Industries Commercial Real Estate

When less is more

Caution abounds as market softens

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Print this page by Robert Burke

Since its beginning in 2001 as a federal IT contractor, NJVC has grown quickly — from 30 employees to about 1,500. But finding the right office space for all those workers has been a challenge. 

About 600 people work at NJVC headquarters in Fairfax County in a building that’s a maze of offices, says Christina Renschen, a senior vice president and the company’s chief administrative officer.  As NJVC grew and space in the building became available “we’d just take it as is, put in a new carpet and a fresh coat of paint,” says Renschen.  A new hire might get an office of 80 square feet, or 400.

Today, NJVC occupies nearly all of the building’s 12 floors, a fact probably lost on visitors, because the offices don’t look the same or share a pattern of design. “There [is] no standardization whatsoever,” says Renschen.

Two years ago the company began looking for a new home with a more efficient — and less expensive — layout.  In December, NJVC will move to a five-story, Class A building in Chantilly’s Westfields Corporate Park.  It signed a 10-year lease to fully occupy the building’s 125,000 square feet, about the same amount of space it has now.  However, there will be less wasted space and a more uniform design. With more employees working different schedules or telecommuting, people can share offices. “We can take advantage of that and have fewer offices sitting vacant,” says Renschen.  In fact, consolidating their operations into the new location is expected to save about 15 percent in overall facility costs.

Uncertainty over federal spending
The desire of tenants to get into new and more efficient space is one of the trends depressing demand in Northern Virginia. Other major drivers include the movement of BRAC-related operations out of close-in suburbs in Northern Virginia and uncertainty over the level of federal spending.

In an area rich with federal contractors, a lot of firms are sitting tight until they know more, says William Quinby, managing director for the Tysons Corner office of Studley, a commercial real estate firm that represents tenants.  “There’s a lot of wait and see going on,” he says. “I think there’s a real concern about the government’s contraction and its impact on government contractors.”

Data from Studley’s research for the fourth quarter of 2011 show rents around the Washington region up from the third quarter, to $31.83 per square foot in Northern Virginia, a 1.2 percent increase. However, leasing was down 14.2 percent in Northern Virginia for Class A space in trailing four-quarter data, to 6.1 million square feet.

Overall, leasing activity for all building classes was up 52 percent, with much of that coming from private sector activity, such as Bechtel Corp.’s lease for a new corporate headquarters. The defense contractor is moving from Frederick, Md., to two buildings in the Reston Town Center, bringing 625 jobs. Yet, other areas haven’t fared as well.  The impact of BRAC-related relocations hit hard in Crystal City. New York-based Vornado Realty Trust, Crystal City’s biggest landlord, took a major hit in its Washington-area holdings when the Defense Information Systems Agency left Vornado’s 400,000-square-foot building at Skyline 7 on Leesburg Pike for a new home in Maryland at Fort Meade in Anne Arundel County. A Vornado representative declined to be interviewed, but the company is predicting that it could take up to three years to recover from the BRAC-related vacancies in its Northern Virginia properties.

One ray of sunshine for NOVA’s office market:  The General Services Administration posted a pre-solicitation bid in April for about 350,000 square feet of space for the State Department in Northern Virginia.  The state department’s lease at offices in Rosslyn expires in 2013, and the GSA is looking for a new, 15-year lease. It will consider new construction as well as space in the Rosslyn-Ballston corridor,  Pentagon City and hard-hit Crystal City.

Vacancies are having one good effect, says Studley’s research manager, Chris Volney. “It’s giving the landlords there a chance to reinvest in the properties [and] they’re beginning to do that now,” he says. Vornado/Charles E. Smith, for example, submitted plans in March to Arlington County for a 23-story office building that, if constructed, would be Crystal City’s tallest structure. The project, which would be called 1900 Crystal Drive, would replace a 12-story building now on that site.

While many areas in Virginia have next to nothing in the pipeline in terms of new construction, the Tysons Corner area of Northern Virginia is seeing new construction related to the expansion of the Metrorail, with four new stations scheduled to begin operations in late 2013. The prospect of enhanced public transit is sparking plenty of activity. In March, the Brick Cos. of Edgewater, Md., announced the $26.7 million purchase of the Westwood Corporate Center IV in Tysons, near the Tysons West Metro station, which is supposed to open next year.

Lower demand for office space makes it a great market for tenants, notes Quinby, and transit access is part of what they want. “They’re looking for amenity-rich areas [and] to be in locations where they can walk to things. They’re looking for access to transit. Those markets that have those attributes will have the higher demand.”

Northern Virginia has been extremely successful in attracting new corporate headquarters. Since 2007, the U.S. has seen six major corporate national relocations, and five of the companies selected Northern Virginia. Still, the area faces a relatively flat 2012. According to a first quarter market report from Jones Lang LaSalle, Northern Virginia’s office vacancy rate increased to 16.4 percent, up from 15.3 percent a year ago.  Overall, the vacancy rate for the entire Washington metro area was 14.6 percent.

While rental rates should remain stable, Quinby expects concessions to “possibly increase to account for the supply-and-demand metrics we’re seeing.” With the coming presidential election and worry that government spending might drop, “people are bullish [on the region] but they’re also cautious … I don’t think the employment forecast suggests more private-sector demand for the next couple of years.”

That caution is part of what’s driving the thrifty thinking of firms that want new space but also want to limit their exposure if business slows down. It is telling that NJVC’s new location will have roughly the same square footage as its current home. That’s atypical; most growing companies traditionally want more space and have been willing to pay for it.  Not in this market. Renschen says the company is adding kiosk-like workstations throughout the building “so that people can come in and get work done without actually having to have an office,” she says. 

CRE Interiors:  Office of Nancy Agee, CEO, Carilion Clinic, Ronaoke

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