Return to Virginia Business - January 2003

by David Hubler

Like countless inner ring suburbs throughout the U.S., Arlington and Alexandria face unrelenting pressures from those farther from their core city. Insatiable demand for new office and residential space feeds suburban sprawl that keeps growth charging away from mature, well-developed suburbs to those outer areas.

Yet, Alexandria and Arlington have a unique ace in the hole. Thanks to their proximity to the nation’s capital, they are denizens of defense and other federal entities. The trend has been going on since 1941, when the foundation was laid for the 6.5 million-square-foot Pentagon building in Arlington. After continuing for most of the Cold War, federal spending slowed during budget cuts of the 1990s, while a booming high technology industry — fueled by the locally created Internet and the emerging telecommunications giants — made more distant locales in Northern Virginia, such as Fairfax, Loudoun and Prince Williams counties, sexier markets for commercial real estate.

Today, however, the situation has reversed. The bust in high technology has left “for lease” signs throughout faster-growing areas of Northern Virginia. Trammell Crow, a commercial real estate developer based in Tysons Corner, puts the vacancy rate in Fairfax County at 12 percent for the third quarter of 2002, and 15.5 percent in Loudoun County. At the same time, vacancies in Arlington were a low 7.5 percent and in Alexandria 8.6 percent.

Once again, the hot spots seem to be Arlington and Alexandria because of a big tranche of federal spending, estimated at $31 billion, this time going to the war on terrorism. The new spending binge is pushing exotic applications such as satellite communications, pinpoint weaponry guidance systems and battlefield management software, many of whose makers have facilities or headquarters close to Washington.

Moreover, Arlington and Alexandria are enjoying an unexpected boost since a referendum to raise the sales tax locally and build more highways and public transit in Northern Virginia failed in November. The levy’s victory would have been more beneficial for outlying areas reliant upon automobiles, but with their efficient public transit systems already in place, Arlington and Alexandria are looking even better. In fact, a new problem could be a lack of office space instead of too many vacancies.

The biggest single event that bodes well for these two inner suburbs is the creation of the Department of Homeland Security, which, in the biggest federal reorganization in 50 years, merges two dozen law enforcement and security agencies and over 170,000 federal employees.

While the precise location of the new department headquarters has not been determined, commercial developers such as Trammell Crow Managing Director Henry Chapman believe Arlington has an edge. “Traditionally, there has been very little government contracting in Alexandria,” he says.

Even if the headquarters is located in the district, Chapman believes Arlington will benefit from spillover leasing. “Arlington contains more government contract-driven offices than any other jurisdiction in Virginia,” he says. “There’s a very good chance the department’s new Transportation Safety Administration will end up in Arlington.”

In fact, the agency and the burgeoning Defense Department are both seeking up to 500,000 square feet of office space close to the Pentagon, in an area that encompasses Crystal City, Pentagon City and the Rosslyn section of Arlington. At the moment, there are only a few sites in Arlington that could rapidly accommodate a large-scale influx of federal workers. One is the complex owned by now-bankrupt telecom giant WorldCom, which went on the auction block in December in Pentagon City, and a 540,000-square-foot building in Crystal City that now houses some Defense Department offices that were relocated there following the Sept. 11 terrorist attack on the Pentagon.

The State Department is currently moving an estimated 1,500 to 1,700 staffers into a new facility at 1801 Lynn St. in Rosslyn, taking all 350,000 square feet in what is one of the largest buildings in Arlington. For security reasons, officials decline to identify the division being phased in, but full occupancy is expected by mid-year.

A little to the south in Alexandria, the U.S. Patent & Trademark Office’s mammoth headquarters is under construction. Late this year or early in 2004, the office will move from its cramped Crystal City quarters in Arlington to a 2.5-million-square-foot complex that will house some 7,000 employees. It’s the largest lease ever negotiated by the General Services Administration and will grow the city’s overall work force of nearly 90,000 by about 8 percent.

Suddenly becoming the belle of the ball again is good news for local officials. “As demand catches up with existing supply,” says Alexandria Mayor Kerry Donley, “the jurisdictions that have positive characteristics like good locations and access to multiple modes of transportation ... will put us in a better competitive position than office projects that are further out in the region.”

Besides providing office space for expanding federal agencies, Arlington and Alexandria are finding defense-related companies knocking on their doors. About 800 information technology firms are based in Alexandria, a city of 130,000, and some of them are growing because of their defense orientation, notes Mark Jinks, Alexandria’s assistant city manager for fiscal and financial affairs. As defense and national security needs have shifted and grown, firms are changing their products or direction, focusing more on federal contracting. Jinks believes a good deal of that projected growth will find its way to Alexandria. “Our real estate tax is lower than Fairfax County, a little bit higher than Arlington and lower than the D.C.-Maryland side of the river, so we’re very tax-competitive,” he says.

Not all the attraction, however, is from federal bucks. Since both cities developed earlier than exterior locales, they have better developed infrastructures. That translates into more amenities such as retail shops, restaurants, and access to arts and entertainment. Alexandria’s Old Towne had been offering up eateries and shopping even before George Washington presided over a meeting there in 1774 to select delegates to the first Virginia Convention. And the World War I torpedo factory at the foot of King Street that is now a center for working artists and craftspeople has become a waterfront focal point for tourists and residents alike.

Arlington recently won the national “Overall Excellence in Smart Growth” award from the U.S. Environmental Protection Agency for its Rosslyn-Ballston Metro corridor. The EPA praised its 21 million square feet of office, retail and commercial space, 3,000-plus hotel rooms, and 22,500 residential units for creating “vibrant urban villages” while minimizing automobile pollution and poor land use from cookie-cutter subdivisions.

