Industries Commercial Real Estate

A headquarters heyday

Fairfax County draws new corporate tenants. Northrop Grumman could be next.

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Print this page by M. J. McAteer

When global defense giant Northrop Grumman went looking for a new corporate home, Northern Virginia was in the race along with Maryland and Washington, D. C.  In the end, after the Los Angeles-based contractor made serious eyes at all three jurisdictions, it chose Northern Virginia. The question now is which locality there will get the gold ring.

Arlington County, Alexandria and Fairfax County have all came on bended knee, bearing tax-incentive deals — the financial equivalent of candy and flowers —  and making lavish promises of the good life if only Northrop Grumman will commit to a relationship.  The state of Virginia is acting as an attentive bridesmaid, by already kicking in $12 to $14 million of economic incentives to capture a headquarters that will bring 300 jobs and an estimated $30 million in new tax revenue over the next decade.

Fairfax County, fast emerging as Virginia’s new mecca for corporate headquarter locations, already has tied the knot with several major companies. So it will come as no surprise if Northrop Grumman decides to tap into many of the county’s commercial strengths: 
●  Ready access to federal government agencies.
●  Plenty of quality office space. The vacancy rate in 2009 was 14.3 percent, so bargains are available.
●  A highly rated public school system. Ninety-five percent of the county’s high school graduates pursue post-secondary education.
●  A 6 percent state corporate tax versus Maryland’s 8.25 percent and the District’s 9.97 percent, plus a 6 percent county corporate tax rate. 
●  A proven generosity to corporate entities.

In 2007 Fairfax wooed and won the North American headquarters of Volkswagen of America, in part by offering $1.5 million in road and land improvements. Some 400 VW employees now work in 185,000 square feet in Herndon, just three miles from Washington Dulles International Airport.

VW has been “very pleased” with Fairfax’s “high-energy, fast-growing environment,” says David Geanacopoulas, the company’s general counsel. “The great school system [also] really was important to us. We wanted institutions that would turn out graduates we could hire.”

Hilton Worldwide recently succumbed to the county’s blandishments, too, which reportedly included a $4.6 million package of incentives offered through both the county and the state. Last August, the hotel chain spurned Montgomery County and instead moved its 325-person corporate offices into about 118,000 square feet at Tysons Corner. Hilton’s spokeswoman Katherine Mikesell cited the quality of life in Fairfax County as a major factor in the decision and added that Hilton employees have been “very positive about the move” — no small compliment considering that the corporation formerly had its headquarters in glitzy Beverly Hills, Calif.

“We have been fortunate to get what we believe are four out of five of the [recent] major corporate relocations in the country,” says Gerald L. Gordon, president and CEO of the Fairfax County Economic Development Authority.

Other Fortune 500 corporations Fairfax has managed to snag include Science Applications International Corp. (SAIC), which is expected to generate 1,200 jobs during the next three years; Computer Sciences Corp. (CSC), which already had about 3,000 employees in the county; and PricewaterhouseCoopers, which will bring 200 jobs to Fairfax.

In all, the county says it worked with 123 companies in 2009 to generate an expected 5,000-plus jobs.  Gordon calls that “a real testament to the kind of business environment [we have] in the county.”

A friendly-business environment coupled with one of the country’s strongest commercial real estate markets — the Washington, D. C., region ranks as one of the best areas for investments — apparently makes for a strong love potion.
Northrop Grumman expects to make up its mind on about 100,000 square feet of space by late May. At press time, it was considering an office building on North Glebe Road in Arlington’s Ballston corridor and the Fairview Park office complex in Fairfax County. With several office locations already in Rosslyn, Reston and Tysons Corner, the company is one of the region’s largest employers with nearly 40,000 workers.

Of course, corporate entities are only one contributor to a thriving commercial real estate market. “On a national scale the metro/D.C. region is the most vibrant market in the country,” says Scott Homa, director of research for the Washington office of Jones Lang LaSalle. “But Fairfax County still embodies characteristics of the national economy. It has large financial and technology bases, and both sectors have been struggling.” 

Brad Flickinger, senior managing director for the Northern Virginia office of CB Richard Ellis, which represents commercial tenants and landlords, agrees that the sluggish business environment has presented Fairfax with “its share of challenges.” Growth is what drives the commercial real estate market. And the lack of growth means no new commercial construction in the county now or anytime soon.

According to CoStar, one of the country’s largest providers of commercial real estate research, Fairfax County’s commercial real estate vacancy rate of 14.3 is slightly higher than the 13.3 percent average for the D.C. region. That rate, says Homa, represents about 7.8 million square feet of “overhang” or empty space. Such a large inventory, he adds, was a factor in Hilton getting “a very good deal” on its Tysons Corner space.

Tysons Corner, one of the country’s largest suburban business districts, is just outside the Capital Beltway and typically weathers an economic downturn better than commercial real estate areas farther from Washington. The Dulles corridor, for example, ended 2009 with an 18.5 percent vacancy rate for its Class A space.

Overall, Flickinger explains, these elevated vacancy rates reflect “less of a supply issue and more of a demand problem.” Once the economy improves, Fairfax should be sitting pretty. “This area checks all the boxes,” Flickinger says. Employers get ready access to clients and capital and even a favorable time zone for doing business in Europe.

Furthermore, he adds, it is “a great value market.” Commercial tenants have the convenience of being close to Washington but don’t have to pay Washington prices. CoStar reports that at the end of the first quarter, Class A office space cost, on average, was $31.18 a square foot in greater Fairfax and $27.75 in the Dulles corridor.

The same space in downtown Washington averaged $52.32 while in the Bethesda-Chevy Chase area rates were $38.67.

The Tysons Corner area in particular should continue to charm the corporate big boys with its combination of access and affordability. Until recently, the county had targeted Tysons for an ambitious 40-year revitalization plan that envisioned it becoming an urban center with four Metro stops. That plan may be scaled back, but a massive public works project to construct hot lanes to the Beltway and extend Metro rail to Tysons already is under way.  Flickinger says that the disruption has not affected the area’s commercial real estate market, and Homa believes that it eventually “should improve the dynamic there.”

Obviously, as the ambitious Tysons project indicates, Fairfax isn’t a county to wait idly for an economic upturn to improve its fortunes. Like high-profile projects such as sports stadiums, though, the long-term effect that corporate headquarters may have on the jurisdiction’s economy remains debatable, especially given the dowry-like incentives that they now demand in exchange for their hand.

VW and Hilton “took down large chunks of space” and thus have had “some trickle-down effect” on the commercial real estate market in Fairfax County, Flickinger says. Yet their biggest contribution to the county’s economy is probably psychological. Image may not be everything in the business world. Yet like the trophy wife on the arm of the millionaire, by choosing Fairfax, these corporations make the county look like a winner. And as the saying goes, nothing succeeds like success.

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