Reston Spring

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Monday, September 22, 2014

Is this rock bottom for Virginia real estate? Office owners can only hope. Washington Post, September 22, 2014

The title of Jonathan O'Connell's WaPo article pretty much says it all:  The office market in northern Virginia stinks.  And this article documents it well as well as many of the causes.  Strangely, not once in the article does it highlight the ongoing shift in reduced office space per worker, a reduction of about half as organizations shift to open space working environments and few (if any) private offices to improve collaboration, take advantage of telework, and just plan save money.

Nonetheless, here are some key excerpts from the article:
This may be the worst time in the past 25 years to own an office building in Northern Virginia. At least one with space to lease.
After mostly uninhibited growth since the early 1980s — a run that produced some of America’s wealthiest counties — there are red flags popping up from Arlington all the way to Stafford County.
Consider: More than one-third of all the office space along Interstate 395 is empty. Thirteen entire buildings sit completely empty along Route 28. In Rosslyn, the biggest building in the region hasn’t found a single taker. Experts say the area is suffering from the same flat leasing environment as the District and suburban Maryland, but with some other heavy factors unique to the commonwealth piling on...
Defense cuts — beginning with the Pentagon’s Base Realignment and Closure Commission and continuing with sequestration — have led to drastic space reductions and spending cutbacks. Contractors have been forced to cut their staffs.
Worse, there is a surplus of buildings in car-centric locations so disliked by millennials that some wouldn’t be caught dead taking jobs there. Five years after the recession, the paradigm has shifted so swiftly that some of the aging suburban office parks may have to just be torn down. . .
“In a contractor-dominant market, spending cuts have a ripple effect,” said Scott Homa, vice president for research at JLL. “You don’t need to look very far along the Toll Road or Route 28 to find cases of prime contractors just handing back the keys to leased space and consolidating their operations elsewhere.”

The most disconcerting statistic, Homa said, may be Northern Virginia’s absorption — the rate at which rentable space is filled or vacated. In the past 25 years, Northern Virginia has had only three years when more space was vacated than leased, meaning it had negative absorption for the year. It has now had negative absorption more than three years running, unlike other competing markets.
But it isn’t all older buildings in the exurbs that are suffering. Seven of the 40 empty buildings were built or underwent major renovations in the past decade. In Tysons, many of the moves to buildings near the newly opened Silver Line have been from older buildings nearby, often for less space. And some of the highest vacancy rates are in what has become a favorite of developers and investors for a decade: Arlington.
. . . sometimes even neighborhoods such as the Rosslyn-Ballston corridor feel too far off the beaten path. Touted for its lively neighborhoods around Metro’s Orange Line, the area’s office market has been in near free fall recently. Between 22 and 23 percent of all the office space in Arlington County – more than 8 million square feet — is vacant. That is nearly triple the rate in 2010.
Vacancy in Rosslyn is even higher — 29.7 percent, according to Cassidy Turley. The county’s largest building, at 1812 N. Moore in Rosslyn, is completely empty 10 months after completion. Government agencies, including the National Science Foundation and the U.S. Fish & Wildlife Services, are departing for less pricey Northern Virginia digs.
Click here for the rest of this article.

And the clear implication of this high office space vacancy rate:  Higher real estate property tax rates for all homeowners to make up the difference in lost revenues from the office market.  

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