Proposed Defense Department Spending Would Fuel Significant Office Leasing Growth in Northern Virginia

WASHINGTON, DC—Proposed Fiscal Year 2020 Department of Defense spending would provide a major economic boost to the Northern Virginia economy, according to a report released by commercial brokerage firm JLL, including more than 2 million square feet of office occupancy growth in the Toll Road to Crystal City corridor.

In fact, the FY 2020 budget would allocate $718 billion for the Department of Defense, marking the fifth consecutive year-over-year increase and breaking the previous all-time record Defense budget allocation of $691 billion set in FY 2010, according to the report authored by Vikrant Ghate, research analyst with JLL Mid-Atlantic Research.

The report notes that The Budget Control Act, beginning in FY 2011, ushered in an era of spending caps and sequestration, driving occupancy losses totaling 5.1 million square feet from 2011 to 2016, forcing contractors to cut headcount and shrink/consolidate their real estate footprints.

“Despite the return of Defense budget growth since FY 2015, the spending cap continues to be in effect. Congress temporarily lifted the cap for 2018-2019, but for FY 2020, if the cap is not lifted, the Trump Administration proposal finds an alternative path to growing the Defense budget, shifting a larger share of the dollars into a war fund immune from the budget cap,” Ghate states in the report.

JLL notes that the Pentagon outsources 53% of its budget to contractors, which would equate to $380 billion for FY 2020 nationally, the highest total in 10 years and 4.8% higher than FY 2019 levels. The report predicts that Northern Virginia will receive an “outsized portion of those contracts as the Pentagon’s shifting priorities favor the region’s defense sector over that of its peers.”

At its last peak a decade ago, the budget was centered around the war on terror and weapons manufacturing, elements of the Defense budget that benefitted the South, Midwest and West more than Northern Virginia. By contrast, the proposed FY 2020 budget focuses more priority on R&D funding, with contracts focused on cybersecurity, AI, machine learning and cloud migration, all areas JLL contends Northern Virginia is a leader among its competition.

Specifically, JLL notes that Northern Virginia will capture a “disproportionate share of the contracts” focused on those sub-sectors, with the local market already controlling 40% of government cybersecurity contracts for example.

The brokerage firm expects that these Defense Department contractors will lead to strong leasing interest along the 82.8 million-square-foot Toll Road to Crystal City corridor. Over the last five quarters, 90% of growth office leases in those sub-sectors occurred along the new corridor with those tenants accounting for 1.5 million square feet of future occupancy growth to the market, with an average lease size of 29,362 square feet.

JLL notes that of the eight largest contract opportunities in the Defense budget ahead, seven are tech-centric, including the $10-billion JEDI cloud-computing contract and numerous information architecture contracts.

The brokerage firm predicts these opportunities will drive at least 2 million square feet of office occupancy growth in Northern Virginia over the next 24 months.

“This growth will come not just from large-cap prime contractors on the Toll Road, but also from a slew of sub-contractors located along that new demand corridor,” JLL states. “This environment will fuel a landlord-favorable market along this corridor where vacancy begins to more dramatically shift downward, fueling increased tenant competition for Metro-centric new office product and new heights in rents for that most-favored office product.”