Brokerage Outlook: Washington, D.C.

For a report on the Baltimore-Washington retail market, please click here for the Maryland section.


• Washington, D.C., Retail

• Washington, D.C., Industrial

• Washington, D.C., Office

Washington, D.C., Retail Galloway Submitted by George Galloway, principal with the Alexandria, Virginia, office of Next Realty Mid Atlantic LLC. Posted 1-06-06. What area is your expertise? • We have three business units, and we work primarily in the Washington, D.C.; Baltimore; and Richmond and Hampton Roads, Virginia, metropolitan statistical areas. Our business units are: retail brokerage, which includes landlord and tenant representation work. acquisitions, where we focus on purchasing shopping centers, freestanding buildings, parking facilities and land acquisition for future development. shopping center development run by our new development partner, Richard Kabat. What trends do you see presently in retail development in your area? • Demand for retail space continues to outstrip supply in the Middle Atlantic Region, especially in the Washington, D.C., metropolitan area. We continue to predict strong growth, measured by additional shopping center space coming on line and improving retail sales, in our industry in 2006 and beyond. What type of retail product is doing well in your area? • Everyone is trying to build mixed-use projects. Some have worked very well, again, especially in the Washington area, where traffic is worse and people are accustomed to living, working and shopping in denser confines. What retailers are new to your area? • There were no real new "drivers" of shopping center development in 2005. Most have been here for a few years. Grocery stores like Harris Teeter and Wegmans and large format operators like Target and Kohl's continue to spur the most growth of shopping centers. As always, drug stores, banks and quick service restaurants are spurring pad development throughout the Middle Atlantic. Who are the active retail developers in your area? • There are many, but the most active seem to be Regency Realty, The Peterson Companies, Lerner Companies, JBG Companies, Toll Brothers, KSI Services and Edens & Avant. Please name one or two significant retail developments in your area. What impact will these projects have on the market? • National Harbor, under development by The Peterson Companies, comprises 7.3 million square feet, including 2,500 residential units, 4,000 hotel rooms, 1 million square feet of retail space and 500,000 square feet of office space. It is probably the most significant project to come to Prince Georges County, Maryland, in the last 10-15 years. • Village at Leesburg, which will be developed by KSI Services, will feature 1 million square feet of office and retail space and will be anchored by Wegmans, Barnes & Noble and Arhaus Furniture. Where is the majority of development taking place? Why is this area doing well? • The largest developments are taking place in suburban growth markets like Leesburg and Gainesville, Virginia, and Lexington Park, Maryland. Population growth is the precursor to all successful retail growth. Dr. Stephen Fuller with George Mason University estimates that we had 83,000 jobs in 2005; in 2006, he expects 75,000 new jobs; in 2007, he expects 68,500 new jobs. What area do you expect to be the next big retail development market? Why? • Likely, it will continue to be Eastern Loudoun County and Western Prince William County, Virginia, in the Washington market. Richmond and Hampton Roads are also active. Please describe the retail leasing activity in your area. • Leasing activity is robust and will remain that way in the foreseeable future. What major leases have been closed recently? • Target, Wegmans and Harris Teeter have recently opened stores. Please give a measure of retail vacancy rates. Please give a measure of available sublease space. • According to a study conducted by Delta Associates, vacancy rates for Metro Washington Area grocery-anchored shopping centers were 2.9 percent in 2005. What types of retailers should look into your market in the coming year? What type of retail is needed? • There is little that should be here that is not. We will see a new baseball stadium built along the Anacostia Waterfront in Washington, D.C. It is anticipated that the Baseball District will include several hundred thousand square feet of retail and restaurant space, up to 1.5 million square feet of office space, several thousand housing units, and 7,000-8,000 parking spaes. The dream is that the area will become a 24-7-365 entertainment, commercial and residential center, will generate jobs and will rejuvenate a once moribund area of the district. Would you like to make any additional observations about the retail market in your area? • The Middle Atlantic Region features some of the best retail markets in the United States. Retailers that come to this region typically feel that they initially overpay in order to secure locations here. Once in business, they find their stores' average unit volumes to be higher. Moreover, by virtue of the fact that the region has extremely high disposable incomes and that it is an extremely difficult region to develop in, retailers find that they are insulated from competitors' entry into the market. Simply, retailers find that building stores and restaurants in the Middle Atlantic Region is worth the extra time, aggravation and expense of coming here. Attention, retailers and restaurants: the water's great, so JUMP in!

