Washington, D.C.

Vacancy rates continue to drop as the first speculative construction begins in the nation's capital. Spirits are high in metropolitan Washington, D.C., as companies, both new and expanding in the region, have brought many vacancy rates below 10% and spurred the first speculative construction since the 1980s.

The region is buoyed by the comeback of markets such as downtown Washington and suburban Maryland, which have been in need of resuscitation. And while there is speculation about the continued viability of area retail markets, shoppers and stores continue to blanket the region.

At the same time, the area's multifamily housing market is strong and growing and considered a hot investment among pension funds, insurance companies and REITs.

Downtown sees office redevelopment Washington, D.C., is seeing increasing numbers of office redevelopment projects this year including speculative work and an extremely active build-to-suit market. Thanks to financial institutions easing preleasing requirements, projects that might not have been built a year ago are now on the drawing boards and in the works.

"With many current buildings becoming increasingly obsolete and falling to Class-B and -C ratings, tenants are actively seeking higher quality buildings whenever the opportunity arises," says CB Commercial Real Estate Group Inc.'s Windows on the Marketplace.

"Downtown Class-A and trophy buildings have almost zero vacancy rates and, with what space there is, it is hard to find large blocks," says Chris Ludeman, executive vice president of CB Commercial at Tysons Corner.

"I think the office market has been really strong here, especially for Class-A office space because there is such a limited supply," says Hill Rogers, research analyst at Barnes, Morris, Pardoe & Foster. "In particular there is a limited supply of big-box office space in the District."

"The downtown Washington, D.C., office investment market has clearly come back to life in the past six months," says Susie O'Meara, director of research at Larson Ball & Gould Inc. "Where investors have been placing their funds only in certain well-defined niches for several years, they have now begun to carefully examine the market as a whole."

According to numbers supplied to Larson, Ball & Gould by Realty Information Group, nearly 120,000 sq. ft. of space was absorbed in downtown Washington, D.C., during first quarter 1997 for a prime vacancy rate of 8.8%.

Interest continues around the District's East End with the expected September completion of the MCI Center. "The MCI Center is great," says O'Meara. "The question is: When is it going to spur some office development? We are seeing signs of development -- people are looking, but there's not much action yet." The area is seeing property transactions as developers jockey for position in the market.

Two additional high-profile buildings still on track for redevelopment include two former retail meccas -- the old Garfinckel's and Woodward & Lothrop buildings. Carr Development and Construction Co. is overseeing renovations at Garfinckel's for overseas owners. The Washington Opera is still raising funds with hopes of transforming Woodies into a new opera house.

"There is a very good market particularly for the redevelopment of product," says Joe Moravec, regional partner of Charlotte, N.C.-based Faison. He adds that there is some conversion of smaller (100,000 to 150,000 sq. ft.) office projects to hotel.

Speculative building begins in Virginia Simply put, this market is tight.

According to Grubb & Ellis, the vacancy rate continued downward, dropping to 5.7%, and net absorption increased for the third quarter straight.

"Leasing has picked up since the first part of the year," says Jean Gerrity, director of market research at Faison. "We've absorbed approximately 1.4 million sq. ft. through mid-May in the region. Northern Virginia accounted for approximately 50% of 1997's growth and Maryland approximately 35%, with D.C. with about 15%."

Particularly strong is the build-to-suit market which, in turn, has spurred the first speculative building in several years.

The first 100% speculative project is Trammell Crow's 60,000 sq. ft. Avion Parkway in Chantilly, now under way with delivery in the third quarter. Trammell Crow was expecting to break ground in May on its Commerce Executive 6 -- a 145,750 sq. ft. building in Reston, which is where Carr America is awaiting site approval for two buildings totaling 325,000 sq. ft.

"The Reston-Dulles corridor is one of the more highly sought after markets," Ludeman says.

Kevin Goeller at KLNB's new office in Herndon adds that with vacancy rates as low as they are in much of the Virginia suburbs, "we have achieved a level where we were in the late-1980s. Without permits in hand, it will be two years before you get a building up."

Goeller says there are also a number of projects which he calls "semi-speculative" where developers are waiting for at least one tenant before breaking ground.

Maryland: High-tech's new Mecca With a growing presence of high-tech firms, the Reston-Herndon corridor is called Silicon Valley East. With companies jockeying for top space in this locale the build-to-suit market is busy.

Arthur Andersen has signed a letter of intent to take 200,000 sq. ft. of the proposed 408,000 sq. ft. Reston Town Center to start in December 1998. Oracle is heading to Route 267 at Reston Parkway to build 250,000 sq. ft. initially, while BDM International is planning a build-to-suit for 250,000 sq. ft. at the same Reston location.

Looking ahead, Dulles continues to be a major attraction to that corridor, especially now that the airport has tripled the size of its main terminal and is looking to grow its cargo capabilities.

Suburban Maryland commercial real estate markets have done a turn around in the last year, thanks in part to Northern Virginia. It's own central location on the East Coast is helping as well.

"There is a lot of pent-up demand from within the market," says J. Andrew Masters, senior vice president with Trammell Crow's Maryland Division.

Suburban Maryland's office and flex space is being absorbed primarily by expansion as well as companies leaving the District. Montgomery County in particular is a draw for professional, high-technology, biotechnology and life sciences firms looking to be near similar businesses and federal agencies.

"Companies typically are not moving to Maryland for better rent deals but for greater functionality and company efficiency," Ludeman says.

