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The Rise and Fall and Rise of Commercial Property in Arlington

Was instability in property values caused by the Pentagon?

Arlington County Department of Management and Budget

When the market tanked, Arlington’s residential market remained flat when the rest of the country was in freefall. But the county’s commercial real-estate market plummeted about 15 percent in 2009 and 2010. For a while, it seemed like Arlington’s commercial property market was about to go off a cliff.

Why did Arlington’s commercial market go so far south while the residential market was able to float above the Great Recession?

The answer, according to George Mason University professor John McClain could be BRAC. That’s the Base Realignment and Closure Commission, which issued a 2005 recommendation that 12,000 workers move out of leased office space in Crystal City. Worried about being able to lease space, owners dropped rental prices. Because commercial property values are largely based on rental prices, the BRAC-created uncertainty may have contributed to the drop in prices caused by the downturn.

“Market values don’t necessarily reflect anything rational,” said McClain, senior fellow and deputy director of the Center for Regional Analysis. “Eventually they reflect rationality, but not necessarily up front.”

When asked about that theory, Arlington County officials are reluctant to agree. Arlington Budget Director Richard Stephenson says the disparity between commercial and residential values were tied to trends in the banking industry. He suspects the sudden drop in commercial values was tied to the collapse of the securities market, which did not have the same influence on the residential market in Arlington. At the low point, the county logged only seven major commercial sales in 2009.

“The amount of money you had to bring to the table to purchase a commercial property made it almost impossible to buy a commercial property,” said Stephenson. “There was risk in the market, and there was a lack of liquidity.”

MANY FACTORS could explain the disparity between commercial properties and residential properties. Traditionally, economists see a lag between residential decline and commercial decline. But that doesn’t explain why one plummeted while the other remained flat. Some suspect that Arlington’s residential market remained strong because the county did not engage in the kind of reckless speculation that has plagued other parts of the country.

“We never had any overbuilding here like you had in Miami and Las Vegas,” said Terry Holzheimer, director of Arlington Economic Development. “And we had very little foreclosure, so we didn’t have the vacancy problem you saw in other markets. So the weaknesses you saw in the rest of the country never happened here.”

Holzheimer says buildings that had been emptied by BRAC have the upside potential for renovating the property and charging higher rents rather than being locked into an existing rate. He said he saw massive portfolios sold during the downturn, including BRAC buildings. But McClain says the influence of BRAC goes beyond the direct influence because of all the ancillary business such as associations and lawyers and even coffee shops that serve BRAC employees.

“It’s probably the effect of BRAC,” concluded McClain.