Arlington County Board member Jay Fisette says that while the region deals with urban sprawl and traffic congestion, businesses are increasingly concerned with quality of life issues. “They’re looking at the inner suburban areas where they can access transit, where they can walk, where there’s a very well established quality of life and cultural amenities. And Arlington sort of epitomizes that.”

If Arlington and Alexandria have any big problem, it might be too much of a good thing. Both jurisdictions are well developed and have vacancy rates in the single digits. With leases running at $30 to $35 a square foot in Arlington and about $28.50 in Alexandria, compared to $15 to $25 a square foot along the Dulles Corridor in Fairfax County, would-be corporate residents may be forced to look further afield.

Fairfax County, for example, reported a 61 percent increase in available office space in just the six months prior to July 2002. The county’s 10 million square feet is the most space it’s had on the market since 1992.

And, not every defense contractor or systems integrator is likely to quit its digs on Interstate 66 or the Dulles Toll Road just to move 10 to 15 miles closer to the nation’s capital. One reason is the larger federal defense contractors like Science Applications International Corp. (SAIC) have satellite offices around the Beltway as well as long-standing working relationships with Uncle Sam. Arnold Punaro, the senior VP and director of federal business development, says SAIC has ongoing contracts with almost all of the agencies that will come under the new department’s umbrella, including Customs, the Coast Guard and the Immigration and Naturalization Service. “We do a lot of work in the chemical/biological/radiological area and we do a lot of R&D in the weapons of mass destruction area,” he adds, “so we have a sizeable amount of business with the elements that will constitute the new department.” Punaro says SAIC will “stay as close to those customers as possible.”

In addition, the empty office space in the outer suburbs is driving down lease rates. This means many tech firms in Reston, Herndon and Dulles are likely to stay there, says Rick Hanna, chief executive officer of Ai Metrix, a network management software company in Herndon. “You drive along I-66 or the toll road and you can see their buildings everywhere out there — whether it’s DynCorp or SAIC or AMS or Northrop Grumman — they’ve got so much real estate there,” says Hanna, whose clients include telecommunications companies and the Department of Defense.

Cheaper leases in Herndon are what attracted Hanna in the first place, and he’s not prepared to move closer without substantial benefits. “I got a very good deal on our space and as I go to renew my lease in mid year, the way it looks right now, I’ll probably be able to get a better deal,” he says, adding that it would take a much better deal to move. “From my point of view, I’ll probably wind up staying in this immediate area because I have a lot of people commuting in from Ashburn and Leesburg.”

In Northern Virginia, no word is more fraught with pain and loathing than “commuting.” Gov. Mark Warner’s failure on Election Day to convince Northern Virginia voters, especially those in Arlington and Fairfax counties, to pass a half-penny sales tax hike earmarked solely for area transportation projects, has meant the cancellation of one third of the state’s road projects, many of them aimed at easing commuting precisely in those locales. The tax hike defeat, coupled with the state’s huge budget deficit, leaves little hope of suburban traffic relief anytime soon.

Even the area’s mass transit plan, which originally spoke of extending Metro bus and rail service through the technology-heavy center at Tysons Corner to Dulles International Airport by 2010, has been scaled back, with no completion date envisioned. In fact, in its latest incarnation, released by the Metro Board in November, the 11-stop, 24-mile extension from West Falls Church to Loudoun County and the airport is not even a top priority in the overall $12.2 billion plan, of which the local jurisdictions can actually account for only $2 billion. In an interview with Virginia Business editors on Nov. 26, Warner said that had the referendum passed, mass transit would have gotten funding that otherwise would require 70 years of routine, annual state budget allocations.

Since more money isn’t forthcoming, the first priority is “the stuff we’ve got to do” just to keep the current transit system running, including fixing escalators, refurbishing rail cars and replacing older buses, says Chris Zimmerman, the board chairman of both Metro and Arlington County. Also in doubt now is a light rail plan for Columbia Pike, a 3.5-mile road that is one of Arlington’s major arteries and business centers. The referendum, had it passed, would have gone a long way to funding the initiative. “We probably could’ve done something just for the money that was in the referendum or slightly more,” says Zimmerman, whose jurisdiction includes the Columbia Pike corridor. The Dulles rail extension, on the other hand, needed both passage of the referendum and millions in federal money just to get off the drawing board.

Even so, Alexandria and Arlington are already well served by Metro, and the impacts on them by the referendum's failure should be significantly less than those on outer suburbs. Federal patent workers, for example, will have two Alexandria stations to ease their commute. And Zimmerman says plans for Arlington’s overcrowded Orange Line include adding new entrances to existing stations and the introduction of eight-car trains to replace the standard six-car configuration.

Ease of commuting, along with other amenities, makes it hard for companies already in Arlington and Alexandria to convince their workers to leave. After E-Trade Group Inc. bought Arlington-based Telebanc Financial Inc. in January 2000 and was going to move the online financial service to the Dulles Corridor, it changed plans when employees balked. “Folks said, ‘We don’t want to leave Arlington,’” Zimmerman says. So E-Trade’s new headquarters is now in Arlington’s bustling Ballston section.

But as Zimmerman sees it, it’s the federal government that represents a major sector of Arlington’s economy. “It has been before and clearly will be in the future. It’s a plus in the sense that at a time of recession, when a lot of high-tech businesses were not able to expand as they had hoped to, the slack has been picked up by government leasing.” It seems likely then that Arlington and Alexandria’s lucky proximity to the nation’s capital will once again make these jurisdictions beneficiaries of federal bucks.

Return to Virginia Business - January 2003