Why Commercial Developers Should Be Afraid, Very Afraid

Metro Park VI

Metro Park VI

by James A. Bacon

While most commercial real estate markets across the United States are slowly recovering from the recession, office vacancies in the Washington metro area ticked higher over the past year, to 13.8% in the first quarter, according to the Wall Street Journal. Clearly a sequester-related decline in federal spending was partially responsible, particularly in Northern Virginia, home to the Pentagon and locus of the defense industry, where vacancies hit 15.8%.

But that’s not the whole story. Buried in the article was an anecdote that should send shivers down the backs of commercial property owners, real estate brokers and local government officials everywhere — not just NoVa, but everywhere — who depend upon commercial property tax revenue to balance their budgets.

Booz Allen Hamilton Holding Corp. signed up in 2011 to take one quarter of the space in MetroPark VI in southeast Fairfax County near a National Geospatial-Intelligence Agency base. But late last year, the WSJ reports, the firm reversed course. The company halted construction and put its entire space on the market for sub-lease. The reason for the move? Not just defense cutbacks.

James Fisher, a spokesman for Booz Allen, said the decision to sublease at least a portion of the space came as more employees have been working from home or at clients’ offices, and as the company has been looking to trim its real-estate footprint.

Companies everywhere are realizing that they have way too much office space. Given the increasingly mobile nature of work — cell phones, laptops, Wi-Fi, the Cloud — more and more people are conducting work at home, at Starbucks, on the road, or in client offices…. just as Fisher said. Mobile work has been around for  a while. What’s different now is that building-automation systems have reached the point where it is possible to measure office utilization far more easily and less intrusively than before. Energy-efficiency systems installed to eek energy savings from HVAC and light bills keep track of when offices are occupied and when they’re not in order to adjust lighting and temperatures. What many companies are discovering is that offices are literally half empty most of the time.

Other than payroll, office buildings represent one of the largest cost centers for service-sector businesses. Increasingly, companies are realizing that they can save loads of money by utilizing their work space more efficiently. This shift in thinking is a secular trend arising from new technologies, having nothing to do with the level of federal spending, and will persist regardless of what happens to federal spending.

As an aside, the Journal noted that tax revenues from commercial properties in Fairfax County are coming in $33 million short of expectations this year. Revenues grew only 0.1%, far less than the 6% anticipated.

If I were a commercial property owner in the Washington area, I would be very afraid.

If I were a Northern Virginia government official dependent upon property tax revenues to balance my budget, I would be very afraid.

If I were anyone, anywhere, counting on metropolitan growth and development patterns to continue on the same trajectory as the past six decades, I would be very afraid.

8 Responses to Why Commercial Developers Should Be Afraid, Very Afraid

  1. Jim,

    The weak demand and reasonably strong supply for commercial space in Fairfax County is one of the main reasons why most of the early FDP (final development plan) submissions in Tysons has been residential. Much of the commercial development is related to businesses consolidating their operations in fewer locations, often owned by the company itself. The decision of Intelsat to move to Tysons has been the biggest “catch” of new commercial tenant interest in Tysons so far.

    Elsewhere in Fairfax C0unty there remains considerable vacancies, due to the slow down in government contracting and the uncertainties about government spending in general.

  2. This article points up why recent demographic studies that are driving much of today’s planning for roads and the like are so faulty -

    The forces driving what happened during the 1970s, 1980s, and 1990s are evaporating. So, as Jim’s article points out, its quite likely that office space demand will not grow at past rates. Indeed, its quite likely that it will contract significantly, and that current over supply will persist.

    Also, as TMT points out, people will always want a home of their own. Here too however the dynamics are also changing – They’ll want more an more homes because fewer people will be living in each home. And more and more of those individual homeowners will want a home and office (work space) of their own in their home. And they will want a far wider variety of homes to chose from, given the expanding variety of current lifestyles. There will be more singles, fewer nuclear families, more empty nesters with more free time and perhaps more disposable income, etc. etc.

    All these forces driving all this change will cause a lot of pain in locales that have experienced explosive growth over the past forty years, putting all their eggs in what might easily become obsolete baskets.

    All of this will open a lot of opportunity for those able to see the emerging new trends and catch their wave, building fortunes out of new lifestyles.

    It is also quite likely that much of this change for good or ill will be happening in places like northern Virginia, and much of this opportunity in other places that missed much of the wave last time – places like Richmond.

    One thing for sure. The last thing Northern Virginia needs now is to be spending a billion dollars based on obsolete assumptions from the past.

  3. So a company has less office types because the employees work in an office that belongs to the customer? That’s not what’s happening. The companies are downsizing core management to increase the number of employees under one manager. Defense company management is being transformed from specific contract/project based management to general skills based management across multiple contracts. It’s not unusual for employees not to know or even heard of a single boss in their department’s ORG Chart all the way to the CEO.

  4. re: ” Given the increasingly mobile nature of work — cell phones, laptops, Wi-Fi, the Cloud — more and more people are conducting work at home, at Starbucks, on the road, or in client offices…. just as Fisher said. Mobile work has been around for a while. What’s different now is that building-automation systems have reached the point where it is possible to measure office utilization far more easily and less intrusively than before. ”

    1. – the only thing more suspect than census/weldon-cooper growth projections is job projections especially with regard to geography.

    2. – this conundrum seems incongruous with Smart Growth/New Urbanism…. Reality-Check, et al.

