Nerdistans in Trouble

nerdistan

How badly are suburban office parks getting clobbered in the current real estate environment? Take a look at the Westfields Corporate Center near Washington Dulles International Airport. Two buildings known as Washington Technology Park I and II were appraised at $187.5 million at the peak of the 2000s-era real estate boom. They were just reappraised for $61.1 million — a 68% reduction, according to the Washington Post.

How could that happen? WaPo reporter Jonathan O’Connell provides the background: First, the buildings lost key tenants as the slowdown in defense spending gutted Northern Virginia’s defense-contracting sector. Defense giant Northrup Grumman paid $4.7 million to get out of the lease. Government consulting firm CSC cut back its space from 180,000 square feet to 20,000. Meanwhile, the office vacancy rate climbed throughout Northern Virginia, driving down lease rates generally. Then, on top of that, writes O’Connell:

Buildings far from public transit and walkable amenities like restaurants began to suffer in particular, as young workers flocked to more urban, transit-accessible neighborhoods. So far this year, 92 percent of all office leases of 20,000 square feet or more are within half a mile of an existing or planned Metro station, according to the services firm JLL.

A decade ago, urban geographer Richard Florida famously termed the sterile and isolated office campuses as “nerdistans,” predicting that they would have little appeal to the rising generation of the so-called “creative class.” It has taken a while, but Florida’s insight has become the new conventional wisdom.

The two Washington Technology Park buildings have other problems as well. The owner, Corporate Office Properties Trust (COPT) based in Columbia, Md., has been unable to keep up payments on the $150 million in debt it took on to acquire the buildings. Unable to renegotiate terms, the company stopped making payments. The debt has been transferred to a firm that manages distressed loans. COPT has blamed the drop in market value in part on the property’s fractured ownership.

Bacon’s bottom line: The Washington Technology Park buildings may be an extreme case, but they are indicative of systemic problems in the Northern Virginia real estate market — and suburban real estate markets generally.  In a down market, some properties suffer worse than others. There’s nothing wrong with the buildings. The problem is location. The worst off are office parks on the metropolitan fringe offering none of the community amenities — walkable urbanism, access to mass transit — that workers and employers are increasingly looking for.

Residential development continues in outlying suburban counties because the population continues to grow and urban cores can’t infill fast enough to handle the surge in demand. Not so with commercial development. Businesses are moving to more space-efficient work patterns and they need less space per employee than they once did. That problem is compounded in Northern Virginia, where the market over-built commercial space in anticipation that the 2000s economic boom would continue forever. With the shift in consumer preference to walkable urbanism, car-dependent Nerdistans are the big losers. We’re accustomed to the specter of ghost malls. Don’t be surprised if we soon start seeing ghost office parks.

— JAB

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9 responses to “Nerdistans in Trouble

  1. This post will show you how old I am.
    When Junior Colleges were first established, the rational was that most would do the first two years of undergraduate school at a local JC,then move on for the final two years at a UVA ,WandM, or another institutions.This would allow for two years to be low cost and allow universities to concentrate on higher level undergraduate programs and graduate level teaching,research,and thus keep cost down for undergraduates. This never seemed to become a reality.

  2. Jim:

    You are completely right. These isolated office buildings are in trouble. I still don’t understand how this happened. I spent a lot of time shopping for office space in Northern Virginia a couple of years ago. There was a clear relationship between walkability and price per sq ft. The more walkable, the higher the price per sq ft. Contrary to the extrapolation of your “core metro” theory it didn’t really matter whether the space was closer or further from the urban core (within reason). What mattered was whether there was a critical mass of mixed use within walking distance. So, buildings within walking distance of the Reston Town Center commanded a premium while isolated buildings just a few miles away did not.

