NVAR Finance Summit Speakers, Other Experts Provide Insight

More heat than light has been generated by the firestorm gripping American political debate during the Trump Administration’s first months. But for commercial real estate brokers and their clients, the Trump Administration’s proposal to increase defense spending by $64 billion was one light that promised a brighter future.  

With Northern Virginia’s heavy reliance on government spending, both in payroll dollars and in government contracts, the anticipated increased government spending for defense, homeland security and anti-terrorism programs might signal the end of a long dark tunnel. The past few years of federal government cutbacks and across-the-board budget cuts increased vacancy rates and stagnant rents.  
Realtors® attending NVAR’s May 24 Finance Summit, unfortuneately learned that the light at the end of the tunnel may just be an oncoming train!

Dr. Terry Clower, director of the Center for Regional Analysis at George Mason University pointed out that even though the region has recently benefited from “pretty good” job growth, with 38,000 new jobs created during the past year, overall budget reductions announced by the Trump Administration override any benefits that may result from increased defense spending.
The “Drain the Swamp” focus of Trump’s budget proposals, eliminating numerous federal programs and reducing funding for others, creates a major challenge to the continued economic growth of the region, Clower noted.   
 
Even if Congress resists passing many of the proposed budget cuts, the end result is likely to be reduced spending from current levels, according to Clower. He also warned Realtors® of the possibility of continued sequestration in 2017, or even a short-term government shutdown this fall as Congress struggles to adopt an overall spending plan.

In a May 26 report on the federal budget release, The Washington Post quoted a response from local Congressman Gerry Connolly (D-VA), who predicted, “The biggest damage that’s going to be done is going to be the whack at federal employment and the ripple effect on federal contracting.”
Connolly’s dour prediction has been bolstered by economic research conducted by Dr. Stephen S. Fuller, director of the Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future at George Mason University.

“With regional office vacancy rates hovering at slightly more than 14 percent, compared to an historical average of 11.3 percent, the additional space will create challenges for landlords and investors looking to reduce vacancy rates or increase rents.”

In a report on the “Direct Effect of the Trump Budget on Federal Activity in the Washington Region,” Fuller predicted three major economic impacts from the budget proposals:
1. A decrease of 20,000 to 24,600 federal jobs, taking between $2.3 and $2.7 billion of federal salaries out of the economy

2. A decrease of from $800 million to $1.2 billion in federal procurement spending, resulting in a loss of up to 12,000 private sector contractor jobs

3  A decrease of $1.1 billion in federal grants in the Washington region.
Fuller observed that for commercial real estate professionals working in the office sector, this could result in “jobs being consolidated into owned space, which is more concentrated in D.C., or into longer-term, lower-cost leases.”  

In addition, Fuller noted that even possible increases in Defense Department spending won’t help Northern Virginia’s economy significantly,  “as most of that money will go towards purchasing new ships and airplanes, repairs to equipment and personnel deployments,” all of which will primarily occur elsewhere.

Not all was gloomy at the summit, however, as Clower pointed out some reasons for optimism among both residential and commercial real estate sectors:

1. Northern Virginia has had some success in diversifying its economy and generating job growth across all wage levels, which should continue but at a lower rate

2. The region is still the center of government and retains a high level of international institutions

3. The region has a diverse highly educated workforce with a high quality of life

4. The region is well connected to the world

5. Jobs are continuing to grow in the self-employed sector.

The slow economic growth In Northern Virginia during the past year has also been reflected in the commercial office market. The CoStar Group’s first quarter analysis of the commercial office market showed a slow but steady improvement during the past year. After being dormant for the past two years, office construction in Northern Virginia has been picking up, with another 1.6 million square feet of office space expected to be added in Tysons alone by 2019, according to Costar.  

With regional office vacancy rates hovering at slightly more than 14 percent, compared to an historical average of 11.3 percent, the additional space will create challenges for landlords and investors looking to reduce vacancy rates or increase rents.

In a trend that has continued for the past several years, as tenants vacate existing office leases to move into newer, often smaller quarters, the owners of older buildings face increasing headaches trying to lease these older spaces, or find new uses for those buildings.

While commercial brokers continue to look for answers with the market uncertainty surrounding the federal government and its budget,  NVAR Realtors® were advised by Summit presenter Ken Fears, the National Association of Realtors®’ director of regional economics and housing finance, “2017 is going to be a year of getting to know our President.”