Washington, D.C., Industrial Skogmo Submitted by Scott Skogmo, managing director with the Columbia, Maryland, office of Sperry Van Ness/Skogmo Commercial. Posted 06/07/07. What area is your expertise? • Baltimore/Washington Corridor industrial market. Specifically, the Interstate 95 corridor from Baltimore through Prince George’s County, Maryland, primarily including Howard, Anne Arundel and Prince George’s counties. What trends do you see presently in industrial development in your area? • Speculative industrial buildings are getting larger with higher ceilings and cross dock capability. A 28- to 32-foot clear is now typical for speculative industrial facilities, and 300,000- to 600,000-square-foot cross-dock buildings are not uncommon. Almost all are tilt-up concrete construction. Some developers are offering smaller speculative buildings for sale to users in the 60,000- to 100,000- square-foot range, but pricing is well above $100 per square foot. Rental rates are increasing due to a shortage of development sites and increasing construction costs. What type of industrial product is doing well in your area? • Class A, tilt-up concrete distribution centers are doing well with ceiling heights above 28 feet, ESFR sprinkler systems, deep truck courts (more than 130 feet), and additional space for trailer parking. Who are the active industrial developers in your area? • In the tri-county area of Howard, Anne Arundel, and Prince George’s, the most active developers based on total industrial and flex square feet owned are Merritt Properties, St. John Properties (formerly MIE), Manekin, Trammell Crow Company, and Opus East. Based on square feet under construction, Preston Partners, Jackson-Shaw Company, and Atapco are at the top of the list, with projects such as Preston Gateway, The Brick Yard and Steeplechase. There is approximately 1.5 million square feet currently under construction in this market area, according to Costar. Please name one or two significant industrial developments in your area. What impact will these projects have on the market? • Significant new projects in the area include Preston Gateway, Dorsey Run Industrial Center and The Brick Yard. Preston Gateway is a more than 1.7 million-square-foot development located in Anne Arundel County, Maryland, near the interchange of Route 100 and Interstate 295 (Baltimore-Washington Parkway), offering immediate access to Baltimore/Washington International Airport (BWI) and Arundel Mills Mall. More than 760,000 square feet of Class A industrial has been developed to date, with more than 500,000 square feet leased, and an additional 300,000 square feet under construction. This project is significant due to its size and strategic location. It has been several years since one developer has been able to offer this much space in one project in the Baltimore/Washington Corridor. Development and leasing services are handled by Preston Partners. Dorsey Run Industrial Center, which is located at 7595 Montevideo Road in Jessup, Maryland, includes a new, speculative distribution center of 612,900 square feet, the 340,000-square-foot Baltimore Aircoil distribution center, and a new build-to-suit office building for Baltimore Aircoil. The new distribution center developed by Trammell Crow Company features a 32-foot clear ceiling height, 50-foot by 50-foot column spacing and cross-dock loading. Within the facility, 178,121 square feet has been leased and 434,779 square feet is available. This is the largest single distribution facility to be developed in the Baltimore/ Washington Corridor in the last 15 years. CB Richard Ellis is handling the leasing. The original Baltimore Aircoil distribution center, built in 1975, has been purchased by Exeter Property Group and is to be redeveloped with new and renovated office and distribution space. The site is 36 acres. The Brick Yard, located in Beltsville, Maryland, is a strategically located 125-acre business park campus to be developed over the next several years. Located between Contee and Muirkirk roads just off Route 1, the park will have immediate access to the future Inter-County Connector. It also borders an existing MARC station. Up to 700,000 square feet of office/warehouse-industrial development is planned, with most of the buildings in the 50,000- to 100,000-square-foot range. An additional mixed-use component may be offered next to the MARC station in the future. Jackson-Shaw Company is the developer and The Michael Companies is handling the leasing and sales.             