The high-stakes brinksmanship in the nation’s capital over federal spending has done little good for anyone involved, and the area’s office sector is no exception. Last year was the third-worst year on record for office leasing in the Washington, D.C. area, according to commercial real estate investment firm Cassidy Turley, with the sector shedding 1.8 million sq. ft. throughout 2012.
But among the uncertainty and political gridlock, the region’s technology sector has proved to be a bright spot. Washington, D.C., and its Maryland and northern Virginia suburbs still boast a highly educated workforce that appeals to tech companies. Within D.C., a growing population and an increasingly thriving scene for younger workers are also helping to fuel the city’s aspirations to become a nexus for startups and major tech companies alike.
“It’s a great place to work,” says Spencer Stouffer, vice chairman with Cassidy Turley. “There’s a great labor market, and it’s a very business-friendly environment,” he says, citing specifically the efforts of northern Virginia’s Fairfax County to attract tech firms. Historically, a large tech company relocates its headquarters to the area each year, and that trend is likely to continue, Stouffer says.
Northern Virginia’s appeal to tech companies goes back more than a decade, when AOL sank roots in the Tysons Corner area. Today, many former AOLers remain in the area, and some have started new businesses.
Former AOL product manager Tim O’Shaughnessy founded LivingSocial, now one of the District’s key tech tenants. Despite some recent financial difficulties and downsizing at LivingSocial, District officials hope that they can continue to tout the online daily deals company as a leading component of its tech community.
Cassidy Turley’s Stouffer also cites the data centers in the Tysons Corner area, whose fiber lines extending along the Dulles Toll Road drove growth among tech companies in the region.
Given these enduring factors, northern Virginia saw the lion’s share of growth among tech firms in 2012.Tech and Telecom accounted for 17 percent of leasing in the D.C. metro area, according to Delta Associates, and 61 percent of those transactions were in northern Virginia.
Cloud computing, cybersecurity and other fields drove positive absorption in Fairfax and Loudoun counties, with the Reston area in Fairfax seeing a gain of 31,000 sq. ft. from tech demand. Another strong area was computer system design, which added 6,500 jobs in the area in 2012, an increase of 60 percent.
Among growing companies, Amazon Web Services leased 108,000 sq. ft. in Herndon and preleased space for a data center in Loudoun. And not all the activity was confined to northern Virginia. Maryland’s suburbs depend more on healthcare companies for growth, given the presence of the National Institutes of Health. But Infosys and Quest Software leased space in Rockville last year, driving positive demand in the submarket. Cassidy Turley expects tech will continue to power growth in the suburb.
A new normal?
Naturally, private tech firms with less dependence on the federal government for business have seen stronger growth. Those firms that do work as contractors will need to see more certainty before they can resume growth, says Jon Kaylor, senior vice president of Boston Properties.
“They need to know what the story is,” he says. “And with sequestration coming, they’re holding back.” If cuts do occur, contractors are likely to shift their business models and focus more on the private sector. But until the government’s intentions are clearer, they’re sitting tight, Kaylor says.
Cuts in federal spending would bring about a “new normal” in the D.C. area, he says, with growth remaining healthy but less robust than in previous years.
In any case, observers say expansion among private-sector tech companies is likely to remain strong enough to keep the whole sector growing. Developers will continue to focus beyond the denser areas inside the Beltway and add offices in Tysons Corner, Reston and Loudoun County, Kaylor says. “If you look at the amount of new development, it’s unbelievable,” he says. But growth will need to stay strong to fill that space.
Even if expansion keeps up, changes in office design are likely to soften its effects. “There’s no doubt it will continue to grow,” says Tom Cleaver, first vice president of CBRE Group Inc. “But the impact on absorption is a little bit tougher to predict.”
As tech companies adopt open floor plans and move more document storage online to “the cloud,” they’re becoming leaner and more efficient in how they use space. Law firms, a key tenant in Washington’s real estate market, are heading in this direction as well. According to Delta Associates, the average sq. ft. per worker in the D.C. area has declined since 2000 from an average of 197 sq. ft. per worker to 190 sq. ft. per worker in 2010. And it is projected to drop further.
Angling for Microsoft
These leaner tech companies account for a relatively small share of the 9 million-sq.-ft. portfolio of Washington, D.C.–based Douglas Development, which has completed more than 180 redevelopment projects in the area and has 4 million sq. ft. in the pipeline. But Douglas has seen strong demand from tech clients over the past three years and expects it to continue, says Norman Jemal, Douglas’s senior vice president and principal.
Douglas has found success prebuilding spaces, with tenants moving in quickly after completion, and has been able to push rents because the spaces Douglas focuses on are harder to come by than standard office space. Tech companies often seek amenities such as high ceilings, big windows and historical touches, Jemal says.
“We find that we’re successful in pushing rents in that regard, just because it’s not commodity space,” he says.
One of Douglas’s key clients has been LivingSocial, among the city’s highest-profile tech tenants. Last year the company leased a new building for live events—a blogger for the National Trust for Historic Preservation deemed the hot spot “awesome.” And after the firm threatened to leave the Capitol in search of better tax rates, the city cut LivingSocial a $32.5 million tax break.
Yet the company also lost $650 million last year and cut 10 percent of its workforce. It will continue to enjoy the tax break only if it meets a goal of hiring a specified number of workers within a certain timeframe. “Those goals are looking kind of iffy at this point,” says Paula Munger, a regional research director with Cushman & Wakefield.
The city’s growing tech roster surpasses LivingSocial alone, however. Recent tenants at Douglas Development properties include Fastcase, a legal research service, and Web developers iStrategy Labs and BrowserMedia.
Jemal ticks off a number of assets the city boasts in its push to appeal to tech companies: a growing population, rising income and education levels, a strong employee base, burgeoning nightlife, and appealing, well-preserved historic buildings.
“These are all elements that make this the kind of city that has the potential to become a tech hub,” says David Zipper, director of business development and strategy for Washington, D.C.’s mayor Vincent Gray. Under Gray, the District has revived an incentive program for tech companies offering a five-year abatement on corporate taxes, expanding it to benefit startups as well as IT contractors.
On top of courting LivingSocial, Gray’s administration awarded a $100,000 grant to Fortify.vc, which helped to convince the incubator for startups to settle in the city rather than across the Potomac River in Arlington, Va. And the District gave $200,000 to 1776, a meeting space designed for tech startups. Its 15,000-sq.-ft. venue will also host Fortify.vc.
“[We] will build a truly unique co-working and events venue in the heart of the city,” wrote 1776 co-founder Evan Burfield in a post on a Wall Street Journal blog in January. “A place where startups collaborate and connect, and talented entrepreneurs from across the world know that Washington welcomes them.”
Looking to keep this momentum going, Gray will attend the South by Southwest festival in Austin, Texas, this month to talk up D.C.’s tech scene with “everyone we can get a hold of,” Zipper says, including many media outlets.
Gray’s administration continues to work on another key plank in its tech strategy: luring Microsoft to a tech campus located east of the Anacostia River. The 2-million-sq.-ft. redevelopment project is located on the campus of St. Elizabeth’s Hospital. District officials want Microsoft to choose the site for their first innovation center to be located within the United States.
In a letter to D.C.’s city council last year, leaders of local startups backed the creation of a tech campus. Landing Microsoft would help the city further establish its image as a tech hub, says Kaylor of Boston Properties.
“The city still hasn’t overcome its image of being dominated by law firms and associations,” Kaylor says. “They need that first big name to put them on the map.”