- January 29, 2009
In politics as in real estate, proximity is everything. In Northern Virginia, the closer to the seat of political power, the better. So it’s no wonder that Arlington County has been one of the region’s most active commercial real estate markets.
While development has slowed, its location across the Potomac River from Washington, D.C. comes close to providing a near recession-proof nirvana amid a crushing stream of foreclosures and financing woes gripping the nation’s commercial real estate industry. “If you need 100,000 square feet of space in Arlington, we’d be hard pressed to find it,” boasts Tom Newman, real estate director for the county’s economic development agency.
At the end of the third quarter of 2008, Arlington’s overall office vacancy rate stood at 8.1 percent, according to GVA Advantis, and was as low as 5 percent in submarkets such as Rosslyn and Ballston. That’s well below national averages and twice as low as other Washington-area markets where office vacancy is hovering at nearly 20 percent.
The big question now is how will Arlington fare under a new president? Will hot areas such as the Rosslyn/Ballston corridor and Crystal City continue to be home to the government’s large concentration of office space outside DC as President Barack Obama expands the role of federal agencies to deal with the economic crisis? Or will huge federal bailouts mean less work for Arlington’s most reliable tenants: defense contractors.
Home to 203,000 residents and just as many jobs, Arlington has more than 33 million square feet of office and commercial space — more than the downtowns of Atlanta and Seattle.
According to area real estate companies, some office rentals recently have gone for as much as $50 a square foot; the average rate on the other side of the river. Typically, though, defense contractors can expect to pay nearly $20 less per-square-foot than for comparable digs in the nation’s capital. The cheaper rents, Virginia’s lower taxes compared with Washington’s and access to the county’s 11 metro rail stations make the area attractive. In fact, Arlington topped the list last fall when BusinessWeek magazine named it the best place to live in America during a recession.
In 2008, Lockheed Martin, Virginia Tech, MedStar Health, Deloitte Services and the U.S. Fish & Wildlife Service were among tenants that leased more than 1.3 million square feet of space, creating more than 4,000 new jobs. “Arlington County is much better positioned than Northern Virginia in general and the country,” says Scott Homa, a senior market research analyst with the Washington office of Jones Lang LaSalle.
Still, just as in weaker markets, real estate industry insiders say the credit crunch is taking a toll. Speculative construction can’t get financing, stalling some projects. Developers with pre-leased projects are finding that higher equity stakes are needed to obtain funding. In addition, cutbacks at firms like E*Trade — one of the few financial businesses with a presence in the county — have increased space available for sublet. Overall, 2009 is being described as a “survival market,” with brokers more concerned about hanging on to existing tenants than pushing new projects.
If comfort can be found in shiny towers, then Rosslyn fits the bill. In the largest private-sector lease transaction ever for the DC area, The Corporate Executive Board signed a 20-year lease for all the space in Waterview. The 633,000-square-foot, 24-story speculative office building opened last year. “It’s a hop, skip and a jump from Reagan National and a direct line to Dulles,” says Andrew Blaisdell, the company’s director of communications.
The move allowed the executive networking and advisory firm to consolidate 1,800 employees, from five Washington-area offices, into a marquee building, overlooking the Potomac.
Waterview is part of a 1-million-square-foot, mixed-use project developed by JBG Cos. of Chevy Chase in partnership with Trizec Properties (now part of Canadian-based Brookfield Properties Corp.) and CIM Group of Los Angeles. The partnership sold the office tower portion of the project in 2007 for $413 million to The Paramount Group, a New-York based real estate investment firm.
It retained its interest in an adjoining 29-story tower which houses Hotel Palamar, a 12-story boutique hotel that’s part of the Kimpton chain. Designed by the architecture firm of Pei, Cobb, Freed and
Partners, the hotel provides amenities to the 133 luxury condos which fill out the rest of the floors. The largest units — 4,450-square-foot penthouses — offer panoramic views of Washington and go for as much as $5 million, says Matthew Blocher, a senior vice president for JBG. About 88 percent of the condos have sold since going on the market in early 2007. While sales are slow now, “we think we’ve done quite nicely,” says Blocker.
