Bureaus, Baseball Keep
D.C. Market Hot

Washington D.C. is a divided city, but there is one thing Democrats and Republicans can agree on: The real-estate market is booming in the nation's capital. Commercial rents are up, vacancies are down and the city added 73,684 jobs last year, an increase of 2.6%. Home and condo prices both shot up 23%.

The retail real-estate market is stronger than ever, buoyed by the strong economy and new job holders. Employers, needing room for their new hires, drove office vacancies down to 12.5% at year end, as tenants signed on for more space here than anywhere else in the country.

Developers are building frantically, betting the boom will continue. The city will get 6.5 million square feet of new office space this year, slightly more than in 2004. The biggest projects are campuses for federal agencies, including the Securities and Exchange Commission and the Census Bureau. Wrapping up the 2.4-million-square-foot Patent and Trademark Office headquarters in Arlington, Va. -- among the largest projects on the East Coast -- is an affiliate of LCOR Inc., of Berwyn, Pa.

The new headquarters for the Department of Transportation is going up in southeast Washington, D.C., part of a big revitalization plan for the area.

Going decidedly upscale, the Department of Transportation is getting a 10-story, 1.35-million-square-foot building designed by big-name architects including Michael Graves & Associates of Princeton, N.J. Developed by JBG Cos. of Chevy Chase, Md., the building will go up in a rundown area of the district's southeast quadrant, where revitalization plans are under way.

The city's $8 billion plan to revive neighborhoods along South Capitol Street and the Anacostia Riverfront, slated for a new baseball stadium, has developers jostling for position there. In Northern Virginia, investors also are tracking a hoped-for 23.5-mile Metrorail extension through Tysons Corner, Va., to Washington Dulles International Airport and fast-growing Loudoun County.

Federal spending continues to drive the capital, laid out by a Frenchman on the banks of the Potomac River, with much of the increase going to defense and homeland security. More funds also are flowing to such private contractors as Booz Allen Hamilton Inc. of McLean, Va. The management-consulting firm will add 4,600 employees in Virginia by 2010.

They may have a hard time finding them: The area's 3.7% unemployment rate is the nation's lowest among cities with populations of more than one million, according to the Bureau of Labor Statistics. That could damp growth, says real-estate analysis firm Property & Portfolio Research Inc. -- though the city still attracts young, educated workers with some of the highest incomes in the nation.

Investors like what they see, but prices are high. Last month, local Ralph Dweck won a bidding war for a trophy office property in the city, paying an estimated $270 million, or $668 a square foot, according to Real Capital Analytics. New York institutional investor TIAA-CREF had logged the previous high when it put down $216.9 million, or $643 a square foot, for a downtown building last year. "Prices are being bid up because there's so much more money than product," says Brian McVay, an executive managing director at Cushman & Wakefield. "There seems to be an insatiable appetite for investment-grade real estate in Washington D.C."

Economists expect prices to keep climbing in the office, apartment and retail sectors, PPR says. However, the pace is likely to slow somewhat. Investors also should watch for overbuilding, especially in the condo market.

While new construction could throw a wet rag on the market, another under-the-radar trend also could slow things. Several government agencies are vacating space. For example, the Patent and Trademark Office is leaving nearly two million square feet in the Crystal City area of Arlington, Va. Charles E. Smith Commercial Realty L.P., a division of New York's Vornado Realty Trust, has budgeted $150 million to renovate and lease the agency's buildings, according to the REIT's annual report.

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