The commercial real estate industry has been waiting a long time for a market recovery in Northern Virginia. In 2011, the disruption caused to the market’s economy by the debt-ceiling debate, followed by the government shutdown, culminated with mandatory spending cuts that were implemented in 2014. These cuts were largely targeted at discretionary spending, especially from the Department of Defense. Discretionary spending feeds the ample government contracting industry in Northern Virginia. With the drop-off in funding, the contractors responded accordingly by downsizing their workforce and by merging with other contractors.
In October 2012, the office-using sectors of the economy peaked at 730,430 jobs (seasonally adjusted). In the following months, federal contractors started shedding jobs to prepare for the implementation of spending cuts. By September 2014, 11,300 jobs were lost in Northern Virginia. Between September and May 2015, however, 85.8 percent of the jobs lost have been recovered.
Even though it is rebounding, the job market has failed to generate sustained new demand for office space. During the first quarter of 2015, net absorption totaled 265,252 square feet. This is only the fourth quarter where demand has grown since the second quarter of 2012 and the only quarter in the last four quarters to post positive net absorption. While one quarter doesn’t make a trend, most of the large companies have already downsized and/or consolidated. As a result, continued job growth should drive new demand for office space.
Since the second quarter of 2012, 1.7 million square feet of space was returned to the market. As jobs return to 2012 levels, not all of the demand lost will be recovered even when factoring in the approximate six-month lag between job growth and absorption. Tenants in the market, especially the government contractors, have become more efficient with their space. During the last cycle, 2004 to 2008, tenants were leasing approximately 200 square feet per employee. This has been reduced to approximately 180 square feet per employee. As a result, more than 11 percent more jobs will have to be created than were lost to replace all the absorption lost since the second quarter 2012.
Going forward, employment is expected to continue to grow and generate new demand for office space in Northern Virginia — but at a slower rate than what has previously been seen. As a result, it will take longer for the office market to recover. While the economy suffered under the budget cuts, these will be over at the end of 2015. And even under renewed sequestration, federal spending is projected to grow, especially from the Department of Defense, and this prospect will help invigorate the contracting base in Northern Virginia and accelerate job creation in 2016. And all this will snowball into an even more profound recovery in 2017 once the new president establishes the government’s spending priorities.
Robert is Director of Research for Colliers International in the Greater Washington D.C. area, where his team tracks and reports on marketing conditions relevant to both users and owner of commercial real estate. He is Americas Researcher of the Year for 2015. You can contact Rob by email or on Twitter.