Prepared with the invaluable assistance of Dr. Stephen Fuller

The Washington metro area economy is recovering faster than other large metro areas. The Federal government continues to bolster local economic growth, adding the largest share of total new jobs, at 16,000, during the past 12 months. This growth, coupled with an estimated increase in Federal procurement to total $84.0 billion in 2010, a 7.0% increase from 2009, will sustain the metro area through the balance of 2010.

Payroll employment increased 5,800 in the Washington metro area over the 12 months ending April 2010. This represents a rise of 0.2%, compared to the national decline of 1.0% during this period.  With 3.0 million payroll jobs, the Washington metro area ranks the fourth largest job base among metro areas, behind New York, the LA Basin and Chicago.

The Washington area unemployment rate was 5.9% at April 2010, up from 5.5% one year ago. This compares to the national rate of 9.9% in April 2010. The national rate declined to 9.7% in May 2010.

The Washington area’s gross regional product (GRP) was $405.5 billion in 2009 in current year dollars, a decrease of 0.5% in 2009 from revised 2008 figures. This reflects a slight recession for the Washington metro area during 2009.

We expect the Washington metro area economy to slowly recover during the balance of 2010 – adding new jobs methodically. Although we believe the local economy is in recovery, we expect the speed to be slow, as consumers and companies remain cautious.  We expect consumer confidence will edge up moderately this year. As jobs continue to be added to the local area during the balance of the year, consumers will increasingly become more optimistic. As consumers feel more confident, retail sales will start to pick up on both essential and non-essential items.

The Washington metro area office market experienced mixed, but on balance encouraging, signals during the 2nd quarter of 2010.  Prospects for improvement are good, with a declining construction pipeline and job growth gaining momentum. Overall, the metro area remains one of the top performing markets in the nation.

Mid-Year 2010 Market Highlights:

• Net absorption: 2.4 million SF in the 2nd quarter, compared to 630,000 SF in 2009.
• Sublease space: Decreased by 176,000 SF. Sublease space represents 1.3% of the standing inventory compared to 3.4% at the peak of 2002.
• Overall vacancy rate: 12.8%, down from 13.2% in the 1st quarter, but up from 12.1% one year ago. Fourth lowest rate in the nation.
• Direct vacancy rate: 11.5%, up from 10.6% last year at this time.
• Space under construction: 4.6 million SF, down from 10.5 million SF one year ago.
• Pre-lease rate: 51%, compared to 32% a year ago.
• Rents: Down 4.2% during the 1st half of 2010, compared to a decline of 6.9% in 2009.
• Investment sales: $887 million during the 1st half of 2010, inclusive of partial interest sales. Average sale price: $329/SF.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

The Washington/Baltimore flex/industrial market experienced improving conditions during the 1st half of 2010, as compared to 2009. Market conditions held up better in the Baltimore metro area than in the Washington metro, as a handful of deals kept absorption only modestly negative in the region during the past six months. Tenants were active leasing bulk warehouse space. However, gains experienced in this property type were offset by tenants vacating flex/warehouse and flex/R&D space.  Rents declined over the past six months as vacancy remains elevated and property owners competed for tenants.  The limited amount of space in the construction pipeline will help stabilize the market during the balance of 2010. Overall, flex/industrial conditions are sluggish in the Washington/Baltimore region, but should stabilize during the balance of 2010 as fundamentals slowly improve.

Mid-Year 2010 Market Highlights:

• Net absorption: Negative 200,000 SF during the 1st half of 2010, compared to negative 2.3 million SF in 2009.
• Sublease space: Decreased by 700,000 SF. Available sublease space represents 0.7% of standing inventory.
• Overall vacancy rate: 11.3%, up from 10.5% one year ago.
• Direct vacancy rate: 10.6%, up from 9.7% a year ago.
• Under construction: 743,000 SF, down from 1.5 million SF one year ago. 40% pre-leased, down from 44% a year ago.
• Space delivered: 311,000 SF during the first half of 2010, compared to 1.8 million SF in 2009. 3% of space delivered in the first half of 2010 was leased upon delivery, compared to 25% in 2009.
• Rents: Down 2.8%, compared to declining 4.3% in 2009.
• Investment sales: $306 million ($85/SF) during the 1st half of 2010, compared to $137 million ($58/SF) during 2009.
• Land sales: No notable land sales in the first half of 2010, compared to $20.3 million in 2009. Average price per land SF was $5.09.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

The Washington metro area economy continued to exhibit recovery, albeit slow, during the 1st quarter of 2010. Washingotn maintains one of the strongest economic bases in the nation. We expect the Washington metro area economy to recover slowly during the balance of 2010.