Where is the majority of development taking place? Why is this area doing well? •The majority of industrial development is oriented as close to I-95 as possible. Although Route 301 and I-81 are heavily used alternate East Coast distribution routes, I-95 continues to be the primary north/south connector from Maine to Florida. What area do you expect to be the next big industrial development market? Why? • While infill sites are being developed along I-95, the new and next wave of development will continue to move west to I-81 and north to Harford and Cecil County, Maryland. Traditionally, companies that needed more than 200,000 square feet of industrial space have considered the I-81 corridor near Hagerstown, Maryland, and the Cecil and Harford County markets because of the greater availability of industrial land and lower prices. Sites along Route 301 in Prince George’s County have also attracted many larger industrial users. Sites in the Baltimore/Washington Corridor oriented to I-95 are valued at $300,000 to $400,000 per acre, effectively pricing out some industrial users. Please describe the industrial leasing activity in your area. • The three-county industrial market of Howard, Anne Arundel and Prince George’s includes more than 124 million square feet of industrial space, of which 92 percent is currently leased, with a vacancy rate of just 10 percent. This dynamic market has experienced a net absorption of over 818,000 square feet of flex and industrial so far this year and over 1.7 million square feet last year. More than 8 million total square feet were leased in this market area last year. Please describe the industrial sales activity in your area. • This market area continues to attract national investors resulting in a very robust sales market. According to Real Capital Analytics, average capitalization rates for industrial sales in the D.C. and Maryland suburbs has been 7.1 percent and 7.2 percent, respectively, in the greater Baltimore market. Most of the industrial and flex product in these markets trades in portfolios, making it very challenging for users who are looking for that elusive single building to purchase. The most recent large transaction in the market area was RREEF’s purchase of the Gateway Commerce Center, a 1.9 million-square-foot industrial portfolio in Columbia, Maryland, that sold for approximately $120 million as reported by the Howard/Arundel Report. The same portfolio was last sold in 2004 for $100 million. Please give a measure of industrial vacancy rates and a measure of available sublease space. • The subject market area currently offers more than 1.69 million square feet of sublease space, which is about 1 percent of the market. The direct vacancy rate is currently about 10 percent. What impact do current interest rates have on the industrial market? What predictions do you have for interest rates and their effect on the industrial market in the next year? • Low interest rates experienced over the last few years have resulted in a boom of industrial condominiums offered in the market. Most of these developments have fared well, with new shell space selling to smaller users in the $125 to $130 per square foot range. It appears that this trend will continue as rates are forecast to remain stable for the near future. Most industrial condominium developments have sold units in the 3,000-to 5,000-square-foot range, however, some are now offering users the option of buying larger 10,000-to 30,000-square-foot, free-standing buildings as part of a condominium regime. What industries do you expect to expand in the next year to absorb a great deal of industrial space? What areas will be affected? • The Baltimore/ Washington Corridor market has thrived over the years due to its diversity of tenant occupants. No specific industry is the dominant occupier of industrial space in our market. Although the defense industry has taken significant space over the last few years, and technology users prior to that, the area has always attracted major distributors due to the strategic location in the middle of the nation’s fourth largest consumer market. It would be difficult to find a major consumer brand that is not represented with some type of distribution arm in this market with access to 8 million people within about an hour’s drive. Government contractors, the GSA, consumer products and technology service industries will continue to expand in this market area. Would you like to make any additional observations about the industrial market in your area? • With rental rates on some new office/warehouse offerings pushing above the $7 per square foot per year mark, many brokers are expecting rental rates and sale prices to continue increasing over the next few years. A combination of factors such as the limited supply of industrial land, increasing construction costs, BRAC expansion, and an extremely healthy, diverse local economy will continue to push prices upward. Many have advised their clients to lease it, renew it, buy it, or build it now, because it will probably cost them more next year. Note: Statistics for this report were provided by Costar, Real Capital Analytics, and the Howard/Arundel Report.

