The federal government offers the one promising outlook for an otherwise bleak construction industry, and nowhere is that more evident than in the nation's capital.

"Washington, D.C., is the hottest market in the country right now," said David Kessler, managing principal of Reznick Group, an accounting firm in Bethesda, Md., that specializes in real estate and construction.

The General Services Administration is driving most of the activity, with 97 million square feet of owned or leased space under its control in Washington and the surrounding suburbs. The Recovery Act provided GSA with $5.2 billion to spend upgrading or building new federal facilities, and $1.2 billion of that total is dedicated to the Washington region, said Bart Bush, who manages GSA's construction and lease projects in the Washington region as regional commissioner of the Public Buildings Service.

GSA is on track to have $4 billion of its Recovery Act funds obligated by the end of March, and nearly all of it must be obligated by the end of September, Bush said Jan. 29 at a breakfast for more than 350 brokers and vendors sponsored by Washington-based Bisnow, a business publication.

In the Washington area, major Recovery Act projects include renovations to headquarters buildings for the State, Commerce and Interior departments and the Mary Switzer Building that houses some offices of the Health and Human Services and Education departments. GSA also is spending $450 million in Recovery Act funds on the first leg of a three-phase project to consolidate 14,000 Homeland Security Department employees at the historic St. Elizabeths campus in southeast Washington.

In addition to construction and renovation projects, GSA leases sites for federal agencies that need more space than their owned buildings provide or that aren't large enough to warrant their own buildings. The renovation projects will spur a growth in leases in coming years as agencies move out of their facilities so work can be completed, developers said.

The federal government "is providing a baseline demand where the private sector has just about disappeared," said Greg Meyer, senior vice president of Brookfield Properties, which recently completed work on a 300,000-square-foot building on Washington's busy K Street in the hopes that it will provide a home to federal employees.

During fiscal 2009 and the first quarter of 2010, GSA signed leases for 10.4 million square feet of space in the Washington region, a pace that few observers thought possible, Bush said.

Leases for another 26 million square feet of space will expire during the next four years, although at least 80 percent of those 450 leases will be renewed, Bush said.

In a welcome move for building owners, Bush said he has set a goal to cut in half the number of holdover leases — leases that have expired but are extended a month at a time pending a decision to either extend the lease or move out. Holdover leases pose a logistical nightmare for building owners, since they're essentially stuck in limbo until GSA's decision.

"I'd rather know an agency is going to leave rather than be in a perpetual holdover mode because you can't plan," Meyer said.

Bush said eliminating holdovers makes good business sense to GSA and the tenant agencies as well, since building owners raise their rents to account for the uncertainty of not knowing when a lease will expire.

Bush said there are 53 holdover leases in the Washington region totaling 4.5 million square feet.