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The credit crunch crisis is making people put on their thinking caps about the future of commercial real estate. For sage insight, we asked our friendly Washington Post quote machine, Professor Steve Fuller, director of the Center for Regional Analysis at George Mason.
We visited Steve yesterday in his 1840 home in Old Town. He says the row house proves real estate’s 7-percent rule: It first sold in 1857 for $215, meaning it has appreciated an average of 7 percent annually. Only research addict Steve would have figured that out.
What trend do you see in the office market here?
By Q1 ’09, we’ll have some see-through buildings. There are now 20m SF under construction—10m in Northern Virginia, 7 m in DC and 3m in Maryland—yet we need only 5m new SF a year.
How bad a situation is that?
It won’t compare to 2001–2002, and will certainly be nothing like the early 90's. Our underlying economy and employment situation are much stronger. What we’re talking about is a moderation of growth; but of course some people got used to the fact we were the fastest growing metro area in the country.
How do you calculate that 5m SF figure?
We project 50,000 net new jobs this year, about the same as last year, but slower than 62,000 in ’05, and 67,000 in ’04. Roughly 48 percent of these jobs require office space, which is 24,000 jobs, multiplied by 200 SF per worker. That gives you 4.8m SF per year. So we’ll need about 9m SF between now and the end of first quarter ’09.
Wow, that's very precise.
Actually, that 200 SF per worker might be overstated. There may be more telecommuting than we realize, and another wild card is that as costs rise, businesses may be using space more efficiently.
Any problems yet?
We’re pushing into double digit vacancy rates in some parts of the Route 28 corridor and along the Toll Road, where there is way too much space. And there is more phantom space out there than people appreciate, because less expansion space is being sublet than before. This compounds the problem in the future because companies will have extra space still on hand and not have to take more.
Every summer Steve sails from Annapolis to Maine on his 30-year-old Hinckley sloop. Here he points to Monhegan Island, one of his favorite stops. Unbelievable fact: Steve owns the boat John Lennon sailed in to Bermuda in June of 1980. Lennon hadn’t written a song in five years, but after that trip was inspired to pen 30 songs -- most on his last album, “Double Fantasy.” Steve has been inspired to write lots more statistics.
Any positives in the situation?
Developers here are more national and better heeled than a few years ago, and insurance companies and Europeans are still racing around to buy buildings. And excess supply keeps office prices down.
Northern Virginia’s future?
By 2015, Tysons will be a rising market because of the Metro. It will be a bigger and more important center, and Dulles will pick up steam. The Route 95 corridor will become a more distinct office market because federal contractors, due to BRAC, will be moving that way.
It’s strong, but Arlington could put it under pressure over the next few years. Buildings in Crystal City and Rosslyn will be closer to the White House than some at the baseball stadium and will be cheaper with lower taxes. Arlington is not sitting still; they’re being very aggressive.