Washington, D.C., Office Donohoe Submitted by Bert Donohoe, senior vice president of the Washington, D.C., office of Donohoe Real Estate Services/CORFAC International. Posted 09/25/07. What area is your expertise? • I will be discussing Washington, D.C. What trends do you see presently in office development in your area? • We have observed a recent trend where internationally acclaimed architects have been engaged to design projects in our market, creating office product outside of typical “Washington” standards.  Who are the active office developers in your area? • The JBG Companies, Monument Realty, Opus East and Lerner Enterprises. Please name one or two significant office developments in your area. What impact will these projects have on the market. • The Waterview project, located just outside Washington, D.C., in Rosslyn, Va., is currently being developed by The JBG Companies. The mixed-use project, which contains 1.3 million square feet, consists of a 634,000-square-foot office tower, a 30-story hotel with 154 rooms, and 133 luxury condominiums, all with views of the Potomac River and D.C.’s monuments. The office tower, which is fully leased to Corporate Executive Board for a 20-year term was recently sold to The Paramount Group for $412 million or $650 per square foot. Where is the majority of development taking place? Why is this area doing well? • The Navy Yard area in the Southeast submarket is the most active submarket due to the availability of raw land. The new 305,000-square-foot Department of Transportation Headquarters, the relocation of NAVSEA (Naval Sea Systems Command) from Arlington, Va., and the baseball stadium for the Washington Nationals, which will deliver in April 2008. What area do you expect to be the next big development market? Why? • Eventually, the next big development market will be east of The Anacostia River, where the only remaining large parcels of land are located within The District. There has been resistance from developers to make this jump, and local and federal officials will need to provide incentives to facilitate new development in this area. What areas are doing well in terms of office leasing? Which areas are struggling with office leasing? • The Central Business District (CBD), East End and Navy Yard areas are doing well with very strong market fundamentals. NoMa, the area North of Massachusetts Avenue, is struggling due to a lack of an amenity base and perceived safety issues. Please give a measure of office vacancy rates. Please give a measure of available sublease space. • The overall vacancy rate for Washington, D.C., is 6.2 percent. Sublease space accounts for approximately an additional 1.5 percent. What impact do current interest rates have on the office market? What predictions do you have for interest rates and their effect on the office market in the next year?  • With interest rates rising, we have seen a slowing in the investment sales market from record levels in 2006, however, D.C. remains a very strong investment market due to the stability of the Federal Government. We see interest rates continuing to rise throughout 2007, with only a marginal effect on the office sector. What is the status of job growth/(un)employment rates and what bearing will it have on the office market? • Job growth for the Washington, D.C., region is predicted to be 49,800 new net jobs in 2007 and the unemployment rate is estimated to be 3.4 percent. These strong fundamentals will continue to fuel positive net absorption of office space throughout the region. Is there any type of office tenant absorbing a majority of space? What industries do you expect to expand in the next year to absorb a great deal of office space? What areas will be affected? • Law firms, government agencies and government contractors absorbed the majority of the space in the region in 2006. We see a continuation of that trend, with an increase in the government agency sector, as federal funds are appropriated in Congress in 2007. Would you like to make any additional observations about the office market in your area? • Washington, D.C., will remain a strong office market due to the presence of the federal government and a limited supply of developable land. Debate concerning the height restrictions within the city and improving the traffic problems are issues that will shape the midterm future of the office market.