Tommy Ellis, a principal in Carlyle Group, stands in a field of grass and brush at routes 28 and 50 in Chantilly, where the worldwide investment company plans to construct two five-story office buildings, with tenants as yet unsigned. The air is heavy with confidence.
District-based Carlyle is among a handful of developers preparing to build here at Westfields Corporate Center, and while each project has its own distinctions -- Carlyle is offering high security, for example -- they incorporate a new reality about the commercial real estate market in Northern Virginia: Building on speculation is back, thanks to the boom in government contracting.
For developers, that boom has been enhanced by new high-security requirements from the Pentagon and the federal government's desire, articulated in the recent base realignment and closure recommendations, to move some of its employees out of leased office space in areas such as Crystal City to more secure and distant buildings.
Developers expect more demand for office space in pockets of Northern Virginia, especially Westfields, as agencies and contractors hunt for sturdier walls, unbreakable glass and buildings set far enough back from the road to deter attacks. Westfields, an office park of about 1,000 acres, also houses the National Reconnaissance Office, the top-secret agency that designs, builds and operates the nation's reconnaissance satellites.
"It's the who's who of defense contractors out here," said Ellis, pointing to a building at Westfields that houses outposts of Computer Sciences Corp. and General Dynamics Corp.
A new CIA complex is being planned near Westfields, and developers expect the presence of the agency to attract even more contractors eager for office space nearby.
Westfields, which already has about 5 million square feet of office space, just less than the size of the Pentagon, could nearly triple in size. An additional 1.1 million square feet is either under construction or on the drawing board, more construction than most other sub-markets in Northern Virginia have seen in recent years, real estate researchers and brokers said. And much of it is going ahead without pre-leased tenants.
That construction on speculation comes as a dramatic counterpoint to recent history. The technology boom and bust of the 1990s left companies with millions of unleased square feet on their hands, causing vacancy rates to spike and rents to plummet. Caution has ruled since, at Westfields and elsewhere, with most developers signing up tenants before putting up buildings.
Wary voices are still being heard. Brokers point out that tenants have been leasing about 250,000 to 300,000 square feet of office space a year in Westfields, and the 1.1 million square feet that is being built over the next few years could lead to an oversupply.
Some developers and brokers remain reluctant to build "on spec" -- especially with rising construction costs -- until they can get a better fix on whether there is sufficient demand for the buildings under construction. Few can afford to have a building sit empty.
Mark Winkler Co. of Alexandria is selling its Westfields portfolio, which includes some 800,000 square feet of office space plus land that could permit construction of 1.7 million square feet more. It's a sign, some brokers say, that the market has reached its peak. Some say Winkler is getting out and cashing in instead of taking a risk in developing the rest of its land.
And a building that was once leased by the company now known as MCI Inc. still stands empty.
"It's a lot of space coming on line at Westfields," said Malcolm Schweiker, a senior vice president at CB Richard Ellis, a commercial real estate firm. "I don't think there's ever been this much space all at one time."
As questions are raised, a few developers are moving slowly on deciding to build without tenants, while others are pressing ahead quickly.
"Is it too much space coming on?" said Matt Ward, a senior vice president of Alter Group, an Illinois real estate investor that recently bought land in Westfields and plans to build a 300,000-square-foot office complex there in the spring. "That's hard to answer."
He said his firm was still thinking about whether to go ahead without a tenant.
"We're sitting on the sidelines waiting to see," he said.
Oliver T. Carr III, chief executive of Columbia Equity Trust Inc., a District real estate investment trust that has been buying property in Westfields since 2002, is going ahead with construction of a large office building -- without a tenant.
"The only downside would be if government spending curtailed," he said.
The optimists say the opportunity to build high-security buildings at Westfields offers a promising niche.
"Now we're seeing defense contractors are expanding, and they're looking for secure space," said William H. Keech, who manages the Westfields park and is the president of the Westfields Business Owners Association. "Some of these new security requirements like setbacks from roads and having surface parking instead of a parking garage can be met at Westfields and can't be met in other locations."
The stable presence of the National Reconnaissance Office prompted Starco Properties, a real estate developer based at Fort Myer, to go ahead with two buildings, totaling 220,000 square feet, without pre-leasing.
Just last week, BPG Properties Ltd., a real estate investment company in Philadelphia, said it paid $41.8 million for roughly 100 acres and plans to start construction early next year -- without a tenant -- on a 165,000-square-foot office building and has room to build at least 1 million square feet more. "We can meet any setback requirement, so it's important to begin the first building soon," said Roy Perry, a senior vice president with the company.
Development at Westfields, once soybean fields and a sod farm, began after Henry A. Long, one of the founders of home real estate behemoth Long & Foster, started buying land in the early 1980s. Keech, who worked with Long at Westfields, said early developers bought the land for $2.50 a square foot. Developers now pay roughly $30 per buildable foot for land there.
Long built some office buildings -- some of the first tenants were telephone companies -- and sold off chunks of land to other developers, but the park suffered in the real estate crash of the late '80s and early '90s.
It took off after the National Reconnaissance Office arrived on 60 acres in the center of the park in the early '90s. That drew in defense contractors such as CACI, Lockheed Martin Corp., Northrup Grumman Corp. and Boeing Co. Most buildings in the complex have special areas for doing secret work.
"NRO is the anchor to Westfields much like the Pentagon is to Crystal City," Schweiker of CB Richard Ellis said. "Everybody wanted to be where the NRO is located."
Barely half a mile from NRO, Ellis walked the 41-acre Carlyle site the other day, wing tip shoes in squishy grass, describing the glass and concrete buildings he plans to construct.
"They're probably watching us," Ellis said, laughing as he surveyed the park.
Carlyle, which has a real estate investment fund of $2.2 billion, is banking that government contracting companies will want high-security features and be willing to pay slightly higher rents for it.
"Not all setbacks are a bad thing . . . " says a flier marketing the building, playing off Pentagon requirements for building setbacks. "The setbacks will be 82 feet from the driveway, but we could do 150 feet back from our neighbors," Ellis said, showing off space on the grassy lot that could be used to deter car bombs. The buildings will have windows that won't shatter and reinforced concrete walls that would help prevent them from collapsing like a pancake if attacked.
Carlyle plans to spend between $65 million and $95 million on the project -- about 15 percent more than it would on construction without the high-security measures -- and wants to get rents in the low $30s a square foot, slightly more than the going rates in the mid- to high-$20s a foot in other buildings at Westfields.
While Ellis argues that his high-security buildings could give a contractor a slight edge over competitors, other developers argue there is no need to offer costly security measures for contractors who do not necessarily have to comply with the same strict rules as government agencies do. And some are not so sure about how fast Westfields will develop.
"You've got new faces showing up, and they've got hot money and they want to turn it into a product rather than sit on the land," said Randall M. Griffin, president of Corporate Office Properties Trust, a Columbia real estate investment trust and one of the largest landlords in Westfields with 2 million square feet of space.
This month, Griffin is finishing a roughly 200,000-square-foot building he built without a tenant. He is waiting to see when to go ahead with a 600,000-square-foot project.
"Sometimes it's all a game," Griffin said. "You rush to be the first to be ready to go with a building, but he who is at the end of that cycle could get hurt pretty badly."
Carlyle Group's Tommy Ellis visits the Chantilly property where the investment company hopes to build offices.