Arlington’s Empty Office Problem

Why 8 million square feet of vacant commercial real estate is bad news for county residents—and how local officials hope to fill it.

The tale of Arlington County’s skyscraper-high office vacancy rates can be told in three acts: the Gleaming Empty Building, the Happy Hour Corner and the Architect Driving the Bulldozer.
Act I opens with the spanking-new office building at 1812 North Moore St. in Rosslyn. Completed in 2013, it was still tenantless as of March of this year and emblematic of a larger problem—8 million square feet of vacant commercial real estate in a county that has more office space than downtown Los Angeles, Boston, Dallas, Denver or Atlanta, according to Arlington Economic Development (AED). All told, that adds up to a vacancy rate hovering around 20 percent—double what county officials would like to see.

Act II finds us in Ballston at the deserted happy hour corner that once was Willow Restaurant. It had been the preferred roost of U.S. Fish & Wildlife Service employees who worked nearby and stopped on their way home for draught beer and flatbread pizzas. That is, until 2014, when the federal government relocated Fish & Wildlife to Falls Church, just as it slashed its office space all across Arlington. For Willow, losing that customer base may have been a fatal blow. The restaurant closed in 2015, its owners convinced that empty offices contributed to the erosion of the clientele that was their lifeblood.

Fish & Wildlife isn’t the only major player to skip town in recent years. Arlington has also weathered the exodus of large employers including the U.S. Patent and Trademark Office and Northrop Grumman. Other federal agencies and government contractors have stayed, but trimmed down.

From 2006 to 2015, the number of non-enlisted federal employees working in Arlington County dropped by almost 25 percent to 27,644, according to the Bureau of Labor Statistics.
“For a generation we enjoyed the lowest vacancy rates in the region. We had a great ZIP code and Metro,” says Michael Foster, president of Arlington-based MTFA Architecture and a member of the Arlington Economic Development Commission.  

Architect and developer Michael Foster is the force behind a new, forward-thinking office complex at  2311 Wilson Blvd. in Courthouse. Photo by Liz Lynch.

Now, Foster says, the county needs to raise its game if it hopes to recruit and retain major companies. And it needs to be more creative about how it fills empty space—some of which is too dated to command the sorts of rents landlords have been hoping for.

Which brings us to Act III. Foster is the guy with the bulldozer. In 1997, he promised that he would someday replace his own two buildings in Courthouse (built in the 1920s and 1940s) with a state-of-the-art office complex. It took a while, but in early 2015 he finally borrowed the demolition company’s diesel bulldozer and took a few swipes at his property on Wilson Boulevard.

The site (which Foster is redeveloping in partnership with Carr Properties) is now being rebuilt with 160,000 square feet of office space and a new mindset. Where once there was an acre of parking lot and walk-up apartments for business owners to live over their stores, soon there will be an eight-story complex with a green roof deck, other environmental features, a day care and fitness center—and an anchor tenant that represents a coup for the county. Opower, a fast-growing energy software company that was founded in Arlington, recently announced that it will lease a minimum of 63,000 square feet in Foster’s new building when it opens in 2018.

Arlington offers proximity to Washington, a highly educated workforce, good public transit and a vast store of federal offices and contractors. For decades, that was enough.
But times are changing. It’s been roughly three years since construction crews placed the finishing touches on the shiny new building at 1812 North Moore St. in Rosslyn. Like a gussied-up prom hopeful who’s been stood up, it sits vacant, despite its ideal location and sweeping views of the nation’s capital.

At 35 stories, it’s the tallest building in the D.C. area. That’s a lot of empty space (535,000 square feet of it) and an amount that helped bump Rosslyn’s vacancy rate to 27.7 percent as of March—the highest of Arlington County’s main commercial areas.  

Tim Helmig, president of Monday Properties, which owns 1812 North Moore, says he is searching for a lead tenant before he fills the rest of the building. As the market picks up, he’s confident they will find the right taker.

