BRAC Takes Toll on Northern Virginia Commercial Real Estate Market

Arlington County, particularly the Crystal City area, is taking a hard hit from a plunge in the Washington area’s commercial real estate industry, according to the latest report from the real estate research firm Jones Lang LaSalle.

But some firms are willing to bet a turnaround is coming soon.

Commercial leases fell by 1.4 million square feet in the first quarter of this year, putting the Washington area at the bottom among real estate markets for major cities.

The reason for the losses is somewhat intimidating, but not necessarily surprising. Most result from federal agencies vacating their leased properties.

“With Base Realignment and Closure measures beginning to take hold, Crystal City suffered one of the worst quarters on record,” Scott Homa, vice president of Mid-Atlantic research for Jones Lang LaSalle, told Patch. “The area lost 820,462 square feet of occupancy in the first quarter of 2012, as the Department of Defense moved out of several office buildings, including 2511 Jefferson Davis Highway, 2451 Crystal Drive and 1421 Jefferson Davis Highway.”

Base Realignment and Closure, or BRAC, refers to a federal government program to close excess military installations and realign them in a way that reduces costs and increases efficiency. More than 350 installations – including related office space – have been closed under the program.

The closings are scheduled to continue at least through 2015.

“Vacancy rates have risen considerably in Crystal City and the Rosslyn-Ballston corridor,” Homa said. “Vacancy in Crystal City now stands at 18.2 percent, the highest rate in 26 quarters. Vacancy in Rosslyn-Ballston, which had been hovering in the single digits since the end of the financial downturn, crept up to 10.5 percent.”

Traditionally, lease contracts with the federal government have been highly sought by real estate firms.

The government has the funding to pay high rents and provide stability to a landlord’s portfolio because – unlike private corporations – it never goes out of business.

“Owners of buildings affected by BRAC – primarily within Crystal City – are being left with little choice but to completely renovate these buildings or reposition assets for residential purposes,” Homa said.

In addition, Congress is trying to drastically reduce the nation’s budget deficit, which is nearly certain to result in layoffs of federal employees and a reduced need for office space.

“The decelerated leasing activity experienced over the past 18 months is expected to persist over the foreseeable future,” Homa told Patch.

As a result, landlords for commercial space will need to search out more tenants among private companies, particularly consumer technology firms that can pay Northern Virginia’s rental rates, according to Jones Lang LaSalle.

“There is a growing opportunity for such firms to expand in Northern Virginia and capitalize on the displaced, highly educated talent pool of government contractor employees,” Homa said. “A rebound in the market is likely to occur based on the strength of our employee base, but it will likely take a lot of time to return to equilibrium.”

More evidence that the current downturn in Northern Virginia’s real estate market is only temporary comes from Jeffrey Kottmeier, research director at the commercial real estate firm Cassidy Turley.

“Northern Virginia has seen an increase of private sector headquarters move to the region in the past five years – from Volkswagen to Hilton,” Kottmeier said. “This creates more diversity in the Northern Virginia economy, which supports the office markets in the long term.”

In addition, the nation’s capital is normally a magnet for companies that want to deal with the federal government, meaning vacated BRAC space could be filled soon, according to some real estate experts.

“You certainly saw that happen when the (U.S. Patent and Trademark Office) vacated its space in Crystal City,” said Elizabeth Norton, Mid-Atlantic research director for the real estate research firm Delta Associates.

Some real estate investment firms – like Lowe Enterprises – are willing to gamble that a rebound is worth further investment.

The company is investing $70 million in redevelopment of 1400 Crystal Drive in Crystal City. The redevelopment is planned to transform the 13-story building into 308,000 square feet of Class A office building space.

Class A refers to the highest, and usually most expensive, quality of office space.

“If you look at where the vacancies are (in Northern Virginia), they are all in Class B and Class C buildings,” Harmar Thompson, senior vice president of Lowe Enterprises, told Patch.

Because the firm is appealing to tenants who prefer the highest quality of offices, “To us it’s not a huge gamble at all,” Thompson said.

The company expects to earn between $48 and $52 per square foot from tenants of 1400 Crystal Drive, he said.

Representatives of Lowe Enterprises and Arlington County Board Chairwoman Mary Hughes Hynes participated in a ceremony last week to announce plans for the redevelopment.

Formerly known as 1411 Jefferson Davis Highway, the property is designed to attain LEED Gold certification.

“The building is currently being stripped down to its structural concrete frame,” Thompson said. “A new floor-to-ceiling glass facade will be installed to maximize natural light, provide energy efficiency, and capture the spectacular views. (This) will enhance the submarket by providing an efficient, environmentally-sensitive, state-of-the-art office building within the heart of Crystal City.”