Bacon's Rebellion

Democracy Thrives in Sunlight

NoVa and the New Congress

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by

James A. Bacon
in

Republicans aren’t the only casualties of the 2006 elections, reports Jennifer S. Forsyth with the Wall Street Journal. Political gridlock could turn into real estate gridlock as federal agencies and federal contractors hold off signing long-term leases. Contractors also have reason to worry about curtailed spending on the defense, intelligence and homeland security sectors that boomed during Republican rule.

The blizzard of new offices due to come on line will hurt developers’ prospects in the overall Washington market. More than 16 million square feet of office space is under construction in the area, with some of it expected to be ready by mid-2007, according to Stephen Fuller, director of George Mason School of Public Policy’s Center for Regional Analysis. Tenants will lease only about four million of that this year, he predicts. “Everyone is building and very little of it is preleased,” Dr. Fuller says.

Aggravating the overbuilding: The surge in federal procurement is slowing. Procurement in the region was up 16.9 percent in 2003 and 19 percent in 2004. The 2005 numbers aren’t in yet, but Fuller expects an increase below the decadal average of 8.8 percent. Procurement growth could slow even more next year as Democrats set new budgetary priorities.

A bursting of the Northern Virginia office bubble would have many ramifications, which we’ll try to explore in this blog as they unfold. They include: (1) Less job creation and a slowdown in the in-migration of people to fill those jobs, with an easing of growth-related pressures on local governments; (2) Less tax revenue for state coffers, perhaps bringing an end to the state’s chronic budget surplus; (3) a collapse in commercial building sector to accompany the slowdown in residential building, with consequent loss of blue collar jobs, and (4) moderating costs for construction, reducing risk of cost overruns on the Rail to Dulles project.

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12 responses to “NoVa and the New Congress”

  1. E M Risse Avatar
    E M Risse

    All the rents will go down but guess what space will empty first?

    The remote locations that are not close to those new and old federal agency contacts.

    EMR

  2. Toomanytaxes Avatar
    Toomanytaxes

    EMR – IMO, you might be over-simplifying the market reaction. I think that a number of factors would be in play, including the distance to federal agencies, the overall access of the space to adequate transportation infrastructure (such as it is), rents, owner incentives, access to parking and/or transit, and the type of work being done by the contractor. There are plenty of government projects that do not need the workers to be near the federal agency. Of course, this does not apply in all instances.

    Declining rents in outlying areas may cause some contractors to move many, but not all, employees to cheaper and more remote locations, while keeping the sales staff and some key service people in closer locations.

  3. E M Risse Avatar
    E M Risse

    TMT:

    All the factors you list are relevant.

    There may be some staff splitting but when rents of core space go down, consolidation is generally favored by enterprises that want to compete for scarce contracts.

    We will all just have to see what shakes out, especially outside R=20.

    EMR

  4. nova_middle_man Avatar
    nova_middle_man

    A good bellweather for all of this is to follow what happens to Crystal City. As the transition to Belvoir begins will other agenices/contractors move in based on the location and transit access or will new growth continue in the Chantilly area and spread into Loudoun.

    Needless to say at least one of these regions is going to suffer as the growth rate slows. To make matters worse there is the added cost of developing additional inferstructure around Belvoir when there is already areas ready for occupancy.

  5. Larry Gross Avatar
    Larry Gross

    wow… all of this because the Dems go in office?

    I gotta pay closer attention here…

    are you guys sure that you’re not getting the Chicken Hawks confused with Chicken Little?

  6. Gold_h2o Avatar
    Gold_h2o

    For a long time in NOVA the mentality has been, “Build it and they will come.”

    I am not so sure this mentality is going to work any longer.

    I still say the fundamentals of living/working in NOVA are out of whack…..the cost of living is high, the taxes are getting worse, the cost of commuting is going to increase in both time and money….the upward cycle can’t continue forever.

    If you have been in the region for a long time (15-20 years) you are ahead of the curve in a lot of ways. But, if you have lived in NOVA for less than 10 years you may never be ahead of the curve, particularly if the value of your house is not increasing….or decreasing in many cases.

    The Dem’s control congress and government spending will likely be reduced……goodbye government related jobs, services, etc.

    Also, Residential real estate has already crashed….if the commercial sector goes south the entire region could be in for an extended dry spell.

  7. Toomanytaxes Avatar
    Toomanytaxes

    Since we are speculating, what are the possible impacts on immigration (both legal and illegal) and the many undocumented workers in our community if they cannot find sufficient work with a potential commercial real estate construction slowdown? Residential construction is obviously down.

    Also, toss into the mix, Jim Webb has said he will not support the expansion of H1-B visas. Quite a few have been issued for people who are our neighbors in NoVA. What happens if Mr. Webb’s approach prevails? What if the high-tech at lower wages pipeline slows too? I suspect that the Democrats will be just as split on immigration issues as is the GOP. These are not simple issues and most solutions generate both support and opposition.

  8. Anonymous Avatar
    Anonymous

    Why on earth would a company pay higher per square foot rents to consolidate file clerks, accountants, and computer programmers? Especially as those folks will never meet the “contacts” anyhow?

