Leases:

By now the consensus is that 2008 will be, well, a challenge. Not the same challenge that a second tier city without the comforting presence of the federal government might face, but a challenge nonetheless. Both sales and leasing velocity are widely expected to slow this year.

Indeed, vacancies are already creeping up – to 6.5% in Q4 from 6.1% in Q3, according to GVA Advantis. And in its newly released report on DC activity, CBRE found that the fourth quarter saw significantly less net absorption at negative 128,830 SF in the District, leading to the lowest level of any jurisdiction in the area for the year.

Advance Realty Group’s DC portfolio of Class A office properties, for instance, was all but leased up last year.  In 2008 it will have 270,000 SF of space rolling over in its 1.6 million SF DC portfolio, says David Fisher, SVP and regional managing director of Advance’s Washington, D.C., region.  Right now it has 35,154 SF of office and lab space available at 3650 Concorde Parkway at the Avion Business Park in Chantilly, and an additional 36,692 SF available at 45240 Business Court at Loudoun Plaza I in Sterling.

“We know how to market space fairly well, so I’m not too worried,” Fisher says. On that 72,000 SF of vacant space, for example, the firm already has good prospects lined up for at least 20,000 SF.

Still, “this will be a challenging year,” Fisher says.  So Fisher is likely resuming the company’s 2006 style promotion when it gave away Super Bowl trips and tickets to brokers who brought home large deals, as well as one ‘wild card’ award to anyone who brought in any sized tenant. Last Super Bowl in Miami the company took about seven brokers, Fisher said. The company didn't do the promotion last year because its portfolio was largely leased up and the market was so good. The 2009 Super Bowl is a distinct possibility, as is the Masters and the Final Four. Last year’s winners included Morgan Sullivan with Jones Lang, Frank Graybeal with CBRE, Neil Beggy at Cushman & Wakefield, and John Hernon, facilities manager for Giant Food of Maryland – one of Advance’s major tenants.

John Germano, senior managing director for Washington-Baltimore at CB, also thinks 2008 will be soft. “But you have to remember we are coming off a wild market. Buyers underwrote buildings based on certain rental growth rates and many based their calculations on unrealistic levels in the short term.”

Germano’s contrarian prediction for 2008? Class A product will command higher rates. “These buildings have a story, they are unique. There is always a demand for trophy product and we will see rates going up for these buildings.”

Everybody else -- the commodity buildings -- can expect to see rental rates drop, he says. “For these buildings the driving factor is price and they will have to lower rates to compete.”

Not that there aren’t tenants out there is search of a home. Last week Fifield Cos. reported it signed on GTSI Corp. for 2553 Dulles View Dr., a 357,000-sf, two-building development in Dulles that is expected to deliver this spring. GTSI is relocating its headquarters from Chantilly. And the federal government is keeping everyone in high anticipation as it makes up its mind where it will find the 500,000 SF DoJ space it still needs to rent.

Tom Fulcher, EVP at Studley's DC office, is currently repping one client in a search for 400,000 SF and a law firm for 270,000 SF.  Looking for appropriate large chunks of space, he says, is just as much of a challenge as leasing it out.

For instance, he says, right now if you are a tenant looking for a big block of B class space -- say 70,000 SF -- you will be looking for a while. The market for 15,000 SF to 20,000 SF blocks as well is not that robust. “But at 5,000 SF, the market is really moving,” he says. Is that because of new construction, developers adding onto K Street holdings or tenants looking to scale back operations? Fulcher shrugs. “I don't know why. It’s just how the market shakes out.”

Mark F. Minich, Sr., EVP at Cushman, is succinct as he sums up the environment for both tenants and owners. “I think, generally speaking, rents will grow less this year than they have grown in last two to three years -- a 2 to 3 percent rate increase is most likely.”

Investment Sales:

After the rush to close pending deals before 2008, DC’s real estate markets have kicked back to the lackluster pace that characterized most of Q4. One interesting investment sale (whose timing by happenstance coincides with the movie release National Treasure) was the news of Douglas Development’s acquisition of 918 F St., a 30,977 SF, 100 plus year old building still occupied by the seller, the American Immigration Lawyers Association.

It’s hardly a surprise that Douglas Development grabbed this building as the company either owns or has developed just about every building on this frontage. Maybe Douglas is a history buff: Ford’s Theater is here and the alley behind 918 F St. is the same one through which John Wilkes Booth escaped after he slipped into President Lincoln's box and shot him in the back of the head with a .44.

Developments to Come:

Archstone-Smith and Madison Marquette, Clark Realty Capital and Forest City Enterprises made the District’s short list to develop Poplar Point -- a 110-acre site along the Anacostia River.  And LCOR, Roadside Development & Smoot Construction, and  See Forever Foundation and UniDev, LLC responded to a bid to redevelop the 3.6 acre Tenley-Friendship/Janney Elementary school site in Northwest Washington. The District will be making its choice within the next several weeks for both mandates.

Also, Behringer Harvard continues to dole out investment dollars here. Along with partners Brookfield Real Estate Opportunity Fund, and Fairfield Residential, the Texas based company is planning to build its third investment property in the area: a 15-story multifamily building in Silver Spring. The 325-unit building will have the 302,469 SF of rentable space and 7,330 SF of ground-floor retail space.