Virginia’s Idling Economy Stalls the Office Market

Anyone who remembers when cell phones were simply mobile telephones rather than today’s powerful computing devices would acknowledge that technological innovations have altered the way we work, play and communicate.

Yet innovation as a current driver for economic expansion and consequently, growth in the commercial real estate market, has not been impressive.

 America’s long held leadership in innovation capacity has faltered since 2000. It now ranks next to last out of 44 countries, according to recent Congressional testimony of Stephan Ezell, vice president of the Information Technology and Innovation Foundation (ITIF).

Likewise, technological innovation has failed to spark productivity gains in the economy.  Greg Ip reported in the Wall Street Journal on August 13, “America’s annual productivity grew just 0.4 percent for each of the past five years, one of the slowest stretches since World War II.”

 Innovation has also done little to spark Virginia’s recent level of annual growth in its gross domestic product, ranging from a high of 0.7 percent in 2012 to a flat 0.0 percent in 2014.
According to the federal government jobs report released on October 3, 2015, the economy only added 142,000 new jobs nationwide in September, while the nation’s workforce dropped to 62.4 percent of the population, the lowest level since 1977, with 5.1 percent of all workers remaining unemployed.

Generally the commercial real estate market recovers with the economy, the key driver being job creation. 

”Almost 60 percent of all leasing activity happened in Tysons within a quarter-mile of one of the four new Metro stations.”

While Virginia’s unemployment level of 4.5 percent is one of the best in the country, the “sluggish economic growth” throughout the DC area resulted in this region’s rating of dead  last in job growth in major American markets in 2014, reported Lawrence  Yun, chief economist for the National Association of Realtors® (NAR),  at NVAR’s September Economic Summit. 

The quality of D.C. area jobs also continued to decline, with lower paying jobs replacing jobs lost in higher paying categories, noted Dr. Terry Clower, director of George Mason University’s Center for Regional Analysis. 

Despite Northern Virginia’s low unemployment rate, the scarcity of new jobs and the lower paying quality of the jobs that were created provides mixed signals for the commercial property markets, especially the office market.  Although office jobs grew at a faster rate than overall employment, demand for office space continued to be held back. Companies are continuing to economize, designing more efficient workspaces and encouraging telecommuting. 

Positive signs in the local job market emerged in the second quarter. Federal employment is no longer declining and federal procurement has stabilized. Clower noted that 40 percent of Northern Virginia’s economy is still tied to the federal government.

These signs of optimism are reflected in the commercial market. Office leasing activity for the newer buildings located near a Metro line slowly started to pick up in the second quarter.  The District’s office vacancy rates dropped slightly to 14.9 percent at the end of the second quarter from their high of 15 percent in April. Nationally, that period was the second strongest in the past seven years, according to CoStar’s second quarter office report.

One consideration is simply the ample supply of vacant office space at increasingly attractive rent rates. The Rosslyn-Ballston Corridor shows a current vacancy rate of 21 percent, compared to a historical average closer to 10 percent. Just a few years ago, the rate was less than 5 percent. Similarly, other Northern Virginia submarkets continued with high vacancy rates such as Southeast Fairfax County at 20.9 percent, and the Alexandria/I-395 corridor at 20.4 percent. 

Led by a 371,000-square-foot office leased by the U.S. Marshall’s Service at Crystal Gateway 3, and a 136,000-square-foot lease signed by Capital One bank at 1750 Tysons Boulevard, the second quarter was positive for absorption, which is the total amount of space leased minus the total amount of space vacated.

”Almost 60 percent of all leasing activity happened in Tysons within a quarter-mile of one of the four new Metro stations,” Revathi Greenwood, local director of research for commercial firm CBRE, told Biznow in a July report.  “Even more impressive, 88 percent of all leases signed in the second quarter in Northern Virginia were Class-A properties.”   

While new office properties are in greater demand, older buildings continue to be a drag on the market. For many tenants it is preferable to move into new buildings with more efficient use of space and more attractive amenities than it is for them to renew current leases. Nearly 7.2 million square feet of new office space in 31 buildings is currently under construction throughout the D.C. area, according to CoStar. 

With the anticipated addition of 2,000 new apartments in Tysons during the next 24 months, commercial tenants who haven’t previously looked in the suburbs may be interested. 
The largest office construction projects currently underway in the D.C. area are located in Northern Virginia, including the 975,000-square-foot Building 3 at the Capital One headquarters campus in Tysons (entirely preleased to Capital One) and a new 700,000-square-foot facility at 2401 Eisenhower Ave in Alexandria, which is 97 percent preleased to The National Science Foundation.

“The key innovative technologies are here now and will reshape the economy.”

Jonathan Aberman, a D.C.-area spokesman on technology innovation, painted a more optimistic picture of the anticipated economic impacts of new innovation in technology in his presentation at NVAR’s Sept. 9 summit. Technological innovation has the ability not only to reshape our lives, but also to drive economic development through entrepreneurs, he observed. According to Aberman’s estimates, 20 percent of the current economy has been created by innovative startup companies.

Virginia’s high-tech innovators historically led growth in such areas as telecommunications and software, he explained. Today, 95 percent of these startups in the D.C. market are in government services, information technology and health care. Increased office demand among these new companies is beginning to cut into the longtime dominance of government contractors in local commercial real estate.

“The key innovative technologies are here now and will reshape the economy,” Aberman predicted, citing artificial intelligence, robotics, drones, virtual reality, 3D printing and DNA-based medicine. 
 With resources in Northern Virginia such as large quantities of ubiquitous data capacity, a young highly-educated workforce, and access to international markets, Aberman noted that the applications for these technologies for national defense, homeland security and health care could become the drivers for future economic growth. 

If so, technical innovations could also help to redefine commercial real estate. Highways could be replaced by “data ways,” and densely populated “live-work-play” environments could replace Northern Virginia McMansions and strip malls.