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February 11, 2014

Convert Empty Commercial Office Buildings in Crystal City and Rosslyn into Affordable Apartments

crystalcitypic1crystalcitypic3The rapid exit of many Defense Department agencies from both Crystal City and Rosslyn left an astounding 25 percent of the existing commercial office buildings empty in the fourth quarter 2013, according to the Arlington Economic Development Office. The overall Arlington commercial office vacancy rate is not much lower—20 percent in the fourth quarter 2013 (Economic Indicators, http://www.arlingtonvirginiausa.com/?LinkServID=8CBD27F2-1D09-08FB-3B16404C0DD82AE3&showMeta=0

The vacancy rates in Ballston and Virginia Square area are now 15 and 17 percent, respectively. The Northern Virginia average vacancy rate is now about 17 percent so there are plenty of other vacant buildings in other Metro adjacent areas competing for office building tenants, particularly along the Tysons Corner -Reston corridor. These buildings become more attractive with the opening of the Silver Line.

Arlington vacancy rates are going to rise higher as more Defense agencies and related military contractors leave Arlington for military bases like Fort Belvoir owing to BRAC. The General Services Administration (GSA), the real estate arm of the Federal Government, has so far terminated about 20 building leases in Crystal City the most impacted area in the Metro region through the end of 2013, and will end another 34 building leases by 2019, according to a Washington Post article (“D.J. OBrien, “CoStar: Despite jump in office vacancy rate, Crystal City shows resilience,” September 29, 2013.)

The end of 20 building leases led in part to a 25-percent vacancy rate in Rosslyn and Crystal City, the end of another 34 building leases is going to raise the vacancy rate much further.

There are a total 22 million square feet of commercial office space in Rosslyn and Crystal City (9 million and 13 million square feet, respectively), 5 million square feet vacant. A typical, 11 story- office building has about 225,000 square feet of usable space, and thus there are the equivalent of 22 empty office buildings in Rosslyn and Crystal City today.

A typical residential apartment building of 11 stories can accommodate around 200 apartments; this was the size of a recent residential apartment building in Crystal City built over the old post office site. Twenty-two commercial office buildings renovated into residential apartments could provide roughly 4,400 apartments; more if the units were smaller in size.

How much would a vacant office building cost to acquire? The county recently purchased a fully occuppied 7-story office building at the Courthouse for use as a county office building and homeless shelter for $27 million. An empty office building is worth considerably less since the dollar value of a building is largely a function of the office rents received or potentially received.

If an empty 11-store office building can be acquired for $20 million and potentially converted to 200 apartments of about 1,100 square feet each, the un-renovated cost of each apartment is about $100,000. Keeping renovation costs down to $100,000 per apartment, would mean an affordable apartment could cost $200,000. If the building contained 200 small efficiency 600 square foot apartments and 100 1,100 square foot apartments, were built instead of the larger 1,100 mix, the average costs would be $170,000–$70,000 per unit acquitision and $100,000 per unit renovation.
This cost is still below what the most recent affordable apartment complext cost ($250,000 per unit at Arlington Mills).

Together Rosslyn and Crystal City have 13,000 residential units (respectively 7,000 and 6,000). Another 4,000 apartments would increase their total residential units by about 30 percent, and bring in a good mix of mixed income residents. Neither area has an abundance of affordable units; Rosslyn in particular has lost many thousands of low rise affordable apartments owing to gentrification.
Both areas are “office building deserts,” lacking a good balance of residents and commerce. From an urban planning perspective, adding 4,000 affordable apartments would be good.

Arlington today needs about 14,000 more residential apartments to meet its shortage of affordable housing, according to the Va Tech Center for Housing Research. If 4,000 affordable apartments could be acquired at a modest cost from owners of empty office buildings, it would be a major boost to meeting the shortage.

Arlington County owing to the high cost of acquiring or building new apartments (even on public land) has been unable to add even 300 units annually. In 2013, the county added only 55 units. Meanwhile market forces eliminate about 900 units annually owing to demolition, gentrification, and rent increases.

The question becomes once of cost of buying these commercial office buildings and the cost of renovating them into residences. The large realty firms may desire to hold the empty buildings in the hope that there will be a major turnaround and that this space will be leased. And thus they would be unwilling to sell to the county government.

However, it is more likely that the turn down in commercial office space rental owing to the DOD withdrawal as projected by GSA for the next 5 years is going to overwhelm any uptick in private firms moving to Arlington. Moreover, the winding down of the Afghanistan war as well as cuts to homeland security and to other federal agencies and to their related contractors makes it unlikely that real commercial office estate will revive in Rosslyn and Crystal City over the next decade, if not longer.

Arlington County’s current approach of building new residential apartments is too expensive to actually finance even 4,000 more units. Arlington’s most recent affordable housing project was the Arlington Mills Complex built on public land at a cost of about $250,000 per apartment. To build another 4,000 apartments would at this rate cost $1 billion.
If Arlington could purchase existing commercial office buildings at a low price, it could add apartments in neighborhoods sorely missing such units, and boost what will become a depressed office area over the next few years.

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