FEATURE ARTICLE, AUGUST 2005

COMMERCIAL CONDOS AUGMENT STRONG NORTHERN VIRGINIA MARKET
Brian Benninghoff

Benninghoff

Robust job growth and the housing demand that the city engenders have supported a healthy commercial real estate market, particularly in the Northern Virginia suburbs of the D.C. metro area. Cassidy & Pinkard calls the northern Virginia market “the hottest suburban market in the country,” noting that the market showed net absorption of 1.1 million square feet of office space during the first quarter of 2005. The biggest cloud on the horizon is the turmoil likely to be caused by implementation of the Pentagon’s recent base realignment and closure recommendations, which could move more than 20,000 defense workers out of Arlington and Alexandria, while adding almost that many jobs to Fort Belvoir in Fairfax County.

Across the Potomac River in suburban Maryland, Cassidy & Pinkard found vacancy rates somewhat lower (11 percent) because less new office product has been built. During the first quarter, the suburban Maryland office market posted net absorption of 170,000 square feet, led by the National Institutes of Health and Lockheed Martin.

One element of the area’s diverse office market that is not reflected in leasing statistics is the growth in flex/office/warehouse condominium construction and sales, particularly in the outlying suburbs of Northern Virginia. Buchanan Partners was one of a handful of developers pioneering this concept about 5 years ago. Buchanan decided to “go condo” with a speculative flex/office project in Loudoun County that was experiencing sluggish leasing activity. Its success has since been repeated with numerous other projects.

The numbers tell the story. By the end of 2002, about 700,000 square feet of commercial condo space had been delivered in the Dulles Corridor of Loudoun County alone. By mid-2005, nearly 1 million square feet of additional flex/office condo product was under construction in the corridor, and almost another million square feet of product is proposed. If all of the projects are completed, the corridor soon will have more than 2.5 million square feet of commercial condo space. Beyond Loudoun County, Buchanan has brought the commercial condo concept to its latest development, Heritage Hunt Village Center, in Prince William County, Virginia. There are several factors contributing to the success of commercial condominiums in this market:

• Rapid housing growth in Northern Virginia since the early 1990s has created a need for the service businesses that typically “follow the rooftops.” These services include HVAC, electrical, roofing, carpet, plumbing, and kitchen contractors and subcontractors, along with medical practices, title companies, lawyers, financial planners, etc. The nature of their operations — slow and predictable growth, ownership by one individual or a small group of people, and the necessity to be located near the residents they serve — make them ideal commercial condominium buyers.

• Commercial condominiums allow small users to control their space. The typical flex/warehouse condominium is 3,000 to 4,000 square feet; the average office condominium is 2,000 square feet. Acquiring their own space allows owners to control their occupancy — at a relatively fixed cost — for an indefinite period of time. Condominium ownership gives the owner a standard of maintenance for internal and external common areas. And since most projects have separately metered utilities, owners also can control most of their operating costs.     

• Real estate is an attractive long-term investment. Certainly the tax advantages of real estate are considered in the decision to buy. More importantly, however, commercial condominium buyers believe they are trading rent for forced savings.  Low return in alternative investments, such as stocks and money market accounts, has contributed to increased investment in commercial condominiums.

• The availability of capital makes acquisition of commercial condominiums relatively easy. The Small Business Administration and many banks offer attractive loan programs for owner-occupants, including reasonable down payments and long-term, fixed interest rates. Without question, the current low interest rates have had a strong impact on both the price and absorption of commercial condominiums. At the same time, it does not appear that a modest increase in interest rates will choke off demand.

In general, the commercial condo market in the Northern Virginia suburbs has been experiencing both rising prices and a slower velocity of sales. Thus the market is likely to see a saturation of commercial condominium users that provide services to local rooftops. For the same reason, the best locations for new commercial condos will be where new homes are being built in large numbers.

Brian Benninghoff is a principal with Buchanan Partners.

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