New office and mixed-use projects are being built like gangbusters in Fairfax County and the county’s economy remains formidable, a local real estate expert said May 11.
More than 2.6 million square feet of office space now is under construction, 83 percent of which has been leased in advance.
“It’s kind of like going to the car dealer and buying your car off the assembly line,” said Curt Hoffman, director of real estate services for the county’s Economic Development Authority, who briefed Tysons Regional Chamber of Commerce members during a breakfast meeting at the agency’s Tysons office. . . .
Companies are flocking to Fairfax County . . . Hoffman said. . . .Wow! How could life get any better for a developer and the County's economy and property tax revenue flows?
Just a tad of perspective shows how bogus the growth in the County's office space is. FCEDA's data shows that, since 2006, the County has added more than 11.5 million square feet of office space. At the same time, the amount of vacant office space has increased by an almost identical amount: 11.1 millions SF. In fact, the amount of occupied office space in Fairfax County has increased by a measly 319.5 thousand SF--enough space to house 1,065 new office workers--112 new office workers per year--using the County's office space per worker planning assumption (300 GSF/worker).
The fact of the matter is that businesses are merely moving their employees from older buildings to new ones as FCEDA's mid-2015 data shows. (Although it is now mid-May 2016 , FCEDA has not yet published its year-end 2015 data update. CRE brokers routinely publish this office data quarterly with a one-month delay.) Over the same period, the office space "available for relet" has grown by 10.9 million SF. Available new office space has grown by less than 200,000 SF.
Against that backdrop, Hoffman called the County's 16.2% office vacancy rate (and that is "direct"only; "indirect" vacancies--unoccupied but leased space--adds two percentage points to that rate) is "near" the "healthy" range of 10%-15% range. We call bullshit! From a developer's perspective, that rate should be under 10%; the lessee wouldn't want to see it below 7% as rents would skyrocket. In fact, over the 35 years the County has tracked its office market, the average direct vacancy rate has been 9.8%. There is nothing healthy about an office market where the vacancy rate exceeds 10%--and the County's overall vacancy rate now exceeds 18%.
And office vacancy is becoming a larger problem for the County. The office vacancy rate has more than doubled since 2006 from 7.7% to 16.5%. Worse, it has grown every year since 2010 (then at 13.3%) when the national economic recovery began. If the office market can't strengthen during a period of national economic growth, its future as a driver of growth in the local economy is very much in doubt, even with the arrival of the Silver Line in the Dulles Corridor.
One point Hoffman makes is that 73% of the current office space is becoming obsolete, meaning only that it is more than 20 years old--and “that’s the next market (replacing office space) we see taking off,” Hoffman said. We disagree for several reasons.
- Office job growth in the County has been and will continue to be slow, if not stagnant, thanks largely to Congress' inability or unwillingness to spend on larger government and government contracting.
- Office space size per worker will continue to shrink. Although the County continues to insist on using 300 GSF/office worker as its office space planning metric, the fact of the matter is that office space per worker is shrinking dramatically. Some estimates say as low as 100 SF/worker. We believe 200 GSF/worker is a comfortable estimate of current and future space per worker for at least a decade.
- Office-type jobs, especially business and technology work, are shifting to other markets for a variety of reasons, including the fact that the internet means that much of this business can be conducted from anywhere in the world.
We appreciate that Hoffman's job is to sell the County's real estate, but he--and many others in County leadership positions--need to provide more credible presentations on the state and the direction of the County's economy, including its office market. The continuing failure to provide credible information will itself lead corporations to move their businesses to other locations whose leadership is more candid about their business conditions and prospects.
Here's the FCEDA data: