The federal government is one of the largest single property owners and users in the world, with a portfolio of more than 3 billion square feet. Historically, it has been one the most powerful drivers of office space in the Washington, D.C., metropolitan area, with a local portfolio exceeding 220 million square feet.

Throughout the past year, the federal government’s increased scrutiny of location and building security, federal agencies’ administrative and departmental reformulations under the Department of Homeland Security, and the private sector tenant’s general reactions to doing business in downtown Washington, have all contributed to a very anxious real estate environment.

At one point, market participants were even unsure whether private sector office buildings located in close proximity to important federal buildings would lose their economic viability.

Despite an anxious tenant base and relatively softening demand, Washington continued to show stability compared to other major metropolitan markets. While the General Services Administration (GSA) continues to take center stage in its quest for space (total leased and owned in Washington: 85 million square feet), the private sector is still holding its own.

In some notable private sector transactions, the law firm of Finnegan Henderson leased 250,000 square feet to kick off the construction of 901 New York Avenue, CareFirst committed to a 240,000 square foot build-to-suit office building in the Capitol Hill submarket, and the law firm of O’Melveny & Myers leased nearly 120,000 square feet in the CBD submarket.

At 6.8 percent, Washington continues to boast the healthiest market with the lowest vacancy rate among all major U.S. markets.

And while demand has softened during the past year, vacancy has risen only about 1.5 percent since last fall.

Through the first three quarters of 2002, absorption in the district reached more than 600,000 square feet, primarily because of the delivery of more than 900,000 square feet of new space. Absorption for sublet and relet space actually measures negative 400,000 square feet through the first three quarters of 2002.

A relatively low vacancy rate and steady demand for large blocks of space have kept developers bullish on new construction for the foreseeable future.

Rents Remain High

Despite the slightly softer market conditions, rents have not moved downward significantly. Average asking full-service rents for class A space are slightly more than $38.00 per square foot, with trophy space averaging $49.25 per square foot.

Average asking full-service rents for class B space have reached $32.90 per square foot, up slightly from 2001. Concessions such as free rent and moving allowances are typically still not being included in deal structures.

Through the rest of the year, the federal government will continue to be a powerful driver for office space demand in the Washington area. Through at least 2006, government-related leasing activity will remain strong because of the increased focus on homeland security and the expiration of about 450 GSA leases, totaling more than 22 million square feet.

With the federal work force decreasing during the past decade, government-related services have increasingly been contracted to outside companies.

The government’s presence will maintain and expand the existing base of service companies and contractors, and will attract new private sector tenants, like major law firms that require access to federal agencies, biotechnology firms in Maryland that require access to FDA and the National Institutes of Health, and defense contractors in Northern Virginia that require access to the Pentagon and the CIA.

In 2001, federal procurement in the Washington area surpassed $30 billion. However, while government contractors have helped build activity and leasing in the Washington metro area market, a solid recovery of the real estate market will be dependent on the national business economy.

-Robb Johnson (robb.johnson@staubach.com) is senior vice president and manager of the Virginia office of The Staubach Co., an international real estate services and strategy firm. Peter Brohoski (peter.brohoski@staubach.com) is vice president of Staubach’s Education & Municipal Services group in Washington, D.C., and Bill Lawson (bill.lawson@staubach.com) is senior vice president and Staubach Federal Government Practice Group leader in Washington, D.C. For more information, visit www.staubach.com.