Positive signs mid-year for Washington’s commercial real estate market
- July 21, 2010
The mid-year forecast for metropolitan Washington’s commercial real estate market is tilting positive. During the second quarter the market absorbed 1 million square feet of space, vacancy rates are dropping, and office properties are selling, a senior managing director for Cassidy Turley said today.
Spencer R. Stouffer told an audience of about 300 that office vacancy rates have dropped to 10 percent for properties inside the Capital 495 Beltway. The rate is higher, 17 percent, for buildings outside the Beltway. In the last 45 days, the market has seen about $3.4 billion worth of sales in office properties, a figure Cassidy Turley expects to grow to $4.5 billion by year-end.
“We think the bottom came in mid 2009 for this market,” Stouffer said during an annual mid-year forecast sponsored by the Northern Virginia chapter of NAIOP (Commercial Real Estate Development Association) at the Tysons Corner Ritz-Carlton.
While the market is nowhere near the activity it saw several years ago, conditions are far better. Stouffer described 2008 and 2009 as “grim years” and said that positive job growth in Virginia is helping to boost absorption and transaction volume in 2010.
Another positive sign? With a drop in the cost of construction materials, the cost for new
office construction has fallen from $60 to $50 per square foot. In some areas, such as Rosslyn-Ballston and Reston Town Center, brokers are even reporting rising rents, Stouffer said.
On the sales side, he added that investors have been telling him, ‘I’m looking to buy vacancy.’ “It’s like someone opened the bar, and the drunken sailor is out on the street again.”
Still sobering signs remain. At Tysons Corner, Virginia’s largest corporate office center, there are 85 full floors of vacant space, he said. Outside the Beltway in Reston/Herndon, 132 floors of space awaits tenants. Other large vacancies are on the horizon with companies such as Raytheon and Sprint preparing to leave current office locations for other venues. On the bright side, Northrop Grumman Corp. plans to move its corporate headquarters into an office building in Fairview Park in Fairfax County in 2011.
Overall in 2010, Stouffer said Cassidy Turley forecasts a 5 percent growth in rents inside the Beltway, total absorption of 2 million square feet and the signing of one new deal for a pre-leased or build-to-suit project in Northern Virginia during the next 12 months. The last new speculative construction project came during the third quarter of 2008.
Washington’s long-term growth also was part of the presentation. Speakers from The 2030 Group discussed how the area needs to adopt a new regional governance structure to address major challenges that will come with job and population growth. Stephen Fuller, director for the Center for Regional Analysis at George Mason University, estimates that over the next 20 years the region will gain 1.5 million new jobs. Population will grow by 1.6 million people or nearly 700,000 households. That translates into a need for 35,000 new housing starts per year.
The growth, fueled largely by the expansion of the federal government and the realignment of many military agencies, is expected to increase the number of daily commuters working in the region from 240,000 to 770,000. “There’s no road big enough or train wide enough” to address that growth, Fuller said.
The 2030 Group is urging the region to prepare in terms of education, workforce development and transportation to address the massive growth or run the risk of being overwhelmed by it. “It will be a difficult outcome if we don’t take charge of it,” Fuller said.
New housing is especially important, he added, because it would decrease the metro area’s dependency on non-local workers, who live outside the metro area and commute in. People pay taxes and spend money in their home jurisdictions, noted Fuller. In 2010, the Washington area economy is projected to lose 4.25 percent of its gross regional production (GRP) or $18.8 billion as a result of its dependence on non-local workers. By 2030, the loss of that spending is projected to be as great as $75 billion.