Commercial Rents Rising

Commercial Rents Rising

Current prices hover in the $30 to low $40 per square foot range.

While the attention of the real estate world in Northern Virginia has been turned to the residential market as of late, business is booming on the commercial end as well, according to local experts.

“The only area lagging has been the small office space market,” said Art Reinhardt, associate broker with the Commercial Group Realty Inc. in Dulles. “Small amounts of space are available for industrial zoned property and the sub-markets have been strong. Virtually anything that goes on the market sells quickly thanks to low interest rates,” similar to the residential market, he said.

The absorption rate has been strong, meaning that available space is not staying on the market for long periods of time, Reinhardt said. “I don’t think we’ve reached a situation where we’re overbuilt in the area. Absorption has kept pace with availability.”

Finding industrially zoned land, however, is something of a challenge. “Class A office space in the Washington, D.C. area has been one of the strongest markets for years, and excess space in Tysons Corner and Reston has been well absorbed,” he said. “There’s a nice balance at the moment.”

Reinhardt acknowledged that the residential market has appreciated in value much quicker than the commercial market, which is helping to maintain stable rental rates. “The office market has been as strong and vibrant as the housing market and this is a very healthy real estate market in general.”

THE CHARACTER of the area, with low unemployment rates and high job growth, makes for a climate not found in many other locales nationally.

“We have a very different area here, we have a different workforce and population, they will demand office space and work space and continue to thrive,” Reinhardt said. “We’ve had bumps in the past. When things get back to more like normal, people will think we’re in a downward trend or a recession, but it’s a healthy thing."

The Northern Virginia market encompasses some 143 million square feet of commercial space, said Herb Mansinne, senior vice president with Jones Lang LaSalle and member of the Greater Washington Commercial Association of Realtors.

“To paint an accurate picture of the overall market, you need to look at the individual sub-markets, each one is different from each other,” he said. The areas each attract different types of jobs and therefore have different kinds and sizes of space requirements, but all have been thriving in the current market.

This year started with a 10.8 percent vacancy rate throughout Northern Virginia, Mansinne said, and numbers for the first quarter of 2005 are expected to be even lower. “Some sub-markets have tighter numbers than that, which is including sub-lease space,” he said. Part of the reason for the low vacancy is the booming government contracting industry, especially in areas like Reston and Herndon.

“The federal government and CIA budgets bode well for the area, many subcontractors they hire are based here in Northern Virginia,” Mansinne said. “The great news in the commercial market since Sept. 11 has been the government.”

Eventually, however, a shortage of commercial space will occur, because speculative construction has stopped in some areas.

“Speculative construction never went away in the Ballston/Rosslyn area or Crystal City,” Mansinne said. “It will most likely return to Tysons and Reston/Herndon this year as those markets recover. The Reston/Herndon market is currently at a 14 percent vacancy market, it might be lower when the first quarter numbers come in.”

The big news in the Tysons area has always been and remains to be the service-oriented professions: bankers, real estate agents, offices. “Those industries are all back in the game, hiring new employees and expanding their space,” Mansinne said. “In Reston/Herndon, it’s the defense market, Lockheed Martin, Booz Allen Hamilton, Northrup Grumman. For the first time, smaller contractors are starting to show up, which shows that our market is diversified and strong.”

Unlike the rest of the country, which was hit by a widespread recession in the early 1990s, the Northern Virginia economy was not hit at all. “By every fundamental measurement, Northern Virginia never had negative growth during that time,” Mansinne said.

That good news does create some problems, however.

“We are fully employed here, I think the unemployment rate is somewhere around 1 percent, so employers are forced to import new talented and skilled workers,” Mansinne said. “If they do that, where can they expand to? There’s not enough housing for people coming into the area. Those two things are the biggest problems facing our market.”

GROWTH HAS BEEN so great in recent years that last year, Northern Virginia netted more newly created jobs than New York City, acquiring 40,000 new jobs in Northern Virginia alone compared to 35,000 jobs in New York. Over 85,000 jobs were created in the greater Washington area last year, Mansinne said.

Rental rates are currently in the low $30 per square foot range, with some places seeing rates as low as the mid $20s to a high point of the lower $40 per square foot range. “We’re coming out of a market where last year, those rates that are now in the $30 range were about $25 per square foot,” he said.

Finding larger blocks of space, over 50,000 square feet, is becoming harder to secure, according to Randy Atkins, the marketing director at Studley (Virginia) Incorporated.

“Below that size, there are still lots of options available throughout all the sub-markets,” he said.

As rental rates start to rise, a company’s flexibility in location can help find available space.

“A tenant looking to find a space in Tysons might look into Reston/Herndon as well and stay in the Dulles Corridor,” he said. “Likewise, a tenant looking to stay in the Rosslyn/Ballston corridor might look out toward Fairfax Center and along the Route 66 corridor for locations, it all depends on where your clients and employees are based,” he said.

Specific shortages come up from sub-market to sub-market, such as the Route 28 corridor, which Atkins said is “probably the most active area because of the type of business out there, like the government and the National Reconnaissance Office.”

Corporations that are flexible in where their offices are located may be able to find all-inclusive rental rates in the mid-$20 range, he said. But prospective renters should not get hopes up too high; a prime spot in the Tysons II market is still demanding rates of between $30 and $40 per square foot. “There’s very limited space available there, along with the Reston Town Center, which has not large spaces available,” he said.

History has a way of repeating itself, Atkins said, such as the early 1990s when space was diminishing before more construction was underway.

“If we continue to absorb space the way we have, companies will have a difficult time finding what they need as far as spaces in excess of 50,000 square feet,” he said.