To many Washingtonians, it is no surprise that commercial development in the area is still steaming along at a strong pace. Many developers and commercial real estate specialists maintain a have-no-fear attitude, despite the stock market plunge, the volatility of interest rates and an office market that some concede is already overbuilt.
But beneath much of the optimism, there is a nagging concern that the Washington area is susceptible to hard times if there is a slowdown in the demand for new office space, particularly if local or national companies cancel or postpone expansion plans in the region or if Congress were to make drastic cutbacks in the size of federal agencies, especially at the Defense Department.
The recent election of Audrey Moore as chairman of Fairfax County's Board of Supervisors also has raised some hesitancy among developers and builders as they wait to find out what changes, if any, she will make in how they do business with the county. More than half of the Washington area's new development was recorded in Fairfax County during the July-to-September period this year.
"We're still very bullish on Northern Virginia," said Chip Ryan, a partner in Cambridge Cos., a local developer of single-story office and warehouse projects. "But we need to be careful and responsible. We can't dump a lot of space on the market and because of the robust economy expect it to bail you out in the long run. Development is an important industry here, but we have to be level-headed about it."
The vibrancy of the Washington area commercial office market came through clearly in the Metropolitan Washington Council of Governments' report for the third quarter. It showed that there were 117 projects started, totaling 8.6 million square feet of space and costing $465.6 million.
Fairfax County accounted for 54 percent of all the development in the Washington area. There were 27 projects, totaling 4.7 million square feet of space at an estimated cost of $257 million. Supporters of the area's continuing development said this is simply a result of the region's strong economy; critics said the Washington area is quickly becoming overbuilt and making itself susceptible to an economic disaster.
"Companies are moving to where the employes live or would like to live," said F. Joseph Moravec, president of Legget McCall Grubb & Ellis, a local brokerage firm and head of the D.C. Association of Realtors. "But there is just too much space. Demand is great, but not that great. We're very, very vulnerable. The slightest dip in demand in the area and we're going to feel it."
Nonetheless, there are few fears that the area will be filled with empty glass-and-steel edifices, like those in Denver, Dallas and Houston. As long as there is a steady flow of communications, electronics, computers and aerospace companies moving to many of the newly constructed buildings in Tysons Corner, near Dulles International Airport, Reston and Herndon in Northern Virginia, and Gaithersburg, Rockville and parts of Prince George's County in Maryland, there will be a demand for more office space, industry officials said. And as long as there are lawyers, lobbyists and associations, real estate experts said they will always demand space.
In fact, some builders said they can't build fast enough.
"The majority of the space that's being built out here is with tenants already in hand," said Ray Smith, president of Webb-Sequoia, developer of Dulles Corner, a 3 million-square-foot office complex started near the Rte. 28-airport access road intersection. AT&T has already leased one building and is planning to lease another.
Other projects in the area that are at least partially leased include the Center for Innovative Technology, a Virginia-sponsored 150,000-square-foot high-tech research center; Electronic Data Systems' building to house its expanded facilities and Westfields, a Henry A. Long Co. 16 million-square-foot conference and office center with 1,200 hotel rooms.
According to Spaulding & Slye, a local real estate firm, the vacancy rate for the 3.9 million square feet of existing office space in the Dulles area is 28.5 percent, one of the highest rates in Northern Virginia and the Washington area. Within the next 10 years, there is expected to be an additional 24 million square feet of office space built.
Still, many developers and builders said they will be able to lease the space because the Washington area office market is becoming diverse enough to continue to attract a variety of companies. The District, Fairfax, Bethesda, the I-270 corridor and Rockville are still the primary locations to develop an office park, hotel or shopping center. But within each of these areas, especially in Fairfax, there are smaller hubs of development that, in many cases, compete against each other to lease space.
But while five years ago companies may have moved to Fairfax to avoid the high cost of leasing space in the District, the scenario has now changed. Companies are moving to some suburban areas to take advantage of the newer, higher quality office buildings and parks and to move closer to their work forces. Many workers, especially those in technical fields, are settling farther from the District to take advantage of less-expensive housing and more open space.
"Fairfax County is substantially built out, but there are still a lot of good prospects for a number of years to come," said James W. Todd, president of the Hazel/Peterson Cos., developers of several major Northern Virginia office and residential projects, including Fair Lakes along I-66, which eventually will have 7 million square feet of office space. "There are some very distinct market areas that overlap. There's Tysons Corner, which has more of a downtown, urban image that competes in some ways but is similar to the District. Then in the Dulles/Rte. 28 corridor, there's the lower density, suburban development."
Compared with other regions throughout the country, especially the hard-hit, oil-based economies of the Southwest, Washington is a still sort of economic paradise, spelling opportunity for many a developer and builder whose dreams of successful office building ventures may have gone bust elsewhere. When many of these out-of-town developers arrive here, they find themselves in an area where there still are plenty of eager land owners wanting to sell their developable tracts.
"Every developer in the country would rather build here than in a place like Texas," said J. Fernando Barrueta, president of Barrueta & Associates, a commercial real estate firm here.
At the same time, land prices are escalating so rapidly that a severe slowdown in demand could leave developers stuck with huge parcels of land and the high cost of maintaining land that is not making them any money.
Some seem to be simply waiting for the right moment to break ground, while others are waiting to sell their pricey land. In the Tysons Corner area, where there is more than 14.2 million square feet of office space, car dealers along Leesburg Pike are increasingly becoming key players in real estate deals.
The owners of Brown's Tyson's Corner Dodge sold the 235,446-square-foot facility for $10.25 million to Rouse & Associates, a subsidiary of the Rouse Co. development firm. The auto dealer leased the property back and continues to operate the Dodge outlet, but that's after making a profit of more than $7 million on the sale of the property. Three years ago, the same piece of property sold for $3.2 million. Rouse said it has no immediate plans to build on the property, which is located at the intersection of Leesburg Pike and the Dulles Access Road.
Last May, the JKJ Ford dealership sold its 521,087 square feet of space along Rte. 7 for $18.5 million to the Rosenthal car dealerships, which now operate a Nissan, Mazda, Honda and Jaguar dealership at the site. Rosenthal owns nearly 20 acres, but said it is doing so well in the automobile business that it is not considering any offers to sell the land.
Overall, most developers, builders and others in the real estate business seem to agree that the Washington area is still a good location.
"Sure, everybody's a little nervous," said John Fagelson, a Fairfax attorney who specializes in land-use, zoning and other development issues. "But if you're in the business of building things, you're not going to close up shop just because you think things are going to go wrong."