In a briefing described by one County Board member as sobering, Arlington officials said they believe the best-case economic-development scenario for the county is to “slowly and steadily” reduce record office-vacancy rates.
But even that relatively modest hope could face headwinds, with new employment patterns, increased competition from other jurisdictions and the federal government angling for cheaper leases all conspiring against what had once been Arlington’s main selling point: its central location.
Arlington’s combination of high vacancy rates and high average rents is “not a good place” to be in, said Arlington Economic Development chief Victor Hoskins during an Oct. 18 briefing with elected officials.
Ballston and Crystal City are holding up well, but Rosslyn is “in difficult shape,” with the ongoing vacancy rate above 30 percent.
Countywide, office-vacancy rates stood at just over 20 percent in mid-2016, with county economic-development officials guesstimating the rate ultimately will decline to under 15 percent. But that might not happen until 2023, and perhaps not at all if the General Services Administration continues to pull out of Arlington.
GSA is in “a race to the bottom” to get deals on office space, County Manager Mark Schwartz told County Board members, and in many cases Arlington isn’t set up to compete, price-wise, with outlying jurisdictions.
The departure in 2017 of the Ballston-based National Science Foundation, which was snatched by Alexandria after intense jurisdictional battles, is sure to bump the county’s vacancy rate up, said Alex Iams, assistant director of Arlington Economic Development, and leases of an additional 2.6 million square feet of office space currently occupied by the federal government in Arlington will be expiring in the next five years.
“We’ll have to contend with all of those,” Iams said.
The soft market for commercial office space has seen average rents decline over the past five years in Arlington, from $45.43 per square foot in 2011 to $42.95 in 2016.
That’s made Arlington slightly more competitive against outlying jurisdictions, but a wide gap remains: According to CoStar, the average per-square-foot rental for Class A office space in the third quarter of 2016 was $42.09 in Alexandria, $33.87 in Fairfax County and $28.02 in Loudoun County. (The average rental rate in the District of Columbia stood at $57.77 in the third quarter.)
The conventional laws of supply and demand – owners of office building reducing rental rates until their buildings are filled – doesn’t apply, said Carol Mitten, a deputy county manager.
Because of the long-term nature of office leases, building owners “are reluctant to write down the rents,” she said, because they don’t want to be stuck with a decade-long stream of low income and would rather wait for market conditions to improve.
County Board member Christian Dorsey called the discussion “sobering . . . but illuminating.”
Iams told County Board members the Arlington commercial market needs to be considered as two separate pieces.
“About half the market is doing very well; those buildings are very healthy,” he said. The other half, where vacancies have been chronic for years, is responsible for the vast majority of the unleased space among Arlington’s 40 million square feet of offices.
County Board member John Vihstadt peppered Hoskins with questions on why Arlington hasn’t experienced more conversion of existing office space to residential.
“We’re seeing a lot more conversion in other communities,” Vihstadt said.
Hoskins said the issue was a complicated one with challenges that range from cost of retrofitting to the low ceilings of existing office buildings, but that when developers are supportive of the idea – such as in Crystal City – it can work.
Such conversions, however, come with a cost to the county government, and taxpayers, as residential properties require more in government services (notably schools, at an annual cost of $18,000 per student) and bring in less revenue than commercial properties.