When the law firm Venable Baetjer Howard & Civiletti surveyed real estate in downtown Washington, D.C., a year ago, it didn't find much appealing. The firm needed room for 200 employees so it could consolidate two locations. A couple of rehab projects were the only things available, but they weren't very exciting. "There wasn't a lot to choose from for our size and date of occupation," says William Coston, managing partner of the firm's Washington office.

Yet, Venable ended up downtown after all, leasing 245,000 square feet at the Terrell Place development project across from the MCI Center at 7th and F streets. The firm's search committee was impressed with the continued strength of the downtown market and the flurry of activity there. "The location is in the heart of the new downtown with restaurants, art galleries, transportation and entertainment," says Coston. "We think it will be a good location to attract young lawyers who want to be at a firm that's in a vibrant downtown rather than a sterile metal suitcase."

That's a switch. Just a few years ago, the hottest spot in the Washington-Baltimore commercial real estate market was Northern Virginia. Millions in hot investment dollars were flooding in as exciting high-technology companies - notably telecommunications - were leasing up shiny new offices. But many of those firms have tanked, and now the vacancy rates are as high as 25 percent in such high-tech corridors as Herndon.

By contrast, downtown Washington is chugging along. Despite a slowdown in 2001, vacancy rates there, including sublet space, remain in the single digits at 9.6 percent. Rents are among the most stable in the country, averaging $46.40-a-square-foot last year compared to $46 in 2000. And plush class-A buildings in the district are set to break the $400-per-square-foot threshold. Unlike Northern Virginia, downtown is a sellers' market. Most landlords are not offering rent concessions as they are across the Potomac River.

What's driving the rush downtown? A flood of federal spending after the Sept. 11 terrorist attacks. Federal agencies are ramping up and grabbing office space, making for slim pickings. Big law firms such as Venable likewise are on a leasing binge, making downtown Washington one of the hottest commercial real estate markets in the nation. "The government is the underlying foundation here. Law firms are here, associations are here, corporate and government affairs' offices. It's really a stable base," says Scott Price, director of research for Delta Associates, a real estate research firm in Alexandria.

The market's strength is changing downtown's geography. For years, an imaginary line seemed to exist down 14th Street. Law firms, lobbyists and other prime tenants would not rent east of the line. Yet, the line has been slowly stretching eastward as available prime space disappears. One consequence is that the city's downtown core is taking on an after-hours life that's never really existed in Washington as it has in New York and other major cities. "People are going where they wouldn't have gone before," says Thomas M. Fulcher Jr., a senior vice president at the brokerage firm of Julien J. Studley.

Demand for large new spaces has fueled new projects. The lower end of the market is getting stripped out to create larger spaces in redevelopment projects such as the one at Terrell Place that will connect the original Hecht's store in Washington with a new nine-story building that incorporates historic facades and another new 11-story building.

While good news to big-time tenants, smaller ones are getting squeezed out. There are few deals in the 50,000- to 75,000-square foot range because landlords are reluctant to break up larger spaces, and they're waiting in the belief that rental rates will go up. "Once they do that, they lose all their ability to bring in a large user," says real estate lawyer Casey Aiken.

On the down side, however, there are signs that the Washington market is softening. There have been no sector meltdowns as in Virginia, but concerns linger about the economy and uncertainties after the terrorist attacks. The District's healthy vacancy rate could edge upwards to 10 percent by year's end with about 2 million square feet of sublet space expected to be returned to the market by the end of June. Tenants are not going out of business, but they remain jittery, says John Donovan, managing director for the Washington region of CarrAmerica, a real estate investment trust. "They're heading to the sidelines. They're trying to avoid making decisions since their crystal ball isn't working well," he says. At the moment, however, downtown D.C. is riding high.

Return to Virginia Business - June 2002