FAIRFAX, Va.—Upon returning from living abroad in the summer of 2017, my family temporarily stayed in a hotel in Fair Lakes, Va., a town representative of much of the Washington, D.C. Metropolitan Area. It was made up of predominantly middle- or upper-middle class suburban housing, with a mix of strip malls and town centers. While at the hotel, I noticed something that seemed unusual in the adjacent lot: an entirely abandoned five-floor commercial building with a large parking area. As I’ve driven around the area since then, I’ve noticed a significant number of similarly vacant or mostly empty commercial buildings.
This situation seems odd—Northern Virginia boasts five of the 13 richest counties in the country, and southern Maryland has two more of them. Why does one of the wealthiest areas of the United States possess such an abundance of vacant commercial real estate? It’s a complicated story, with perhaps one overarching theme: As a report of the Stephen S. Fuller Institute at George Mason University in Fairfax, Va., assesses, “the Washington region remains overly dependent on the federal government.” Many developers, realtors, and economists once thought that the region was impervious to recession—but current real estate trends suggest that is not the case.
In 2014, Northern Virginia had about 40 large buildings with at least 50,000 square feet “ready for use,” meaning with few or no current tenants. In the District alone, there was “more than 14 million square feet of unused commercial property downtown, about double the vacancy rate of a decade ago” in 2017. The numbers are comparable in Maryland, and they are far higher in Virginia. This is a remarkable amount of unused property across the region, especially given that some lease contracts require entire buildings to continue utility payments.
This is the case even in booming Tysons, one of the wealthiest areas of Northern Virginia, with its marriage of extravagant wealth and seemingly incoherent planning or design. Currently in Tysons, commercial buildings are between 18 and 22 percent vacant. Healthy vacancy rates are supposed to be at about 10 percent, a figure that allows for enough flexibility for current tenants to expand their office space as needed, and for property owners to have some flexibility with space for potential new clients when contracts with older tenants expire. Tysons, a prosperous commercial and real estate market, still somehow has vacancy rates twice the estimated “best practice” rate.
The history of the D.C. area real estate market can help make sense of how we got here. In the 1980s, the region experienced exceptional, unprecedented growth in commercial real estate. Much of this corresponded to the Reagan administration’s focus on national security. The I-270 corridor in Maryland was known as the “life sciences corridor” because of the significant expansion of bio-medical properties owned by the federal government or federal contractors. The National Institutes of Health, for example, is located in this area. At the same time, on the other side of the Potomac, Virginia’s large number of defense-related contractors in the Dulles Toll Road corridor in Virginia made it the “death sciences corridor.”
In the late 1980s, the region witnessed a large influx of speculative building plans funded by S&Ls, or savings and loan institutions, responding to a corresponding growth in federal spending. The motto at the time, largely fueled by these federal expenditures, was “get the money out.” When the federal purse was burgeoning, this system perpetuated itself. But when that purse contracted, the trouble started.
Commercial property developers typically maintain a three-to-five-year building plan. If there is a dip in the economy, or a reallocation of federal expenditures, these developers “get caught,” so to speak, and the properties they are building go into default. In the D.C. area, where approximately 30 percent of the economy is the federal government, this means that government budget dips will have an outsized impact on the region. In 1989, the Resolution Trust Corporation, or RTC, was formed to address this problem, which had developed into what became known as the savings and loan crisis of the 1980s.
The RTC, a U.S. government-owned asset management company was “charged with liquidating assets, primarily real estate-related assets such as mortgage loans, that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision (OTS),” a consequence of the S&L crisis of the 1980s. With the RTC breathing down the necks of S&Ls, these institutions sought to get commercial properties off the books as quickly as possible. This created a hyper-artificial real estate market, where many properties in default were sold at “steal” rates—one building in Chantilly, Va., for example, sold for the absurdly low cost of $22 per square foot. (In more stable market circumstances, they usually sell for between $100-150 per square foot.) The buyers of these properties were real estate investment trusts with sufficient capital.