Meanwhile, scores of other Arlington buildings similarly have unfilled space—a lot of it the result of federal government pullbacks. “Between BRAC and sequestration…that was devastating,” says Victor Hoskins, who took the helm as director of AED in January 2015 after serving as D.C.’s deputy mayor for planning and economic development and as deputy chief administrative officer for economic development and public infrastructure in Prince George’s County. “That was not bad, that was devastating.”

1812 North Moore St. in Rosslyn

BRAC—shorthand for the Defense Base Realignment and Closure Commission—was a national effort beginning in 2005 to streamline the Defense Department’s infrastructure. Though Arlington wasn’t decimated by military base closures like other parts of the country, it certainly felt the pain after 16 DOD agencies and programs were directed to leave the county, relocating 17,000 jobs to military installations elsewhere. By the end of 2015, those departures had left 3.7 million square feet of empty offices in Arlington, according to AED.

Plus, there was a trickle-down effect. Many defense contractors (including a high concentration in Crystal City and Rosslyn) also saw positions eliminated or were required to relocate, per BRAC mandates. Not only was the military using less office space, so were the contractors who had flocked to Arlington to be near their main customer.
From 2010 to 2013, federal procurement spending in the entire D.C. metropolitan area dropped from $81 billion to $69.1 billion, notes Terry Clower, director of the Center for Regional Analysis at George Mason University.

Sequestration (automatic government spending cuts) delivered a second hit to the local economy, forcing more workforce reductions and shuttering offices. Some agencies and contractors moved away in search of cheaper real estate. Others stayed put but downsized and reduced their space needs. It doesn’t help that the federal government in leasing now calculates 165 square feet per worker, compared with a previous 220 square feet per worker. Multiplied by thousands of workers, “that’s huge,” Hoskins says.

Furthermore, the General Services Administration allows federal agencies to pay higher rents in D.C. than in Virginia (despite comparable real estate prices on either side of the Potomac), placing Arlington at a competitive disadvantage in attracting federal tenants.

There are other forces at play, too. People work differently now than they did back when much of Arlington’s office stock was erected. With the advent of teleworking, some companies have cut their office space needs by as much as 20 percent. And the conventional wisdom on office design has changed. Thirty years ago, every executive needed a 150-square-foot office with a door, whereas today’s companies tend to prefer open floor plans that are more conducive to collaboration. “We’re starting to design office space that feels halfway between an open office and a coffee shop,” says Foster, the architect.

In short, there’s a disconnect between how older office buildings are designed and how companies want to use them.
According to AED, most of the vacant Class A (top-flight) commercial space in Arlington was built around 1994. Back then, buildings had columns every 20 feet. That was fine when interiors were divided up into warrens of enclosed offices. But now companies want open space with 40-foot distances between columns. “From the ’80s and ’90s there’s a lot of space that feels functionally obsolete,” says Marty Almquist, a broker and principal at the real estate company Avison Young in Tysons Corner.

Almquist has seen plenty of business cycles since she started working in Arlington 30 years ago. But she believes the recent county impacts are more permanent than your typical market fluctuations. Landlords are “being very patient with their money” and holding out for rents to go back up, she observes. However, the rapidly changing business landscape has some commercial tenants demanding five-year leases instead of the longer deals that give landlords more certainty and help with securing financing.

At the same time, competition from other jurisdictions has increased. Recent Metro expansions, such as the Silver Line rail to Tysons, have made new areas attractive to companies shopping for real estate. D.C. shook its reputation as a murder capital and started aggressively fighting for commercial business. And other municipalities have come hunting for acquisitions on Arlington’s turf. Last year, TSA became the latest large employer to announce it is leaving Arlington, after the National Science Foundation made a similar announcement in 2013.  

Arlington’s office space problem puts the county’s funding structure in a precarious position, insofar as half of Arlington’s tax revenue comes from the commercial sector and half from residential property—a mix that’s always been “the envy of any city,” Foster says. (By comparison, residential property owners carry 70 percent of the burden in Montgomery and Fairfax counties and 64 percent in D.C., according to AED.)

Victor Hoskins became director of Arlington Economic Development in 2015. He's on a mission to reduce office vacancies by 10 percent. Photo by Liz Lynch.

