The Washington region's office market in the third quarter registered its worst performance since late 2009, a sharp contrast to a boom the area saw throughout 2010.Now owners are adjusting to the likelihood that the public sector and its sprawling support system in the private sector will halt its growth in coming years—or even shrink.
"For us, it'll mean a relatively flat market, which we're not used to," said Douglas Donatelli, chief executive of First Potomac Realty Trust, a large office landlord in the region. "We're used to a market that absorbs space."
The federal government is by far the largest occupier of space in the region. The General Services Administration alone, which handles the bulk of federal leasing, accounts for 15.3% of the privately owned office market, according to brokerage CBRE Group Inc. Washington, by contrast, was the envy of landlords in most other cities through much of the recovery. Even when times were rough after the economy turned in 2008, Washington managed to escape with fewer scars than most other cities—likely aided by increased federal spending—and then roared back to be the best-performing office market in 2010.
In the first half of the year, investors were paying up for office buildings at values above those reached in the market's prior peak of 2007. For example, Beacon Capital Partners sold a 680,000-square-foot office building known as Market Square to Wells Real Estate Investment Trust II in March for a record $905 a square foot. The recovery in the Washington D.C. metro office market is expected to continue at a slow pace throughout the remainder of 2011 and into 2012.