In recent years, other mixed-use projects have transformed Rosslyn into an urbane environment popular with young professionals. In fact, JBG has received approval from the county for another twin-tower development called Central Place. Like Waterview, one building would offer commercial office space — 535,000 square feet — while the second tower would be residential with ground-level retail. The towers would be built directly above the Rosslyn Metro station.
According to Blocher, marketing and leasing are under way for the office building, which will be built to meet gold LEED (Leadership in Energy and Environmental Design) standards. JBG plans to begin construction this year, he says. Blocher declined to comment on the project’s financing, saying only that JBG is not immune to the same financial problems as other major real estate developers.
While some private development is on hold, Virginia Tech is moving ahead with plans to purchase a 145,000-square-foot research facility at 900 N. Glebe Road. The project, part of a broader, mixed-use JBG development on the site of a former Chevrolet dealership, is being financed through industrial development bonds. The center is expected to employ 150 researchers, faculty and staff who would work on network and computational research related to the region’s defense, homeland security and technology industries. Site work began last June, and Virginia Tech is aiming for a 2010 move-in date.
Developers also have plans for Founders Square, Ballston’s last large undeveloped tract. Last summer, the country approved a site plan for five acres that calls for high-rise residential buildings, a speculative, 15-story office building and nearly 30,000 square feet of retail.
As this area continues to redevelop after the loss of a large federal agency, several projects are going up. Bethesda-based Meridian Group broke ground last year on the first phase of National Gateway at Potomac Yard. The building, which will provide 445,000 square feet of office and retail space, will consist of two twin towers. So far, Meridian has pre-leased 46,000 square feet to LA Fitness, says Vice President John Wilkinson.
“We have financing. Everything is in place. We’ll deliver it in October of 2010,” he adds. The building has been pre-certified for gold LEED certification, a plus, Wilkinson says, in leasing efforts. According to him, Meridian firmed up its financing a year ago with Corus Bank, a Chicago-based construction lender. “In today’s market, it would be much more difficult to get a construction loan.”
Altogether, National Gateway is envisioned as a $1 billion-plus project that would create an urban town center of more than 1.5 million square feet. Despite the recession, Wilkinson remains optimistic about the future build out. “We’re seeing strong pent-up demand. The market, the fundamentals are very strong. Vacancy is low. There’s not a lot of new development happening.”
Meanwhile, Marriott has obtained financing to build two hotels within National Gateway: a 300-room Renaissance Hotel and a 325-room Residence Inn. These developments are welcome news to real estate agents who worried that Crystal City might become a glass and concrete ghost town following the 2004 exit of the U.S. Patent and Trade Office, which moved to Alexandria.
Fortunately, in recent years, the private sector has stepped up. The split between public and private development — once as high as 85 percent public/15 percent private — has changed. Today, the number is closer to 65 percent public/35 percent private, according to Mitchell N. Schear, president of Vornado/Charles E. Smith, the region’s largest commercial landlord and the dominant player in Crystal City.
“We’ve gotten a tremendous amount of trade and industries that want to be DC-proximate but don’t have to be downtown,” says Schear. For instance, nearly 90 percent of the space vacated by the patent and trademark agency has been re-leased by such tenants as the Public Broadcasting Service.
The change in the mix means a more diverse and younger work force that’s been good for retailers and restaurants. Still, a bigger jolt for Crystal City is just around the corner. By 2011, defense agencies leasing space in the Rosslyn-Ballston corridor and Crystal City are due to consolidate in areas such as Fairfax County as part of a sweeping military realignment. If fully implemented, 17,000 jobs would leave Arlington. Most of the losses — 13,000 jobs and 3 million square feet of leased space — would come from Crystal City.
Schear says Crystal City is well positioned to relieve the pent-up demand from a tight market. “If people were building unabated then I think the BRAC situation would be more of a challenge.