When office vacancies are high, the tax balance gets thrown off. Every percentage point increase in commercial vacancy means $3.4 million less in county tax revenue, Hoskins explains. That affects how much the county can spend on things like quality schools, trash pickup, parks, libraries, police and emergency responders.

A continued vacancy rate in the 20 percent range threatens to shift about $800 a year in property taxes onto the average Arlington homeowner, he says.

That’s not the only danger. High vacancies also cause secondary casualties among restaurants, shops and service businesses. When a major office tenant leaves town, the retailers and cafes that relied on its workers to create a lunch crowd suffer the consequences.

That’s partly what happened at Willow. It lasted 10 years, serving up lobster bisque and steak for company events in its private dining room, beers for those federal employees at the bar and white-tablecloth dinners.

Brian Wolken, who co-owned the restaurant with chef Tracy O’Grady (his wife) and pastry chef Kate Jansen, says their tables started to empty out with the departure of Fish & Wildlife. Then came an explosion of new restaurants in Ballston (including newcomers like Kapnos Taverna and SER), which, he says, created an oversaturated market and siphoned away even more customers.

Wolken is now searching for a location for his next restaurant, Willowwood. He says his sights are set on Falls Church.

The former Willow Restaurant space in Ballston. Photo by Liz Lynch.

Real estate experts say it’s clear that Arlington needs to expand its business horizons and lessen its economic dependence on Uncle Sam. “We rested on our laurels and that looked like arrogance to some people,” says Foster. “Now we are in a competitive regional market, not just a lucky ZIP code.”

There are signs that county officials are already thinking more strategically about economic development. The commercial vacancy rate has dropped 1.7 percentage points since Hoskins arrived last year.

“I love this stuff,” Hoskins says, rattling off the various initiatives that are being put in place to attract and keep businesses in Arlington. Casting a global net, his office is now hunting for future tenants at the annual South by Southwest (SXSW) technology and entertainment gathering, the International Consumer Electronics Show and a U.S. Department of Commerce investors’ event called SelectUSA.

His staff doubled in his first year and now includes a Mandarin speaker to help recruit businesses from China.

Staying on point, he’s quick to tout the county’s highly educated workforce and the defense and technology companies that already have a stronghold in Arlington. For example, the Defense

Advanced Research Projects Agency (DARPA), a Pentagon arm whose research has led to several seminal inventions, is based in Ballston. “The Internet was created here! GPS was created here!” Hoskins says.

Now he’s looking to leverage those assets to attract additional technology companies focusing on education, medicine, the environment, cybersecurity and big-data analytics. “They grow the fastest. They create the future,” he says.

The tech emphasis has already netted a few key successes. Shift Technologies, a company that uses big data for used-car buying and selling, is set to open its first East Coast office at the Crystal City co-working incubator space called 1776.

In February, the software development company Basket announced it will move to Clarendon from the District.

And then there’s Opower, the Arlington startup that celebrated its IPO in 2014 and flirted with the idea of moving to D.C., but ultimately chose Foster’s Courthouse complex as its future home. To sweeten the deal, Arlington County kicked in $2.5 million worth of incentives—bolstered by another $1.14 million from the state—to convince Opower to stay and grow in Arlington.
This marks a notable shift for the county board, which only recently established a policy allowing incentives in select circumstances. Though the approach has been used sparingly (of the 78 deals closed in the 20 months prior to February 2016, only five involved incentives, Hoskins says), it does offer a new bargaining chip in the race against other municipalities that are prepared to do the same. (European grocery giant Lidl, which announced last year that it will set up its U.S. headquarters in Arlington, also received a dangling carrot of $4 million from the county.)

“We were losing business. I can vouch for that because I was in D.C.,” Hoskins says, acknowledging his own efforts to poach tenants from Arlington when he worked in the District.
Arlington County Board chair Libby Garvey agrees. “It’s absolutely crucial for us to have [the incentive option] in our toolbox,” she says. The county will soon set up its own incentive fund. (Something many rival cities already have.)

