What office tenants want in today’s economy – Fredericksburg

     Wilson Greenlaw, commercial sales & leasing specialist in Thalhimer's Fredericksburg office, shares his perspective and thoughts on a recent Wall Street Journal article describing the state of the national office market and how it relates to the Fredericksburg area. 

"On August 18th, the WSJ ran an article describing the deceiving nature of the current office market. The author noted that when you drill it down, there is little expansionary activity. In Fredericksburg’s office market, this is only partially true. As Washington, DC becomes the new center of America’s economic world, the government contracting portion of the Fredericksburg market is expanding. Conversely, economic confidence for just about everyone else is tough to come by.   

What we’re experiencing is unprecedented in many ways. We had an inflated run in the early 2000’s driven by overextension of credit to just about everyone. Our government borrowed heavily and printed money. Homeowners bought homes they couldn’t afford and companies expanded as confidence ran at exceptionally high levels. Today, this has all come to roost and we are now in an extensive de-leveraging. Banks are tightening their portfolios and everything is getting smaller. 

Office tenants are experiencing a healthy reality check in some ways. As we communally de-leverage ourselves, we are shaking off the fat that we put on during the gorging of the previous decade. Companies are getting rid of legacy positions that don’t necessarily produce at the bottom line. Everyone is streamlining processes to increase efficiency. File cabinets are giving way to cloud computing and off-site data management. Space planners no longer account for file storage in medical offices. 

All this bodes well for the coming recovery. When we do rise from this era we will all be leaner, meaner, and more productive. The increases in efficiency are poised to carry us through a sustained period of economic growth. 

In the Fredericksburg Office market we have two submarkets. One is married to defense spending and the other enjoys the spoils of the greater economy. 

Defense contractors are still on a healthy expansionary curve in our market. Since 3Q 2008, office vacancies  immediately adjacent to Quantico MCB have decreased from 24% to 13% at the end of 2Q 2010. In August of this year, we witnessed the impressive absorption of 40,000 sf in Spotsylvania County by defense contractor A-T Solutions. This does not appear to be waning. Arguably the most successful office project in the area, Quantico Corporate Center, has pre-leased or is otherwise negotiating for better than 50% of the 140,000 sf third building which has yet to break ground.   

The non-defense related companies provide an alternative image which is reflective of the greater economy. Office vacancy within a 10 mile radius of Fredericksburg has gone from 13.5% in 3Q 2008 to 17.7% at the end of 2Q 2010. In the last year, we’ve only seen 6 office transactions over 10,000 sf. Of those, 5 were defense contractors and one was medica- related. Two were renewals. 

We don’t enjoy a large number of corporate headquarters in the region. The average office user in the market only occupies approximately 5,000 sf. These users are the drivers of the greater economy. According to the US Census Bureau, firms with fewer than 100 employees account for 36% of employment. It will always hold true that office absorption will follow employment. Fredericksburg’s office market will not recover with strength until these small users can borrow operational funds and feel confident that they know where the goalposts are. 

The market activity among these users has effected a churning within the market. Some users are shifting addresses as aggressive deal-making occurs. Landlords are increasingly willing to concede to these users in order to stabilize cash flows. As noted in all markets, it’s a Tenant driven process right now. 

One of the interesting emerging trends is the increased competition among localities for quality businesses. Caroline county lobbied extensively to have the entire County classified as a HUB zone, which provides a measurable incentive for businesses which contract with governments. Spotsylvania and Fredericksburg have both re-tooled their economic development programs. Spotsylvania recently expanded its Technology Zone and Fredericksburg is currently working through the same process. All of this bodes well for small businesses as real tax savings are able to be realized. Brokers, tenants and landlords would all be well advised to reach out to the local economic development offices and educate themselves on the programs which are available. 

Everyone should consider contacting a commercial real estate professional and learn about the ways that users are saving money in today’s market through existing lease re-negotiation, new space opportunities, and local incentive programs. Office brokers are more important than ever as it takes an ever increasing amount of diligence and creativity to save money and unearth opportunity.    *Research data provided by CoStar.

Read full Wall Street Journal article here:  Troianovski, Anton.  "Office-Leasing Rebound Could Be Deceiving", The Wall Street Journal, August 18, 2010.

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