More space could come open if private defense contractors follow their clients.
While the Pentagon's announcement is a blow to an office market that is only now recovering from the technology bust, the effect goes deeper than lost leases. Brokers, building owners and others say it marks a fundamental shift in how the commercial real estate game will be played in Arlington, Alexandria and Falls Church, Va.
For decades, brokers and investors have built careers on a dependable stream of calls from Defense Department officials looking to plant another military office near the Pentagon. Developers have erected buildings with that in mind. Investors have pushed up prices, especially in these past few years of war and heightened security, partly out of confidence that the Defense Department's demand for space would stay strong.
Now, a basic piece of the equation has changed.
Particularly in Arlington and Alexandria, where the defense presence is most concentrated, "every block" will feel the effect, said Joe Delogu, a principal at Spaulding & Slye Colliers, a major commercial real estate firm. Brokers had, for example, been courting the National Geospatial-Intelligence Agency, which was hoping to find about 2 million square feet of space so it could consolidate its offices from Bethesda and Reston into a single spot, probably outside the Capital Beltway. Now the agency is slated to move to Fort Belvoir, and for those brokers the courtship is effectively over.
It is unclear how long it will take for the Pentagon to move its employees out of Northern Virginia. Brokers expect the process to take several years, which will at least allow time to adjust.
Still, the numbers alone stand to change the Northern Virginia market. The Pentagon leases about 4 million square feet of Arlington's 31 million square feet of commercial office space. The fact that such a major tenant is leaving, even gradually, will likely stabilize rents, or even cause them to fall as landlords try to fill space as it comes open. It will mean costly renovations and marketing efforts for investors whose buildings have long been filled with government tenants.
Patrick Mahady, executive vice president at real estate services firm CB Richard Ellis, is a property broker who specializes in leasing to government agencies. He said the Pentagon's moves will affect almost every part of his business. He says landlords will have to pursue backup tenants and will most likely lower rental rates.
Charles E. Smith Commercial Realty, for example, will have tenants leaving from 17 buildings, vacating about 1.7 million square feet of space leased to the Defense Department. Company President Mitchell N. Schear said that the overall strength of the Washington market will help the company absorb the loss of the Pentagon as a customer.
There is concern, however, that as government agencies leave, private contractors will follow.
That could be a boon for the outer suburbs, around places like Fort Meade in Anne Arundel County and Fort Belvoir in Fairfax County, where many of the employees from Crystal City and Arlington are slated to move.
For those developers trying to either retain or recruit Pentagon business, building to meet the new security standards is going to be costly, developers point out. Shatterproof glass and reinforced columns, the types of improvements the Pentagon now demands if its employees are to stay in dense urban areas, can add as much as $30 or $40 to the average $150 it costs to build a square foot of office space in the region.
For years, area developers have bought land or planned to redevelop buildings in markets closer to the District, thinking that planners wanted to see more dense development around Metro stops. Now they worry if they'll be able to get government tenants in those spots.
The defense agency's departure from close-in markets could also affect whether companies invest in new buildings, or in ones that may be offered for sale in the future.