“I’m bullish on Arlington,” Garvey continues. “We’ve basically been remaking our economy, getting away from large government organizations and moving more toward tech. You get new, exciting companies coming and they attract other ones. We are starting to get some synergy.”
As a complement to AED and its recruitment efforts, three of Arlington’s main commercial areas have Business Improvement Districts—public-private partnerships that work to make their mini-downtowns more attractive and lively.

Crystal City’s BID, for instance, was formed after BRAC’s impact hit and after the Naval Sea Systems Command decided to move from Arlington to Washington’s Navy Yard, emptying 1 million square feet of space.

“You take a big loss and it takes a while to fill it up,” says Angela Fox, CEO and president of the Crystal City BID, which organizes programs like bike races, gallery exhibits, happy hours and Tech Tuesday networking events.

Similar BID efforts in Rosslyn and Ballston bring live music, farmers markets, outdoor festivals, fun runs, street art and other programming.
BIDs are hyperlocal, so they’re perfectly positioned to help the county retain the businesses that already are here, says Mary-Claire Burick, president of the Rosslyn BID.

One question that remains is what to do with aging commercial space that can no longer command top dollar.

Having some of that office space rent for less money (categorized as lower-class real estate) isn’t all bad, says Clower, who teaches public policy at George Mason University. Lower rents give growing, smaller businesses a chance to afford more square footage.

Nancy Iacomini, chair of the Arlington County Planning Commission, says owners of older office buildings must decide whether to upgrade, replace or revise the mix to include more residential and retail use. Her panel looks at the impact of those kinds of proposed changes. Will more residential, for instance, mean a need for more bus service, parks and schools?

“You don’t just say ‘No, you’re an office building and you should always be an office building.’ We need to look at all the possibilities,” she says. “Will we become a little more residential than office? I don’t know. But we need to think about it.”  

Foster (who is also a developer and a former chair of the Arlington Planning Commission) is pushing for more out-of-the-box thinking. He feels those older buildings designed with 20-foot-apart columns may now be better suited for housing or even studio space for artists, though he acknowledges that some landlords are slow to face the reality that their buildings will never command high rents again. “We should know when it’s time to trade in our old, obsolete buildings,” he says. “Sometimes the bulldozer is your best friend.”

He says county leaders could be a little more flexible in allowing certain buildings to convert to residential use—perhaps offering zoning incentives to property owners who are willing to tear down and build new. To make the numbers work, however, he says landlords need zoning allowances for three to four times as much space in the new building. Otherwise they can’t afford the carrying and construction costs.

In this regard, Rosslyn presents an interesting case study. BID president Burick says the trend toward more residential use of space has been a boon to the area, which for years was viewed as a business district that turned into a ghost town after dark. Today, Rosslyn packs 13,000 residents into half a square mile, along with the 20,000 employees who fill a 15-block radius. Shifting the balance, she says, has helped lure more restaurants, retailers and other businesses with the promise of a place that doesn’t shut down after 6 p.m.

And the momentum is continuing. In March, the county approved a plan that will replace four Rosslyn office buildings, two low-rise residential buildings and the Spectrum Theater with five high-rises. Known as Rosslyn Plaza, the joint venture of Vornado Realty Trust and Gould Property Co. will bring 1.8 million square feet of new office space, 550 new residential units, a new hotel and 45,000 square feet of additional retail, plus parking and a public park to Rosslyn’s eastern edge.

“The buzzword du jour is ‘mixed use.’ We see that as a good thing,” Burick says. “In order to be a vibrant area that lasts into the evening and weekend, you have to have residential.”
Helmig, whose Monday Properties has signed deals to lease 200,000 square feet of commercial space in Rosslyn since the fourth quarter of 2015, is similarly optimistic about the neighborhood’s transformation.

“Right now walkable, urban areas near the Metro are gaining a higher proportion of new tenants, compared to markets characterized by sprawl,” he says. And in this regard, Rosslyn has one notable advantage over the District. “We have heights and densities that D.C. can’t match by law.”

Hoskins predicts—or is it promises?—that in five years’ time, the county’s office vacancy rate will drop back down to historic averages of 10 percent.

Wait and see.

Tamara Lytle is a freelance writer based in Northern Virginia.

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