We might need to take a breather from the ongoing fight sparked by the Washington Post article this week stating Tysons is the new downtown not DC. Or we could fan the flame by pointing out the dynamics of why Fairfax’s future will be similar to Charlotte while DC will remain relatively traditional in its growth pattern… instigation it is.
During our read of the comments and discussions that engrossed the original misguided premise of the article, we found an interesting comment. DC’s lease rates are far greater than those found in Tysons and Fairfax.
Firstly, Washingtonians, this is not something to be proud of. This negates the ability for small companies to grow organically. When every dime has to go towards office space, it leaves less room to create new products and ideas. What you end up with is large tenants who are willing to pay more because of the proximity to the government. What you lose is the ability to create new and innovative future home town businesses.
So why, when so much office space is going to areas of Maryland and specifically Tysons, do developers not charge less in DC? After all vacancy rates, while strong in DC, can always be stronger. The reality is, they might not be able to charge that much less.
When people compare Virginia and DC they cite the tax rate inequality, but we have seen DC provide the equivalent tax rates via one time tax breaks as with Living Social. The real costs for companies, and why they leave for areas like Tysons, is the lease cost. Why pay $70 psf when you can pay $35 psf (rhetorical, clearly some companies do see a benefit of being in DC for many reasons).
DC
Take for example a project whose land and contributions will cost $100 million. Let’s say it’s in DC and is allowed to redevelop from the existing 6 story building to a 12 story building (tall by DC standards). The developer would have to have a reason to tear down the operating 6 story building, pay $100 million, and construct a $150 million new building. Well that dynamic works, if you find that you have a market for far higher leases, but the number of occupants of high lease rates is limited. Explosive growth occurs when many different business classes can buy into a city.
Tysons
Now take for example a project where land and contributions still will cost $100 million. Let’s say it’s in Tysons and is allowed to redevelop from the same 6 story building to a 35 story building (the current height restriction in Tysons). The decision for the developer is much easier now. The same $100 million is needed in both cases, and in this case construction might cost upwards of $300 million, but the revenue generated annually from the new building is 3 times more than the project in DC. Even if the rates are lowered to a 50% premium compared to the DC project this project annually makes 1.5 times more than it would in DC annually.
This is the underlying economic balance between the two cities and why DC is scrambling to figure out a way to “relieve” certain areas of the historic height restriction.
So? big buildings popping up. Who cares? It doesn’t change the surrounding area. True, in the Dallas model it wouldn’t. If you just allow sprawl and it doesn’t fix anything. The difference is Tysons is changing its policy and creating a more holistic approach to the growth, taking the new revenue from the highly assessed towers and creating the relatively affordable infrastructure needs. With lesser rates you are actually more likely to avoid anchor tenants, something that has riddled newly developed areas of DC like Columbia Heights.
So far the only way DC has found to correct this is to actually mimic the sprawl format of suburbia (through more Targets and groceries and Costcos), not by organically growing upwards. That is because those are the only types of companies able to fill out massive spaces and pay the higher costs that you find in historic preservation cities. You see, DC is stifling and choking itself on its own self-established nature.
For what it is worth, I don’t believe in what the WaPo said. I believe DC will always be a large city and likely always a step ahead of Fairfax. Clearly the Washington Post created this article to rile up a few incredulous statements because it is absurd to call Tysons the new city and DC the suburb. However, if you look at Tysons as the COB of the overall metro including Vienna, McLean, Merrifield, and the Dulles Corridor you find that actually in many ways Fairfax is a city in its own right with Tysons at its heart. The article shouldn’t say, DC you are the new suburb, it should say DC you have a new metropolitan region to compete with.