Friday, January 8, 2010

Rents Signal Rise of D.C., Fall of N.Y.

The office market in Washington, D.C., is poised to topple New York as the nation's most expensive, reflecting the declining fortunes of the nation's financial center and the government expansion under way in the U.S. capital.

Rents declined in almost all of the 79 American cities tracked by Reis Inc., a New York based-research firm, in the fourth quarter of 2009. The largest fall was in New York, where average effective rents -- or the net amount tenants pay after landlord concessions -- fell nearly 20% to $44.69 per square foot annually. It was the sharpest decline in rents ever recorded by Reis since it began compiling data in 1981.

By contrast, average rents in Washington were $41.77 per square foot, down 3% annually. Reis estimates that by the end of this year, rents in New York will come down to around $41.07, slightly below their estimates for Washington of $41.27.

"The financial crisis hit New York hard, which is why it's down so much, whereas the government is one of the few sectors that has actually added jobs," said Robert Bach, chief economist for Grubb & Ellis, a Santa Ana, Calif.-based brokerage firm.

Nationwide, effective rents fell close to 9% last year to an average of $22.44 per square foot, Reis found. It was the largest annual decline on record. Meanwhile, the vacancy rate rose to 17%, the highest since 1994.

Washington's ascent may be shortlived, Mr. Bach notes. While Washington may remain strong relative to other cities, Mr. Bach said the city has a large amount of new construction under way, which could depress the market eventually.

In addition, another estimate puts Manhattan rates at $60 per square foot, while the average effective rent in Washington is $46. "I wouldn't anticipate New York falling as far down as $46," said Raymond Torto, global chief economist for CB Richard Ellis.

Rent prices in New York and Washington have long outpaced the rest of the nation -- and by a wide margin. In the past, usually after recessions that shrink business and expand government, Washington has moved ahead. But this time, the gap has narrowed sharply and quickly. As recently as two years ago, average rent in midtown Manhattan was $61 per square foot, nearly $20 per square foot higher than the average in Washington's prime downtown area. According to most commercial-real-estate brokers, the gap has nearly disappeared.

To be sure, the most prestigious office space in New York -- including Fifth, Park and Madison avenues -- remains among the priciest in the world, even though rent levels for those prestigious addresses are falling. In December, Brazil's Banco Itau agreed to pay more than $130 per square foot for half the top floor of the General Motors Building on Fifth Avenue with views of Central Park, perhaps the priciest lease per-square-foot of the year. Still, the space would have fetched 50% more three years ago, brokers say, and the landlord, Boston Properties Inc., offered concessions, a Banco Itau executive said.

"With tenant improvements we think we got a fair deal," said the executive, who declined to provide further comment. Boston Properties couldn't be reached for comment.

Landlords in Washington, by contrast, say strong demand means they can raise rents in the most sought-after buildings. Monday Properties, which controls about a third of the office space in the Washington suburb of Rosslyn, Va., has raised rents between 3% and 4% at 1000 and 1100 Wilson Blvd., two 31-story towers on the Potomac River. The vacancy rate in Rosslyn, which is about two miles from the Pentagon, has fallen slightly to under 6%, said Tim Helmig, head of Monday's Washington office.

Much of the demand comes from an expanding federal government and contractors and companies that need close access to the government. Of the 16 largest leasing transactions in Washington last year, 10 were by government agencies, according to tenant-brokerage firm Studley. In the fourth quarter of 2009 alone, the Department of Agriculture leased 330,000 square feet in southwest Washington, and the General Services Administration, which handles leases for government agencies, added 1.4 million square feet of new leased office space last year, bringing its total in Washington to 8.4 million.

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