Atlantic Realty Cos. of Vienna is owns, develops and manages more than 6 million square feet of offices, shops and residential units in Maryland and Virginia. David A. Ross, the partner and co-founder of the 12-year-old company, shared his views on the regional commercial real estate market.
are you starting?
A As most of the marketplace knows us, we've been predominately suburban office developers. But this marketplace and market timing has given us a chance to broadly [diversify]. We've found ourselves doing from-the-ground-up development of retail office and residential. And we've found ourselves doing retail and medical-type office space. We're doing pre-leasing of properties and build-to-suit for tenants in the marketplace.
Is the space left from technology companies filling up?
Yes, we've seen a substantial amount of our sublease space here in Northern Virginia getting absorbed. It's getting absorbed by many of the companies that are out doing business with the government. Companies like Computer Sciences Corp., Unisys Corp. and SAIC [Science Applications International Corp.]. . . . In Tysons Corner, Reston-Herndon and Fairfax Center -- those are the three primary markets where we're seeing substantial firming up of absorption and a decline in vacancy.
What areas still have not recovered?
All three of the market areas in Northern Virginia [Tysons Corner, Reston/Herndon and Fairfax Center] have a ways to go in recovery. Although rents are firming up, we still have vacancy. We still have an issue of market rents not meeting the cost to support new buildings. We still need to get some of this vacancy leased. And we have a substantial increase in the cost of construction. . . . We're seeing rents today in Class A office space in Northern Virginia ranging from $24 to $28 a square foot. So the rents that are needed to support that new construction just aren't out there today.
What kind of rents do you need to support new construction?
The price of steel and cooper has gone through the roof. What we needed until recently to support a stable type of market would have been rents between $28 to $30. . . . And now, with the rising cost -- we've seen where steel and copper have gone up as much as 60 percent -- we need rents of between $32 and $34 a square foot.
Is the sales market slowing at all with slight rises in the interest rates?
With regard to the investment sales market, we see a very, very stable and thriving market for two reasons. One, interest rates have gone up, but they are still at 40-year lows. And, the equity markets are still unclear, sketchy and unstable. For those who have been investing for a stable, income-producing asset, they're still looking at real estate as a safe and secure investment. In D.C., government business and the government contracting is seen as a very stable business.
Are the sales prices of buildings going to come down?
Ultimately, if you're a seller all good things have to end. If you're a buyer, hope is around the corner. I don't see them continuing at these levels. I've been doing this for 25 years, and I've never seen them at this level. It is the highest it's ever been, at least in the suburban market. And it's minimal returns ....
The condo market, when will that soften and come back to equilibrium?
I don't believe there will be a significant drop or fall. We will see a leveling off and a clear decline in the level of condo construction.
I wish I knew the answer. We're hearing that interest rates are continuing to rise. We'll probably see some higher spikes in 2005 and that will mean you'll see some leveling of construction. Pricing will follow that.
Tysons Corner has had negative absorption, while Reston's absorption of office space has been huge. Does Tysons have a future?
We are of the opinion that Tysons has a very bright future, but it won't be without a substantial amount of work. That includes the county Board of Supervisors, politicians, the citizens and the development and business community. Tysons has a good thing to look forward to; that is the Metro. It may be seven to 10 years out, but it will be coming here. Tysons will continue to suffer until the infrastructure is put in place to support a 24/7 environment.
That's hurting its office market?
We're seeing employers move out to Reston because it's a more organized, more amenity-friendly, pedestrian-friendly type of environment. In fact, the rental rates for comparable rates are higher in Reston than they are in Tysons. They're $2 to $3 a [square] foot higher in Reston whereas in the '80s, they were $2 to $3 a foot higher in Tysons.
Dana Hedgpeth writes about commercial real estate and economic development. Her e-mail address is email@example.com