    The stunning point is the number of buildings built in the last few years as isolated office buildings. Trust me – few people have a lower level of respect for Northern Virginia developers than I do. However, I have never thought of them as stupid. But they seem too stupid to learn the very simple lesson of the Reston Town Center – concentrated density, mixed use and walkability make for higher priced space. I would also be willing to bet that few to none of the Reston Town Center office buildings are hurting for business (despite the higher prices).

    If you drive down the Dulles Toll Rd from Tysons to the airport you will see isolated building after isolated building lining both sides of the road. Many of these buildings were built over the last 10 – 15 years. There is too much space between these buildings, hence no effective walkability. The same buildings could have been built on less land creating higher values for the developers, better accommodations for the employees who reside in the offices, more opportunities for retail operators and greater free space for the citizens.

    So … why doesn’t this happen?

    By the way – I travel extensively. I see the very same development patterns happening in Austin, TX, Silicon Valley, CA and other fast growing areas.

    This is starting to look a lot like the mortgage crisis. Developers capitalize on a local demand bubble by building the cheapest possible buildings with little regard for whether the value will last. The developers sell the building to commercial real estate operators who figure they can recover their money before the demand ebbs. The banks lend money because banking executives get compensated on the loan fees being generated at the time of the loan with no penalty for loans that fail long after they are made (the bank gets penalized but the executive who approved the loan is long gone by the time it defaults). One day the bubble goes “pop” and it’s like a game of musical chairs. Somebody is left owning the underwater buildings and the bad loans. So, naturally, they turn to the government and say … we need help … we need a bailout.

    Meanwhile, all those school systems that depend on transfer payments from NoVa and Tidewater better batten down the hatches. This game of dominoes won’t end until the schools in rural counties are left wondering what the hell happened.

  3. “Residential development continues in outlying suburban counties because the population continues to grow and urban cores can’t infill fast enough to handle the surge in demand.”

    I do not believe that to be true. If you segment residential real estate customers (renters of buyers) you might use a graph that relates sq ft to cost. There are various “clumps” of demand on that graph. One substantial “clump” of demand is for a a combination of sq ft and cost that can only be achieved in the outlying suburban counties. Many people are not willing to pay the same amount for half the sq ft just to be closer to work. These people wouldn’t buy the smaller in-fill homes if they were available.

  4. Who has time to walk anywhere when you only have 30 minutes for lunch? Most people brown bag these days.

    • Apparently somebody must have time to walk given the prices being charged for space in the Reston Town Center – along with the plethora of new gyms, restaurants, stores, etc. One thing that probably helps is the local apartment buildings and condos. Imagine how much more time you would have if your commute was a 5 minute walk!

      You can even walk to a golf course from the Reston Town Center in about 15 – 20 minutes.

      The dudes and dudettes from way back when muct have had some reason for forming villages. Maybe they got tired of paying the king’s horse tax.

      • It will be interesting to see how high-priced, high-quality apartments at Tysons are absorbed into the market. So far, despite high prices, there seem to be interested parties – which is very good.

        Rents for the Macerich apartment at the Tysons Corner station range from $1500 for a small studio to $8000 for a three-bedroom penthouse. Source: Tysons Partnership presentation to the GTCC in February.

        So far, no push to build and sell condos. Developers indicate they cannot get financing to build large-scale condo projects, so they are sticking with rentals. Most are building apartments instead of condos that will be rented, as the latter are normally bigger than the former.

        • ” Developers indicate they cannot get financing to build large-scale condo projects, so they are sticking with rentals.” Why not? What is driving the lack of vision of these bankers?

          • well .. if you believe in the “market” then don’t you have to believe in the choices the market makes?

  5. if you look at commercial and commercial strips – you have to sort out if they are essentially serving rooftop services or other services.

    so no matter where you are – urban or suburban or even rural – there are going to be commercial that serves rooftops… pizza, groceries, insurance, cleaners, dental, etc.

    you are always going to have some percentage of “commercial” to serve rooftop no matter the economy… people are going to need some level of services.

    the commercial that adds value on top of the rooftop commercial

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