Dulles Slows Down
Monday, November 12, 2007
Few places have epitomized the recent boom in commercial real estate better than the busy arteries that connect Dulles International Airport with the rest of the Washington region.
In Reston and Herndon alone, 15 new buildings totaling nearly 2.8 million square feet of office space have risen since 2005. As an office market, the Dulles Corridor surpasses Tysons Corner in raw square footage.
Companies such as Sprint, Sallie Mae and Volkswagen have located operations there. The corridor has seen job growth of 24 percent over the past seven years.
But now this fast-growing suburban business hub is headed for a pause.
With federal contracting slowing from its recent boom, and as the national and regional economies soften, the current wave of construction projects is likely to leave empty buildings. Few new office projects are expected to get started in the near future, as developers focus on finding tenants. The process is likely to take at least two years, given historical trends, according to developers and brokers.
"There is going to be a lot of competition for tenants out there, and I am not going to paint a pretty picture," George F. McKenzie, chief executive of the Rockville-based Washington Real Estate Investment Trust, told analysts during a conference call last month. "Activity has not been as good as one would have expected over the last 12 months."
Completed in July, the Washington REIT's Dulles Station West sits empty a few turns off the toll road, the first element in a future office park. The project is the first ground-up office development in the 47-year history of the company, which invests mostly in existing commercial property.
"This is our only significant vacant project," Sara Grootwassink, chief financial officer for Washington REIT, said during a recent tour of the property. "But we also have realistic expectations: You don't open up a building like this and expect it to be 100 percent leased."
Proximity to a future Metro station along the toll road and high visibility from that highway will help attract clients, Grootwassink said. Yet when the firm bought the land and development rights for the building in December 2005, the potential to build a second, larger building was part of the deal. While that opportunity remains, the space will become a park for now.
"It is a factor of the market, obviously," Grootwassink said. "We would not plan on the second one until the first one was leased."
New Center of Gravity
The last time Northern Virginia's commercial real estate market slowed was after the tech bust of 2001, when dozens of dot-com start-ups went out of business. But that downturn was relatively short lived. After the terrorist attacks of Sept. 11, 2001, the federal government began pouring money into national security programs, with many of those dollars going to contractors in Northern Virginia.
The Dulles area's relatively inexpensive real estate became a draw for many businesses. In the latest quarter, for example, rents for the Dulles area were $29.81 per square foot, compared with $47.94 in downtown Washington.