Jobs fill up offices and drive retail sales…it’s as simple as that.
Unfortunately, despite Northern Virginia’s low 5.5 percent unemployment rate, job growth remains flat. As we pass the midpoint of 2014, the commercial market remains stagnant.
 
For the past year, job growth amounted to roughly 6,000 net new jobs, less than 1 percent, which is just not strong enough to ignite the office market or fuel retail sales. By comparison, for the past 20 years, the local economy has grown an average of more than 40,000 net new jobs each year. 

The anemic job growth rate from June 2013 to June 2014 resulted in the Washington, D.C. area having the third lowest rate of job growth of the 15 largest employment metros, ahead of only Chicago and Detroit, according to figures from the Bureau of Labor Statistics and the George Mason University Center for Regional Analysis. This was reported in the Washington Business Journal on July 25. This region’s May 2013 to May 2014 job growth rate exceeded only the Detroit metro area’s employment numbers.

Realtors® attending the NVAR economic forecast in June heard GMU economist Stephen Fuller point out that during the past year the growth of 9,800 private sector jobs was offset by 2,800 losses in federal government jobs.

“The good news in the local job market is that job creation has continued in the lower paying retail, leisure and hospitality sectors, while the government reductions are levelling off.”

The good news in the local job market is that job creation has continued in the lower paying retail, leisure and hospitality sectors, while the government reductions are levelling off. Healthy growth, albeit at a lower than average level, is expected to continue during the next several years, before local job creation reaches its more typical average level.

The additional jobs in the retail sector slightly reduced the Northern Virginia vacancy rates – to 5.9 percent –for neighborhood and community shopping centers, according to the mid-year report of  Delta Associates, a consulting firm for local retail real estate powerhouse Rappaport. Average rental rates increased slightly. Northern Virginia has nearly 40 million square feet of space in these centers, with another 1.3 million square feet currently under construction. 

In the office market, however,  reductions in both federal government jobs and the contractors and services that depend on federal spending, have done nothing to improve Northern Virginia’s average vacancy rates, which continue to hover around 17 percent, according to the midyear 2014 office report released by CoStar, the leading commercial real estate information service. 

Hardest hit have been the submarkets where government offices are located and contractors cluster. Representative submarkets and their corresponding vacancy rates are:
• Crystal City –  23.5 percent
• I-395 corridor – 31.7 percent 
• Pentagon City – 30.8 percent 
• Rosslyn – 29.1 percent
• Springfield/Burke – 21.8 percent. 
 
Elsewhere around the country the overall economic recovery is fueling a resurgence in the office market. Vacancy rates nationwide have dropped from 13.5 percent at the end of 2013 to 11.8 percent at the end of June 2014, according to CoStar economist Walter Page. 

Also affecting vacancy rates is the “downsizing” of current tenants requiring smaller spaces. Another phenomenon is the “flight to quality” which results as tenants flock to the newest offices in the best locations, leaving behind older buildings, which have been more difficult to lease. Fully 75 percent of absorption has occurred in new buildings across the country, Page noted.

In the rest of the country, nearly 80 percent of the office absorption is occurring in the suburban submarkets. However, in the Washington, D.C. market, only 20 percent of the absorption is occurring in the suburban submarkets, said Maeve Gallagher, CoStar’s real estate economist who covers this regional market.

The Washington, D.C. market also fared poorly for landlords with lease rates increasing only an average of 1.4 percent during the past year, compared to a national average increase of 3.7 percent. Rental rates in Northern Virginia have dropped 44 percent since their peak in 2006-2007.

The housing industry, which has long been a driver in job creation, is currently making the smallest contribution to the economy since World War II, Fuller pointed out. 

“The economy is sitting waiting for direction while generating roughly half the new jobs needed."

Virginia’s economy, which during the past recession was one of the strongest in the country, has grown slower than the national average for the past three years. Its one-tenth of one percent rate of economic growth, as measured by gross domestic product (GDP), makes it the third slowest growing state in the country, based on recent figures released by the Bureau of Economic Analysis. Virginia is followed only by Maryland, which was flat and Alaska, with a GDP that shrank by 2.5 percent. 

“The economy is sitting waiting for direction while generating roughly half the new jobs needed,” Fuller concluded.

In an effort to jump start job creation in Virginia’s small business community, Governor Terry McAuliffe in late July signed an executive order creating a “micro business” designation for small businesses, including women and minority owned enterprises, with no more than 25 employees and $3 million in average annual revenues. Those designated will be eligible for specified contracts or services from state government agencies.

Until a stronger local job market takes hold, commercial Realtors® will continue to face strong headwinds.