The renewed interest in Maryland has vacancy rates dropping in line with those in Virginia. First quarter numbers for Montgomery County show a prime vacancy rate of 7.9% and a total rentable space of nearly 45.8 million sq. ft. Net absorption for the quarter was approximately 395,000 sq. ft.

The most popular submarket is Bethesda/Chevy Chase, which in first quarter 1997 posted a 5.8% vacancy rate. And despite a prime vacancy rate of 18.9% and negative net absorption for the quarter, Silver Spring is coming back to life.

Significant for Silver Spring is what is not being built. A year ago Canada's Ghermezian Brothers were pushing for approval of their 2 million sq. ft. American Dream Mall. The project was rejected by the county with a renewed interest in that site for more appropriate development.

In mid-May, the county approved a mixed-use development being put together by Folger Pratt and Hazel Peterson Cos., which will include residential, retail and a minor hotel or office component. And while Suburban Maryland has yet to spur the confidence for speculative building, build-to-suit numbers are growing.

Multifamily maintains strength The region's multifamily housing market is never really a bad market, and right now it's almost too hot to handle, thanks to overwhelming interest in Class-A and Class-B properties by REITs, insurance companies and pension fund managers.

"REITs are into the market in a big way, even buying on the presale market, which has not been done before," says Al Cissel, director of the multifamily services group at Carey Winston/Barrueta. "This is a way to get in ahead of the competition."

Because of this active market, developers are moving quickly to capitalize on current conditions and renovate well-positioned buildings. Class-B and Class-C properties in the right areas are getting exterior and landscaping upgrades, new kitchens, appliances, carpet and sometimes clubhouses.

The Northern Virginia multifamily market is also seeing new construction. "Even though housing prices have leveled off, there is still relatively strong job growth in Northern Virginia, which is spurring the need for multifamily," Ludeman says.

Cissel says the suburban Maryland market is equally hot thanks to the fact that Virginia office markets are so tight.

This tight market means rising rents. Monthly prices average over $1,100 in Rockville and over $1,200 in Bethesda. The suburban Maryland average rent is $848.

At the same time, Class-A buildings in Washington, D.C., are pulling in $1,400 per month for high-rise locations. And in Northern Virginia, Class-A properties are renting on average for $889.

And in one of the largest multifamily deals of late, Carey Winston/Barrueta this spring brokered a huge deal in Alexandria. With a price tag of $60.5 million, Mount Vernon OPCO LLC purchased 1,387 units at Mount Vernon Square Apartments, the Mount Vernon Shopping Center and 8.7 acres of adjacent developable land.

"There is a good equilibrium here," Cissel says. "The demand is greater than the supply throughout the market."

Retail continues to draw interest Despite some market contractions and predictions that area retail markets are overbuilt and likely to suffer, the region remains strong and continues to be a draw for new entities.

"The money is here as is an educated workforce with disposable income, and that is worth the retailers taking a chance to be in this market," says Goeller of KLNB.

If the regional retail market is not mushrooming like it has over the last two to three years, it at least remains steady. Power centers with big-box retailers continue to come into the market despite the loss in the last year of such high-profile players as Herman's Sporting Goods, Best Products, Computer City, Luskins and PetStuff. Come summer, Rhode Island-based Bob's Stores expects to pull out of its four Washington market locations after being here just one year.

However, "the dire predictions of a year ago that the Washington metropolitan market was tapped out has not come to light yet," says David A. Ward, vice president of Hicks & Rotner Retail in Chevy Chase. "What this seemingly contradictory market means is that where retailers have fallen by the wayside, new ones are quick to move into the market," he says.

The last year has seen stores such as Modell's Sporting Goods, Borders Books, Barnes & Noble, HomePlace, Home Depot and Old Navy Clothing Co. expand throughout the region. Making especially big names for themselves in the last year have been Target, Kohl's and JCPenney.

A number of mall operators may also think JCPenney is heaven sent. In addition to its existing base of eight stores in the region, the Texas-based department store last July opened up seven stores in former Woodward & Lothrop locations. The move makes JCPenney the area's second largest department store behind the locally based Hecht's.

As a whole, Northern Virginia continues to perform very well on the retail front with many existing centers tight. Suburban Maryland is equally hot, especially throughout Montgomery County and in the Annapolis area, Ward adds.

"In Tysons, Fair Lakes and Springfield, it is difficult to find any large spaces, and Sterling is so hot that you can barely get in any more," Ward says.

New and expanding retailers in the next year to 18 months may have some more choices as plans for new centers continue to jump off the drawing board.

Jacoby Development of Atlanta expects to bring Home Depot and Target to its new 500,000 sq. ft. center in Frederick, which has yet to break ground. Come fall, Petrie, Dierman & Kughn hopes to break ground on its Centre at Hagerstown (600,000 sq. ft.), Centre at Winchester (500,000 sq. ft.) and Centre at Salisbury (350,000 sq. ft.).

Also expecting to break ground this fall is work on the Washingtonian in Gaithersburg, a 500,000 sq. ft. center with commitments from Kohl's and Gaylon's, a new sporting goods retailer from The Limited. Delivery is slated for mid-1998.

"Gaithersburg is still hot as retailers play catch up with years of residential development in the area," Ward says. "Milestone is almost full there, but the area around I-270, where Washingtonian is planned, has opportunity for big spaces which aren't in places like Rockville or Gaithersburg proper."

Esme Neely is a freelance writer in Annapolis, Md.

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