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Base Realignment and Uncertainty Surrounding Government Agency Spending Pushes NOVA Commercial Development to New Expanses
Posted January 30, 2012
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Leading DC metro area commercial real estate firm releases the status of the leasing market
Washington, DC - Cresa, a nationally recognized leader in tenant-only representative commercial real estate, has released information regarding the state of the Office Market in Northern Virginia moving into the 2012 calendar year. Depending on location, there are great opportunities for tenants to take space.
The greatest chance of opportunity is currently in the inner submarkets. Rosslyn-Ballston, Crystal City and Old Town Alexandria experienced a significant reduction in demand during 2011 especially in Class A space. In addition, this space is some of the most expensive and prestigious in the Washington, DC Area. As a result, asking rental rates have also increased in the inner submarkets even as vacancy rates rose.
"The buildings where so much space was returned during 2011, present some of the greatest opportunities for tenants willing to pay the price for the space," explained Tom Birnbach, Managing Principal at Cresa, "Some of this space hasn't been available in years, and the tenants that lease it will be able to enjoy some of the best locations in the DC area."
Given Northern Virginia's close association with the federal government, in terms of both housing large government institutions and being one of the largest recipients of procurement spending, the legislative impasse on Capitol Hill has created a lot of business uncertainty for tenants in Northern Virginia; tenants are less likely to spend capital on moving or over committing to office space. This was especially true in the inner submarkets. Uncertainty in regard to the status of federal leasing and procurement dollars slowed the robust demand growth which occurred in 2010.
Additionally, a number of defense agencies relocated out of office space under the Base Realignment and Closure (BRAC) Act. The National Guard, the Defense Information Systems Agency (DISA) and the Washington Headquarters Command returned the vast majority of the space in the inner submarkets. In addition, a number of private sector tenants closely associated with the government vacated space as well. Northrop Grumman gave back large blocks of space in Rosslyn during their relocation to Merrifield and a number of other defense contractors downsized or left their space in the Rosslyn-Ballston Corridor and in Crystal City in order to follow their clients to their new locations or to realign their space to reflect current staffing levels.
All indications show that demand growth will at best remain lackluster in 2012 in the inner submarkets. Most of this year's leasing activity was renewals and what wasn't will constitute very little growth. This coupled with more expected move outs of additional defense agencies to military facilities, means that vacancy rates are not expected to decrease too much over the next year.
In contrast, demand for office space rebounded in the outer submarkets, which include the areas of Fairfax, Prince William and Loudoun. The federal agencies and their contractors in areas like Route 28 South, Tysons Corner and Reston/Herndon, are more closely tied to the government's intelligence agencies. These agencies face less uncertainty in regard to their funding than other areas within the government, and thus are not as susceptible to the spending cuts.
As a result, demand grew in the outer submarkets during 2011, and vacancy rates shrank, especially in Class A space. Some the largest deals executed during the year were in these submarkets and most of the leasing activity will constitute new demand. All of this points towards a continued reduction in available space and increased competition for the space that remains.
With better access to credit and strong demand in 2010, developers and tenants alike ramped up development activity in 2011. Even with 1.8 million square feet delivering during the year, development activity increased from 2.4 million square feet under construction to 3.3 million square feet in 2011. Of this space, three major built-to-suit projects broke ground during the year, adding 1.2 million square feet of space to the development pipeline. These projects include Boeing Company's new headquarters at Monument View in Crystal City (329,000 square feet), the first phase of Aerospace's headquarters in the Route 28 South submarket (180,000 square feet) and the renovation of the Melpar Office Complex for the new Tri-Care and Office of the Medical Command for their Headquarters (720,000 square feet).
During the year, eleven buildings totaling 1.8 million square feet delivered. Of these, five were build-to-suits, which totaled 977,794 square feet. Some of these deliveries included the redevelopment of 12310 Sunrise Valley Drive in Reston for the Defense Intelligence Agency and delivery of the New Defense Advanced Research Projects Agency's headquarters in Ballston, 266,054 and 352,740 square feet, respectively. The six speculative buildings were built and totaled 824,094 square feet. They delivered 18.3% committed.
About Cresa (http://www.cresa.com/washingtondc/)
Cresa is an international corporate real estate advisory firm that exclusively represents tenants and specializes in the delivery of fully integrated real estate services, including: Transaction Management, Project Management, Strategic Planning, Workforce and Location Planning, Subleases and Dispositions, Portfolio / Lease Administration, Capital Markets, Sustainability, Industrial / Supply Chain and Facilities Management. With more than 55 offices, Cresa is the largest tenant representation firm in North America. Through its alliance with Savills, one of the world's largest commercial real estate services firms, Cresa covers more than 255 locations in 40 countries.
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