Real estate industry braces for impact of Defense cuts

By Jonathan O'Connelll
Monday, August 16, 2010

It isn't clear yet how dramatically Pentagon spending cuts announced last week will affect the local real estate market, but they are already making some in the industry uncomfortable. Consider the Haskell Co.

A Jacksonville, Fla.-based specialist in designing and constructing buildings for corporate and institutional clients, Haskell was selected from a pool of 13 companies in August 2009 to build an $11.6 million headquarters facility for the U.S. Joint Forces Command in Norfolk. Construction is underway and is expected to be complete early next year, as scheduled.

There's just one problem: Defense Secretary Robert M. Gates said last week he will shutter the Joint Forces Command, meaning Haskell is building a headquarters building for a unit that will no longer exist. The command currently employs about 2,800 military and civilian personnel as well as 3,300 contractors, most of them in southeastern Virginia.

For Haskell, which was awarded the contract by the Navy's Facilities Engineering Command unit, it's business as usual for executives unless they hear differently.

"Until the Navy tells me otherwise, we're going to build the building," said Mark Higby, a Haskell vice president.

Higby said he heard about the planned cuts only from news reports and not from Navy officials. The company previously built a 22,000-square-foot facility for the Marine Corps in Norfolk.

Higby said he hoped the cuts wouldn't necessarily result in a loss of real estate. "What we're doing is an office building, so it may be that there are needs for office buildings up there anyhow," he said.

Office tenants, and the tax revenue they produce, pay for many of Fairfax County's public services, and the defense industry makes up a large part of that. In the second half of 2009, during which time 4.9 million square feet was leased in the county, many of the largest transactions came from units doing defense work, including a 230,000-square-foot lease by KPMG in Tysons Corner, a 130,000-square-foot lease by General Dynamics' information technology business in the Dulles corridor and a 113,000-square-foot lease by the Missile Defense Agency at Baileys Crossroads.

"It's a concern for us," Gerald L. Gordon, president and chief executive of the Fairfax County Economic Development Authority, said of the cuts. Still, he said, the county enjoys a greater presence of companies in other industries -- such as Volkswagen of America and Hilton Worldwide -- than it has in the past, positioning it better to withstand potential losses.

"If this was 30 years ago in Fairfax County and that was happening, we would really be concerned," he said.

Robert Peck, public buildings commissioner at the General Services Administration, said through a spokeswoman that it is too early to tell how the cuts would affect the federal real estate portfolio. Some independent projections have found that three years of 10 percent cuts in contractor spending, the numbers Gates announced, could cut Northern Virginia's economic growth in half over that period.

But if one looks historically at how a retooling of the military affects local real estate, there is plenty of room for optimism, according to John Sikaitis, research manager in the D.C. office of Jones Lang LaSalle. Gates has not called for a decrease in overall defense spending as he prepares the military for conflicts beyond those in Iraq and Afghanistan, and Sikaitis suggested that a shifting of resources could bring more contract work locally to firms specializing in research and development and other long-term needs. That could lead to continued local expansion.

"As we do kind of escalate down in the conflicts abroad, you're going to see this renewed investment in Northern Virginia," he said.

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