    3. – how does this trend play with the idea that without additional transportation infrastructure NoVa and Hampton, etc, et al, will become strangled with productivity-killing congestion?

  5. re: ” re: ” Given the increasingly mobile nature of work — cell phones, laptops, Wi-Fi, the Cloud ….”

    all rely on internet – which has become – arguably – as important as electricity and yet not built out to that scope especially in places away from MSA cores.

    and likely never will be unless the govt treats it like they have transportation and electricity – especially for the rural areas.

    increasingly in rural areas – the schools have internet and wifi but the homes that kids go home to – do not and that also means that mom and dad cannot increase their education via online either.

    so the question is – should expansion of the internet be a core govt function – like transportation and rural electrification – or not?

  6. “so the question is – should expansion of the internet be a core govt function – like transportation and rural electrification – or not?”

    This is a good question. Some thoughts:

    Cheap electricity is not evil. It’s a blessing. It’s essential to modern civilization and to raising the standard of living for all people.

    So why do so many today detest cheap electricity? Why do so many try use government to force the price of electricity ever higher? Is it not a proper role of government to deploy policies that promote cheap power to insure its benefits can be spread to all? FDR knew this. Why have we forgotten?

    Same for roads – roads are far too important to be turned over to private toll operators who make private decisions based on private selfish interest. Good roads are among our major blessings. Don’t allow selfish interests to highjack what should be public roads built for public benefit. Its wrong.

    And it’s total fiction that private enterprise builds roads – That’s B/S. Public money builds roads. That’s why Moguls never go broke building roads even when they build roads to nowhere. Their hoodwinked public investors do. Government here is walking away from its proper roll and responsibility.

    Same for parking – parking is not evil. Its a blessing. So are cars for goodness sake. Driving up costs for parking and for cars is lunacy. This does not solve problems, it punishes people. Same for jacking up cost of people’s electricity. And its turning out the internet might well be same. Why the hell does it cost $70 a month to hook another poor child to the internet. This is akin highway robbery of our children’s lives.

    So the key to solving problems is not taking options away from people – The key is finding ways to increase the options people can take advantage of. This is the path of wealth and problem solving. With options, opportunities for making life richer and better are endless – it’s where I-Pads come from.

    When government walks away from its proper roll, special interests fill the void and do great harm. We’re seeing that happen more and more now.

    At the same time we are also paradoxically seeing government become more and more intrusive in places where government does not belong, and where government as enormous power to do great harm. Things are flipping our systems of society upside down. It’s leading us into an era of gross dysfunction, enormous waste, pervasive corruption, and ignorance.

  7. re: “why do so many detest cheap electricity”.

    I’m not sure anyone “detests” cheap electricity most of all those who live in rural areas whose access to electricity – was subsidized by others via that big, bad, nasty govt because the private sector was not about to extend electricity into areas where it was not profitable to them.

    but two issues are being conflated here. One is the issue of whether or not big, bad, nasty, corrupt, wasteful govt should involve itself in providing things like road, electricity and internet to folks who live too far and too dispersed for the private sector to want to provide it.

    and then of course, the other is, – for everyone who buys electricity, no matter where they live, why they would “detest” it for being “cheap”.

    we do have some of the cheapest electricity for many industrialized countries due primarily to the fact that we do not restrict pollution AND we site polluting plants away from cities. If each city had to have the electric generator plant inside it’s city limits, pollution in the form of gases, particulate matter and mercury would rain down on those who used it and, in fact, this is the way much electricity used to be generated – inside the city limits – much like the

    Jim Bacon would call this paying for your allocated share …..instead of offloading/shifting costs to others.

    indeed even in Washington DC, there are still coal-burning plants:

    http://en.wikipedia.org/wiki/Capitol_Power_Plant

    so what if ALL of the electricity in the NoVa region had to be generated in the region itself – would people still be pleased with the “cheap” rates that were part and parcel of burning coal that would end up making NoVa look at cities in China?

    See.. we move the pollution rather than reduce it – so it’s out of sight and out of mind – but it still goes into the environment and indeed most of the waterbodies in the east around the major power plants – do have mercury levels too high for people to regularly eat the fish.

    see…that’s a “cost” Reed. it’s a shifted-costs that keeps the price of coal-generated electricity “cheap” – but we do pay for it.

    but you sort of ignored my original question which was should the govt subsidize internet for everyone the same way it has electricity and roads?

  8. NoVa is in deep kim chee. Office occupancy rates are going down even as the overall US economy improves. Meanwhile, the NoVa skyline is littered with construction cranes building ever more office space – much of it in mixed use developments.

    Cuccinelli is “out to lunch” when it comes to NoVa’s economic situation. Slight changes to the tax rates won’t make a rat’s ass worth of a difference up here. The challenge here is re-training government contracting drones to become “fit for use” in an enterprise serving the commercial market. We don’t need tax breaks – we need the local public universities and community colleges to start offering data science classes at night. We don’t need companies to move to NoVa, we need existing technology companies to … a) re-focus their federal support personnel on commercial business and b) expand their commercial operations in NoVa.

    Economic development in NoVa is nothing like economic development elsewhere in Virginia. It’s more like Cambridge, MA – Austin, TX – Silicon Valley, CA than Roanoke or Richmond.

    Of course, the centralized control philosophy so beloved by the faux conservatives and libertarians in Virginia demands a “one size fits all” approach befitting a Dillon’s Rule state.

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