Defense Leasing Remains Strong in Northern Virginia

By Allan Lengel
Washington Post Staff Writer
Monday, July 23, 2007

After the Sept. 11, 2001, attacks, the federal government and its defense contractors began scarfing up new office space in the Washington area.

Today, their appetites have diminished.

With budget constraints and the Iraq war -- and some of the initial hunger sated -- the government has become far more restrained. The defense industry meanwhile continues to expand its presence, particularly in Northern Virginia, but at a more modest clip than before, real estate experts say.

"The post-9/11 impact in the Northern Virginia office market has been enormous," said Herb Mansinne, national director at Jones Lang LaSalle, a commercial real estate firm. "We're not building bombs here, but we're certainly architecting the war here. That's manifested itself into more leasing in the market."

In the past year or so, defense contractor Lockheed Martin was moving into a 145,000-square-foot building in Chantilly, Northrop Grumman broke ground on a 112,000-square-foot building in Chantilly, and contractor Serco was planning to move into a 85,000-square-foot space in Reston.

In government circles, the FBI's Washington office is upgrading to a 200,000-square-foot satellite office in Prince William County from a 98,000-square-foot building in Tysons Corner, driven by a need for more space and new security standards. Also, the CIA is building a 1 million-square-foot facility in the Chantilly area.

Before the 2001 attacks, the market was ailing. Northern Virginia was hit particularly hard by the high-tech bust -- its vacancy rate soared from 4.5 percent in 2000 to almost 20 percent in 2002, according to Jones Lang LaSalle. No question, real estate experts say, the government-prompted push for more office space after the attacks has contributed to the health of the market. The vacancy rate in Northern Virginia is about 10.5 percent.

"There was huge attention being paid to anti-terrorism, to homeland security, to intelligence agencies as well as the [National Institutes of Health] and bioterrorism," said Timothy C. Hutchens, executive vice president of government leasing for CB Richard Ellis, a commercial real estate firm.

While Northern Virginia was a big beneficiary, the rest of the Washington area also got a boost.

After the anthrax attacks of 2001, for example, the National Institutes of Health contracted out bioterrorism research to private companies. That led to more space leased, particularly in Montgomery County, real estate experts said.

After its creation in 2003, the Department of Homeland Security leased well more than 1 million square feet of new space in the area, including 556,000 square feet for its offices in Northwest Washington.

But by 2005, growth in most federal agencies had slowed significantly.

"Money was needed for the war effort to keep the troops supplied and to get the troops there," Hutchens said. "All of a sudden the budget got very tight."

Still, war-related Defense Department contracts continued to flow to private companies, particularly ones with a major presence in Northern Virginia. In fiscal 2005, Lockheed Martin landed $19.4 billion in Defense Department contracts, Northrop Grumman got $13.5 billion, Halliburton got $5.8 billion, Booz Allen Hamilton got a $1.2 billion, and the Washington Group International got $879 million, according to the department.

The result, says John F. Sikaitis, research manager for Jones Lang LaSalle, is that 60 to 70 percent of the large commercial office leases in recent years in Northern Virginia have gone to government contractors.

"The Northern Virginia activity has largely been directed by the war on terrorism, counterintelligence and the Iraq war," Sikaitis said.

Real estate experts don't think the market has too much to fear from an end to major operations in Iraq.

"You're not going to see a huge drop-off," he said. "Even if the war comes to an end, you're not going to see record levels of decline in defense spending. You need to see the military build up again in terms of equipment and new technology."

Commercial real estate experts say they expect defense contractors to continue to take on more office space, but not at the same frenetic pace that was seen shortly after the Sept. 11 attacks.

"Those rates of growth are unsustainable," Mansinne of Jones Lang LaSalle said, adding that the Northern Virginia office market is likely to remain the biggest beneficiary of the government spending.

"That's where the affordable office space is, that's where space exists, and that's where employees live," he said.

Allan Lengel covers commercial real estate. His e-mail address islengela@washpost.com.