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Commercial Real Estate, Alexandria |  Recession proof?

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Print this page by M.J. McAteer

Most Virginia cities have taken a mauling from the bear economy. Not Alexandria. It’s managed to keep the beast at bay. Evidence of its continued prosperity is right there on the street for all to see.

In the city’s colorful waterfront area, discretionary spenders — 3.3 million of them annually — fill the brick sidewalks, peeking in boutique windows, perusing menus posted outside trendy restaurants and queuing for tickets for boat excursions on the Potomac River. More than half stay the night, giving Alexandria hotels an occupancy rate that’s 30 percent higher than the national average.

Inland, foot traffic remains heavy, too, as thousands of white-collar workers keep the office vacancy rate at about half that of surrounding jurisdictions. Some parts of the city, admittedly, have retail room to spare, but overall, Alexandria is sitting pretty while things have gotten tough for commercial real estate in many other cities.

Why? 
Two reasons, mainly: Location, location and Old Town.

Alexandria sits diagonally across the Potomac from the nation’s capital, and it’s just a water taxi ride away from National Harbor, a new tourist and conference destination, across the river on the Maryland side. This strategic location makes Alexandria the recipient of much government largess and of spillover business from National Harbor and its monolithic next-door neighbor, the Gaylord National Hotel & Convention Center.

Government is growth business
The feds have always been a growth business for Alexandria. With the Obama administration’s stimulus plan, that should continue to be no small advantage. For instance, starting in 2003, the U.S. Patent and Trade Office began a phased-in relocation of its headquarters to Alexandria. Now, 8,000 patent office workers report for work in five sleek buildings in Alexandria’s Carlyle area.

The Defense Base Closure and Realignment Commission (BRAC) also is bringing in 6,400 new jobs in 2011. Two towers comprising 1.8 million square feet of office space are under construction at the Mark Center near Interstate-395 to accommodate the relocation of some branches of the Department of Defense.

The arrival of the agencies is expected to be an economic catalyst for the area. According to Sigrid G. Zialcita, director of research for the McLean office of Cushman & Wakefield Inc., a study found that for every federal job, a private-sector position is created. Some of these spin-off jobs are in the service industry, as eateries and stores rush to serve a new clientele; others, though, are with contractors, who like to be close to the federal hand that feeds them.

Stephanie Landrum, senior vice president of the Alexandria Economic Development Partnership, a public-private organization partly funded by the city, estimates that the Defense Department and its contractors account for about 14 percent of the city’s work force and leases. Lobbyists like to be near the Washington power source, too. Alexandria is home to more than 400 trade associations, the fourth largest concentration in the country.

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21 million square feet of space
Alexandria is not unique in being close to the capital, of course. All of Northern Virginia has benefited from the blessed munificence of Washington, which has made it the second largest commercial suburban market in the country with about 130 million square feet of office space.

Alexandria accounts for about 21 million square feet of that space. Like other cities around the country, it has seen a bump in office vacancy rates in response to the economic downturn. According to Cushman & Wakefield, its vacancy rate rose from 7.2 percent in the first quarter to 8.8 percent by the end of the second quarter. Meanwhile, Northern Virginia’s overall office vacancy rate went from 13.6 percent to 14.5 percent — still below a national rate of nearly 16 percent — partly because of a building boom in 2006 that took place mainly beyond the Beltway. Alexandria, on the other hand, “never had the speculative building,” says Landrum.

A good location combined with a prudent approach has served Alexandria well. Its other not-so-secret weapon? The commercial appeal of historic Old Town. Government agencies and contractors represent about half of the district’s tenants, says Zialcita. Eateries, watering holes and shops constitute the other half.

An influx of celebrity chefs also draws interest.  Stephanie Pace Brown, president and CEO of the Alexandria Convention & Visitors Association, says the city’s meals revenue has “done very well” of late. For the July 2008 to April ’09 fiscal period, the city’s meal tax revenue was up 37 percent to $11.8 million. Part of that increase represents a 33 percent tax bump in the meals tax, but it also reflects the city’s emerging prominence on the culinary scene.  In June, the Restaurant Association of Metropolitan Washington named Old Town’s Restaurant Eve as the best fine-dining spot of the year and Anthony Chittum, executive chef at Vermilion, as the region’s rising culinary star.

Enough of these diners retired to city hotels for Alexandria to log an impressive 82 percent occupancy rate in April. That dwarfs the 56.4 percent nationwide average for the same month, and is down only slightly from the 85.9 percent average rate of 2008. Brown attributes the slight decrease to an uptick in the number of rooms available in the city. The chic Kimpton hotel chain, for instance, recently opened its third Alexandria venue, the Lorien Hotel & Spa on King Street.

Boost from National Harbor
Last year’s arrival of National Harbor with its new stores, bars, hotels and restaurants, also has provided an unexpected boost. “At first, National Harbor was threatening to people on both sides of the river,” says developer Milt Peterson, CEO of the Fairfax-based Petersen Cos. But then Alexandria realized that National Harbor could be “complementary as opposed to competition.” Peterson describes the relationship as “synergistic.”

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Even with an additional thousand rooms available at hotels at National Harbor, Alexandria hotels continue to get overflow business during big conventions, says Amie Gorrell, public relations director for the 2,000-room Gaylord. With the prospect of a 500-room Disney hotel coming to National Harbor, that flow may slow, but Peterson expects the “the cross-pollination” to continue.

A water taxi has been a big part of that. The Potomac Riverboat Co. makes it easy for conventioneers and other National Harbor visitors to hop across the river to Alexandria for sightseeing or a night out. During its inaugural season of April to October 2008, the taxi carried 100,000 passengers.

Not that it is all sunshine and ponies for the city. Alexandria’s 8 million square feet of retail space has taken a hit just like retail space elsewhere. In response the city has stepped up programs to help small businesses and is conducting a “buy Alexandria” campaign.

The 900,000-square-foot Landmark Mall in the Van Dorn neighborhood has been a particular problem. Even before the economy tanked, the mall was in decline. Now its owner, General Growth Properties, Inc., has filed for Chapter 11 bankruptcy and is trying to sell some of its properties. The city envisions the 51-acre mall site becoming a Reston-style town center but has yet to find a buyer.

Meanwhile, the government can give with one hand and take away with the other. While BRAC is moving thousands of workers into the city, it is transferring 7,200 other Defense Department jobs elsewhere, leaving behind 1.4 million square feet of vacant office space. One casualty of this shuffling, the 600,000-square-foot Victory Center in the Eisenhower West section, is undergoing a renovation to make it the largest secure site inside the Beltway. Its best bet for a new tenant? Another government agency.

Meanwhile, the outlook for commercial real estate nationwide is unlikely to improve significantly this year, says Zialcita.  Alexandria, though, has shown itself capable of keeping a muzzle on the bear market that has bitten so many other cities so hard.


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