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December 11, 2007

(*compared to the rest of the country)

Sponsor Update: Furniture dealership and space planning firm WorkSpaces LLC has been busy.  Projects recently completed: the Securities Industry & Financial Markets Assoc. offices at 1101 New York Ave, and the Buccini/Pollin Group offices at 2020 K St.

Quite a little caveat doth Cushman’s Brian McVay add…but, hey, we’ll take it.  Brian used to manage the whole region for Cushman (’98-‘04), meaning he was trapped at his desk administering things, except when he had to go out at night and be trapped at his table at fundraising dinners.  Now he’s a broker in Tysons and actually gets out on the street and learns stuff.  (He has to do real work again—he’s got three kids in college.)  So we thought we’d check in about the state of the Northern Virginia market

Our first two questions:  How long is that couch?  And did everyone else move away after Brian sat down?

Third question:  Why all the doomsayers?  Because, Brian says, we’re spoiled.  People remember what happened in the 2001 dot bomb and assume we’ll repeat it.  Brian says the dynamics are completely different today.  He says real estate fundamentals are still healthy:  delinquency rates on commercial mortgages are at historic lows and debt and equity are still available, albeit on stricter terms.  More comments:


  • On paper 2007 is a record breaking year with $9.4B in NoVa investment sales (the previous record was $4.5B).  However, Brian calls this the “EOP effect” because around $7B of this were portfolio sales like the Blackstone’s acquisition of EOP (and then Blackstone sales to Beacon, and Beacon sales to Monday—all of which counted, even though many of the same buildings were involved).  Next year we’ll be back to “normal” with around 25-30% less volume.  He assumes some level of portfolio sales will continue.   
  • At the beginning of the year, money was plentiful and inexpensive and there was more money chasing assets than assets to be sold.  Since the August credit crunch things have slowed considerably; for example, if a sale wasn’t near closure, it might have been shelved to ’08.  (What’s magical about the new year?  A bit psychological, he says, plus institutionals’ investment allocations are re-set.)  In ’08 he thinks we’ll see sales more consistent with ’04 and ’05.

We have been studying this picture and trying to decide what Brian is doing here.  We have concluded he is showing us what grip he plans to use if called in to replace Jason Campbell.  In the meantime, he’s planning to follow Plan B:  take his family to the Homestead for Christmas.


  • NoVa’s averaged about 2.7M SF over the last 3 years. In 2007, 2.9M SF delivered and in ’08 4.3m SF will come online – still only about 5-6% of NoVa’s total inventory.
  • In ’09 we’ll be down 30%, back to our historical average, most likely around 2M SF.


  • Right now, it’s 10.8% but there’s a big range in submarkets (from 6.1% in Ballston to 21.5% for Rt. 28 South).
  • Overall, vacancy will increase by 1-1.5% in ‘08.

Leasing Activity

  • 04 was off the charts, but that tapered off ’05-’07.  Yes, there will be higher vacancies due to a ton of space coming online, but leasing activity itself should remain steady.  


  • Overall, rent growth will more closely mirror inflation: 2% - 3%.
  • Most users decide on space needs based on their business fundamentals, not on gaming the market.  The primary users of NoVa office space are contractors and professional service firms, and if you look at what’s happening in their worlds, things are okay.
  • Some markets like Reston and the Dulles Corridor will see a decrease in effective rents over the next year, but that’s just a function of short term supply being out of balance with current demand.  We are seeing “rent abatements” more and more (eg, five or six months free rent, or higher tenant improvement allowance).
  • Rent increase isn’t so much a function of being inside vs. outside the Beltway, but rather trophy-class vs. commodity. 
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