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Northern Virginia

Suburban markets get wired up with the constant flow of high-tech companies moving in.

High technology continues to make Northern Virginia something of a bastion for new industry on the East Coast. While major companies locate their high-tech facilities here, heads also are turning toward Northern Virginia as it is chosen as a locale for technology conventions. IBM/Toshiba's new computer chip manufacturing facility is now operational in Manassas, and Netscape Communications has placed Northern Virginia on its short list for a software development facility. Additionally, Fairfax County next year will host the World Congress on Information Technology, where 1,000 executives from technology firms around the world will descend upon Northern Virginia and be exposed to its dynamics.

According to Guy Copperthite of Carey Winston/Barrueta, Vienna, Va., Northern Virginia's limited supply of available office space and its pool of qualified workers are being stretched thin trying to accommodate this burgeoning high-tech industry. "As a result, Northern Virginia's employment growth rate is projected to cool to 2.6% this year from 3.2% in 1996," he says.

Activity in the suburbs throughout Northern Virginia continues to fuel activity and make headlines here, Copperthite says. Plans are under way to build a new $150 million minor league baseball stadium and entertainment complex 30 miles south of Washington, he says. In addition to the baseball stadium, this endeavor would include a minor league hockey arena, convention center, hotel, office and retail space, and a performing arts center.

Also, the Navy is relocating 3,000 employees of the NACAIE division to Patuxent River in St. Mary's County, Md. The Navy's NAVSEA division is expected to follow suit by moving to the Washington Navy Yard in Southeast Washington, and the Patent and Trademark Office is studying options to consolidate, possibly out of Crystal City. And, Copperthite adds that the U.S. Postal Service already is negotiating for one of the buildings that NAVAIR is vacating.

Demand for space is indeed strong, Copperthite continues. "Office demand is strong, but absorption is negligible," he says. The region has had an absence of available vacant space since mid-1996, forcing Northern Virginia's share of the regional office market to decline to 11% by midyear 1997.

Due to very low vacancy rates, Northern Virginia experienced just 113,000 sq. ft. of net absorption from fourth quarter 1996 through the first half of 1997, according to Copperthite. That figure can be compared to 3 million sq. ft. per annum from 1994 to 1996. "But Northern Virginia will continue to experience only modest absorption for the next year and a half, restrained by a lack of available supply and an inadequate pipeline of space under construction as well as planned new development," he says. The overall office vacancy rate at midyear 1997 remained at 5%, extending to four consecutive quarters a vacancy rate in the 4.8% to 5.0% range. Class-A vacancy remains very low at 3.6%.

Washington's office maintains pace The Washington-area office market, at the same time, is turning in its fourth consecutive year of nation-pacing economic performance, according to Gregory H. Leisch, president of Delta Associates Inc., Alexandria, Va. "Unemployment remains at a 24-year low of 3.3%; we've pretty much seen the end of federal government right-sizing and job creation is the third highest in the nation," Leisch says.

As a result of continued economic gains and rising confidence, Northern Virginia and the metro Washington area now are seeing the announcement of plans to build large-scale projects such as the Cross County Connector -- a 2.1 million sq. ft. D.C. Convention Center -- MCI Arena and Jack Kent Cooke Stadium. Additionally, the private sector has come forward with grand building plans of greater magnitude than those seen in recent years. Among them are the 2.5 million sq. ft. of office space at Potomac Yard and the 3.7 million sq. ft. of office product that is under way or in the planning stages at Tysons Corner.

The increased activity in the office arena has sparked interest throughout the region. "The office market in Northern Virginia is the flavor of the month right now," says Andrew Czekaj, chairman of Cambridge Holdings, Herndon, Va. "Everybody wants to be a part of it." According to Czekaj, prices have doubled over the last few years, with Class-A rents in areas such as Tyson's Corner fetching figures in the upper-$20s per sq. ft. Even Class-B properties, he says, are in the low-$20s per sq. ft.

The need for new space is well justified. "The office market is tight and getting tighter," Czekaj says. On the acquisition side, he says, "it's a who's who of pension funds, institutions and REITs looking to buy." Large private investors also are lining up and, in many cases, competing for space.

With product scarcity an issue in Northern Virginia, capital is a commodity with which to be reckoned. Large acquisitions taking place between 1992 and 1994 saw capital as a scarcity with property a commodity. "Capital dictated the terms back then. Now the situation is totally flipped," Czekaj adds. "This reversal has all us industry watchers in Northern Virginia doing the same thing. Like me, they're all trying to figure out their next buying strategy. I'm scratching my head, wondering what to do next."