    Not only is rent cheaper, PEOPLE are cheaper. A recent study showed employees in Fredericksburg were willing to take up to a 5K pay cut to work locally.

    More and more companies are going with back offices in cheaper areas – and limiting expensive “close contact” office space to the handful of people who actually need that contact.

    “Farm sourcing”, for even more rural areas, is also growing exponentially.

  9. E M Risse Avatar
    E M Risse

    The answer is simple:

    In Fredrecksburg they are willing to take a 5K cut in pay, in Fauquier a 8K cut and in Norton 20K.

    Lets say the job would pay 75k on K Street.

    In Granada they will do the job for 20k that is a savings of 55k, not 5k.

    In addion enterprises that are geared up to compete for the contracts avaliable in the Core of National Capital Subregion have few of the jobs that are easiest to move.

    If economics of office space worked the way Anon 8:53 thinks it does there would be little difference between space in Manassas and in the RB Corridor.

    EMR

  10. Ray Hyde Avatar
    Ray Hyde

    Anonymous is right and EMR is wrong.

    Here is the reason. It is a huge world out there. There are far more people earning $5k or $55k less than there are holding down those few specialized jobs in town.

    In the aggregate they earn a lot more money, and spend what they earn closer to home. As a result, they are far more sustainable than those that hold the jobs in EMR’s miniscule and overblown example. His example is right, so far as it goes, but it is far too specific to be meaningful in a large way.

    Even in the city, the quality of jobs has been declining. When you look at the number of entrance guards it takes to man the building where I am currently working, you realize that downtown needs more and more and more low skilled workers in order to support the skilled ones.

    It isn’t just the economics of office space that make the difference. It is the combination of office space, housing costs, transportation costs, taxes, crime, pollution, generalized urban grief, higher food costs, business overhead, lack of green space, and cubicle living. that is offset by vibrant and more expensive shopping, and night life opportunities.

    It is a total system, and most people make total system decisions. Only we don’t all recognize these for what they are, because the mix is so complicated.

    The result is that we make what we call “gut decisions”. The reason we call them gut decisions is that we know a bad one will make us sick to our stomach.

    Considering what it costs to travel now, those that take a cut in pay may actually be better off for working outside the city and close to home.

    I don’t see any point in proposing theories as to why things we see are obviously happening, shouldn’t be happening. We would be better off to understand why they are happening, and make plans accordingly.

    Or, we could just waste a lot of money on social engineering and angst as to why it does not work.

  11. Anonymous Avatar
    Anonymous

    EMR writes –

    “In Fredrecksburg they are willing to take a 5K cut in pay, in Fauquier a 8K cut and in Norton 20K.
    Lets say the job would pay 75k on K Street.
    In Granada they will do the job for 20k that is a savings of 55k, not 5k.”

    Nope, you’re thinking of the wrong jobs.

    File clerks. Computer programmers. Accountants. Web designers. Network engineers. Computer security analysts.

    Granada does not have the infrastructure for massive outsourcing of white collar and blue collar jobs (and overseas outsourcing has a number of issues that make it less desirable than it’s sold – there are advantages to keeping jobs in the US.) But these jobs DON’T interact with the “contacts” – and given that reality, it makes far more sense to put them in an area that’s cheaper, and have them drive in for a meeting if you need them on-site.

    “In addion enterprises that are geared up to compete for the contracts avaliable in the Core of National Capital Subregion have few of the jobs that are easiest to move.”

    Nope. These same enterprises are outsourcing jobs overseas, to rural areas, to more remote suburbs – any place they can get a price advantage. There have been multiple articles about this in the press – and I notice that BR is not picking up on it. It’s a major, significant trend.

    For most companies, MOST jobs can be done as easily in Fredericksburg or Richmond as they can in DC. The rank and file dont’ need face time with decision makers – and keeping them housed in the inner loop means higher salaries, higher office costs, and less happy employees.

    “If economics of office space worked the way Anon 8:53 thinks it does there would be little difference between space in Manassas and in the RB Corridor.”

    Nope. Bad logic. It’s desirable because it’s cheaper – both cheaper to hire the employees (you can get the same employees for less money, and with reduced commuting costs, they don’t lose) and cheaper for the office space rental itself. I fail to see the logic in “it’s cheaper, so it must be less desirable.” It’s more desirable BECAUSE it’s cheaper, for people and for office costs.

    This is a big trend, a growing trend, and ignoring it doesn’t make it go away. The papers in DC and Richmond have both run articles on this. Telecommuting, moving offices out to more remote suburbs – those are all growing. All of this may actually be a GOOD thing, not a bad thing, too.

  12. Toomanytaxes Avatar
    Toomanytaxes

    10:42 – Very well stated. I’d say that one of biggest reasons that many of us are here today is because we were here yesterday. A company normally does not pull up stakes and move its operations overnight. But many companies will look at other geographic options when it’s time to renew a lease or remodel offices or expand.

    Another factor favoring the status quo is the fear of many people about managing staff remotely. How can I be sure things are working when I cannot see the workers? But more and more managers are developing the skills necessary to supervise remotely.

    There are, of course, many people who like urban life. But, IMO, there are probably more that would rather live in a less-hectic, less-crowded, less-expensive environment. Given a choice, most people will not chose to live in a dense, urban environment.

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