There were other federal trends beginning in the 1980s that also affected the real estate game, nationally and in the D.C. area. The Base Realignment and Closure program, or BRAC, was established in 1988. Since its inception, more than 350 military facilities have been closed nationally. Many Defense Department civilians and contractors working off-base in commercial spaces moved onto military compounds. One of the largest bases in the D.C. area, Fort Belvoir, now reportedly has a staff that is 80 percent civilian. Moreover, when bases close, commercial real estate being used by DOD contractors off-base is also affected.
DOD has also pursued public/private development, where private companies, such as hotels, are allowed to build on public (i.e. military) properties. This inevitably impacts the off-base economy. Other government contractors have meanwhile merged, often leaving behind unused spaces. The General Services Administration, or GSA, has cut the size of the average office cubicle in half, which also takes a toll on the demands for commercial real estate. Moreover, budget sequestrations can—and have—put government contractors in deep water, with many analysts arguing that contractors are those hardest hit by tighter budgets.
Other non-federal trends can also impact commercial real estate. The ubiquity of mobile phones, as well as the growing embrace of telecommuting, have dramatically impacted a former reliance on commercial spaces. Alternatively, Millennial workers have less interest in working in car-centric office parks, preferring public transit access.
The final, but perhaps most important factor, was the subprime mortgage crisis of 2007-2010. The roots of this disaster can be found in the Carter administration, when the Community Reinvestment Act began encouraging riskier housing loans. This was furthered by the 1982 Alternative Mortgage Transactions Parity Act and the Housing and Community Development Act of 1992, the latter demanding that at least 30 percent of government-subsidized lenders Fannie Mae and Freddie Mac’s loans be for “affordable housing.” For decades, politicians created increased risk in the housing market. When the bubble burst beginning in 2007, the calamitous effects were felt in the commercial real estate market as well. Only in the last year or two has the market begun to return to the numbers seen right before the crisis, though that reemergence has been quite asymmetrical in different regions across the country.
This is certainly the case in the D.C. area, where commercial spaces languish in some areas (e.g. Chantilly, Fair Lakes, etc.), while others experience phenomenal prosperity. In the currently burgeoning Reston Town Center area, where such big players as Google, Microsoft, Oracle, and Bechtel rent space, vacancy rates in commercial buildings are at an astonishingly low 0.5 to 1 percent. Reston is a particularly interesting case, given its history as a planned community with origins in the 1960s. While Reston appears in many respects to represent the future of real estate—with its union of walkable residential and commercial spaces that will soon have access to D.C. Metrorail’s Silver Line—the older Reston is defined by suburban communities with adjacent strip malls separated from major thoroughfares, and is thus largely invisible to the passerby. Such invisible commercial properties, such as the Tall Oaks strip mall on North Shore Drive, now languish with vacancies.
One solution is the transformation of these buildings into mixed-use (also called multi-use) residential/commercial spaces that allow for more market flexibility. This requires changes to contracts and sometimes local codes, but it addresses the dramatically shifting moods and conditions that define our country’s digital-economy era. People can rent space in which to live and work, and if their business prospers, have the option of expanding their space in the very building in which they live. The Tysons and Reston areas mentioned earlier boast examples of exactly this kind of economic development.
It’s likely this problem is not going away, and may even get worse—the Stephen J. Fuller Institute assesses that “the Washington region’s high cost of living and quality of life issues have made it less competitive with its peers.” Coupled with Fuller’s evaluation that “[another] recession is likely in the foreseeable future,” this likely means all those empty buildings won’t be filled any time soon. Moreover, this increasingly seems to be a problem not limited to the D.C. area: 14 to 22 percent of national suburban office inventory has been assessed to be obsolete, while businesses across the country are moving back into the cities.
No region is served by having so much unused commercial space, places that remain dependent on infrastructure but are not contributing to economic productivity. Some prominent developers in the D.C. area already seem to recognize this—a few years ago one developer reportedly acknowledged that the region didn’t have a development problem, but rather a “tear down problem.” TAC has already identified some areas in Northern Virginia defined by largely vacant, outdated strip malls that could benefit from a “tear down” approach, if not a significant makeover. I still happen to take pride in the region, but we need to change course in our development patterns before it’s too late.
Casey Chalk is a student at the Notre Dame Graduate School of Theology at Christendom College.