.

The outlook for Washington’s office market continues to be good, although more moderate than the roaring growth of the past four years.

“Current conditions suggest that rent growth may continue in the near term for submarkets located inside the Beltway, but it likely to stagnate soon for those submarkets located outside the Beltway,” the Delta Associates report said.

Democratic control of Congress is likely to affect federal spending, possibly shifting funds from Northern Virginia defense contractors to suburban Maryland health industry contractors, the company reported.

CB Richard Ellis Group, a real estate services firm, largely agreed that Washington’s robust office demand would slow soon.

Real estate developers delivered 340,000 square feet of new office space in the second quarter of this year but leased only 212,000 square feet of space, CB Richard Ellis reported.

“Funding for the war in Iraq has limited most other federal government real estate-related spending,” the CB Richard Ellis report said. “Lobbyists, architects, consultants, law firms and nonprofits represented the majority of leasing activity during the quarter.”

Nationwide, employment gains in office jobs drove rents up an average of 3.1 percent in the second quarter of 2007 compared with one year earlier, according to real estate research firm Reis Inc.

Property Lines runs on Thursdays. Call Tom Ramstack at 202/636-3180 or e-mail tramstack@washingtontimes.com.

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