And while a few years ago the acquisition market was led by individual funds and venture funds, Czekaj says, today the trailblazers are very much the pension funds and REITs. The industry is witnessing a massive transference of wealth from the independent owner/operator to the funds that dominate the market today, he says.

Industrial values on the rise There also is much investor interest in the industrial market in Northern Virginia. As there is very little big-box/distribution space here, the industrial sector is made up mostly of service center/flex product.

"Values are going up in these properties, too," Czekaj says. "There's more capital chasing fewer deals." REITs, pension funds, individuals and partnerships all are buying what properties are available. And, as a consequence, property values are rising. "We're seeing on the order of a 25% to 35% increase in value in this property class over the last year," he says.

Values have been moving faster than rents during the last 12 months, according to Czekaj, although rents are firming and growing. Average rents, depending on submarket and percentage of finish, are in the $7.50 to $12.50 per sq. ft. range.

And aside from real demand, not much to speak of has been built here during the last five years, especially in the flex/service center market. "That was the pariah of all product," Czekaj says. "At the height of the market last time around, the service center product went for $130 to $140 per sq. ft. Then the market crashed, and the going rates were in the $20 to $50 per sq. ft. range. In 1993 or 1994 you could have bought the same properties that were for sale a few years earlier at just a fraction of their previous cost," he adds. Needless to say, values have firmed since then.

While rents have rebounded dramatically, the market is tight enough to more than justify new construction in this product type. With a 5% to 7% vacancy, there is very little competitive space for prospective tenants to consider, Czekaj says. And that has created huge demand for what little space is available. "If you need space today, you have to pay what people want you to pay for it," he says. Tenants are starting to bid for space now. "This is a trend that has us sitting squarely in a short-term spiral that should, hypothetically, and hopefully realistically, subside," Czekaj says.

Multifamily stays on track Perhaps not so dramatic, but definitely stable in Northern Virginia, is the multifamily market. "There certainly is building going on here, but it's not a boom or bust situation," says Leo Horey, vice president of property operations for Avalon Properties Inc., Alexandria, Va. "We measure and monitor the ratio of renter/household formations to new apartments constructed to keep demand and supply in check," he says. At best, the market would offer a 1-to-1 ratio, but not to be scoffed at was the 2-to-0 ratio at year-end 1996. By comparison, Boston has an 8-to-6 ratio, Horey says.

Occupancy is climbing in the multifamily sector, with speculative building at a minimum. At the beginning of 1997, it was predicted Virginia as a whole would see 4,000 starts, with the Northern Virginia area having approximately 1,600. That's a number with which Horey can feel comfortable. "I think we're well within balance," he says. "Absorption is occurring, and occupancy remains strong." In fact, occupancy is in the 96% range, says Horey. And rents are rising accordingly. "Over the last year, we've seen consistent rent increases," he says. "We must make sure the occupancy platform is high and increase rents accordingly." That typically translates into a 3% to 3.5% increase, depending on the submarket, he says. Rents are in the $916 per unit range, says Horey.

The most vibrant of the Northern Virginia submarkets is Tyson's Corner, Horey says.

Avalon Properties has under way 558 units at Avalon Crescent in Tysons Corner. Also under way by the company are 234 units at Avalon at Fair Lakes in Fairfax, Va., and 460 units at Avalon at Cameron Court in Alexandria.

Overall, 1997 figures from Charles E. Smith Residential Realty Inc., Arlington, Va., show 3,500 units added to the Northern Virginia apartment market by all developers, with another 7,800 units planned for 1998 and 1999. Meanwhile, absorption is keeping pace, justifying this planned development.

Multifamily projects are becoming increasingly swanky, too, according to Al Neely, senior vice president of development for Charles E. Smith Residential Realty Inc. "We think multifamily sites need to have distinguishing amenities these days," Neely says. "Competition for amenities is becoming intense." Popular today, he says, are apartments that meet the telecommunication and business requirements of their tenants. Many also offer conferencing space for those who work from home. And basketball courts and gaming facilities also are becoming par for the course.

"Everybody's building more luxury into their units," Neely says. "The renter looks for the kind of amenities they'd get in the purchase of a townhome or condominium."

Two-story apartments and integrated garages also are high on the list of amenities. "In certain submarkets, these kind of amenities are very successful," Neely says. The returns on these amenities are very attractive, too.

"Throughout Northern Virginia saavy developers are scrambling to build what needs to be built," Neely continues. "They're identifying the corridors where expansion is needed and, in all market sectors, are providing new properties to a growing economy."

Lisa Pritchard Mayfield is a Macon, Ga.-based writer who contributes frequently to both NREI and its sister publication, Commercial Real Estate South.

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