The Washington metro area has over 119 million SF of retail space, inclusive of all types of retail, in over 1,000 shopping centers. Northern Virginia is home to over half of the total metro retail inventory.

The metro area has 25.9 SF of retail space per capita, compared to the national average of 23.4. Although Northern Virginia and Suburban Maryland are above the national average, the District remains underserved at just 8.6 SF of retail space per capita.

For specific data on vacancy rates and rental rates in the Washington metro area, please contact us to receive a complimentary subscription to the full report.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

To receive a complementary copy of the full report and be added to future distributions, contact Donna Dennis.

For This Development Cycle the Train is Leaving the Station: Rents Rise Smartly and Vacancy is Down as Absorption Sets Another Record.

Highlights of market performance as of Mid-Year 2010:

• Stabilized vacancy rate for investment grade apartments (Class A and B) is 3.1%, down from 4.3% a year ago. With the national rate at 8.2%, this is the lowest vacancy rate of any metro area in the nation.
• Rents for all investment grade apartments were up 3.6% over the past twelve months. Class A rents performed even better, rising by 4.2% during this period, compared to a decline of 1.8% during the preceding year.
• Annual Net Absorption, at 11,845 Class A and B apartments, set a new record due to a surge in Class B apartment absorption. Class A absorption continued at a strong pace with 6,770 units absorbed, remaining one of the strongest in the nation. Average monthly absorption at new projects increased to 14 units per project per month, propelled by strong lease-up pace at projects delivering during the Spring.
• Concessions at Class A projects edged lower, following a pattern first seen in this cycle in the first quarter of 2010. At mid-year 2010, concessions were 4.1% of face rent, compared to 6.2% of face rent at mid-year 2009.
• Pipeline: After the pipeline ballooned to 36,951 units in December 2007, largely driven by the reversion of condominium projects, the pipeline began its cyclical decline, continuing downward to a new historical low of 16,606 as of year-end 2009. As the horizon for improving market fundamentals grew closer in second quarter 2010, the pipeline edged up to 17,309 units. We believe that we are now seeing a cyclical increase in the development pipeline, although it will be gradual at first due to the difficulty of obtaining development credit.
• Investment Sales: Investment sales in 2009 were significantly off the pace of prior record setting years. The first half of 2010 has seen a return of more healthy investment sales activity to the market. Sale activity continued to gain steam this quarter. So far in 2010, we note $773 million of multifamily Class A building sales (three low-rise and eight mid/high-rise properties) – more than the total volume in 2009. We recorded $25.7 million of land sales to construct new apartments and condominiums in the first half of 2010, exceeding the total of $21.7 million for all of 2009.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

• Volume: New unit sales volume (defined as net binding contracts written with security deposits up) in the Washington metro area during the 2nd Quarter was 636 units.
• Prices: Condo sales prices are down, while resale prices are on the rise. Effective new condo sales prices were down 6.0% metro-wide from 12 months ago, with prices in the Central submarket of the District up by 3.6%. Resale prices are up 4.1% metro-wide. However prices remain lower in Suburban Maryland jurisdictions.
• Concessions: Metro-wide, concessions are stable – averaging 3.9% of the asking price at Mid-Year 2010 compared to 3.8% last year at this time.
• Pipeline: There are currently 4,624 unsold new condominium units that are actively marketing in the metro area, which is about the same amount as last quarter. As a result, there is now 1.8 years worth of inventory of product on the market at current rates of sales velocity in the metro area. In the Central submarket in the District, there is less than six months of new inventory left to sell.
• Sales pace: Projects that have sold out in the past two years have averaged 2.4 sales per month. Projects introduced to the market more recently have averaged a higher pace.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.

Class B apartment rents are up and vacancy is down year-over-year.

• Average effective rent increased to $1,450, up 2.8% from a year ago. Effective rents increased over the year in Northern Virginia and Suburban Maryland, but decreased in the District.
• Vacancy decreased by 250 basis points to 2.1%. Vacancy was down in all sub-state areas at mid-year 2010.

Opportunities continue for renovating existing B and C grade properties. In our view, these opportunities can be the most profitable where the rent spread is widest between Class A and Class B (or Class C) rents. Because units can be renovated, rents can be raised correspondingly and still represent a discount to prospective tenants compared to Class A rents.

Sales Transactions

During the first five months of 2010, there have been six Class B apartment sales noted, two high-rise and four garden properties totaling 1,541 units and $177 million. During 2009 there were 16 Class B garden sales and four high-rise sales posted, comprising a total of 3,597 units at an average price of $99,174 per unit for garden properties and $85,671 per unit for high-rise properites.

To view and/or download a sample report in an Adobe Acrobat PDF file, click here.