Far from recession-proof, D.C. region still resistant to economic shock
Washington-area residents might be tempted to view themselves as immune from the nation’s economic nose dive, living in the seat of federal power, cushioned by a steady base of government jobs and billions in federal contracting dollars on both sides of the Potomac River.
And though the health of the region’s work force and markets outshine much of the rest of the nation, economic experts say the area is by no means recession-proof. Perhaps only recession-resistant.
“We have in our recent memory that D.C. is fully capable of dipping into recession, and this in fact occurred during the 1990s,” said Anirban Basu, chief executive of Sage Policy Group, a Baltimore-based economic consulting firm.
“The late 1980s was a story about overbuilt commercial real estate … Washington, D.C., and its suburbs fully participated in that commercial real estate bubble and also fully participated in its aftermath.”
The root of today’s downturn is residential, not commercial, real estate. And local communities — especially in the outlying suburbs — contributed heavily to the rash of home foreclosures that fueled Wall Street’s meltdown.
Still, economists forecast a far rosier 2009 for the District and surrounding areas than for the country as a whole. The gross regional product is on track to see 2.5 percent growth in 2008 over the previous year, beating U.S. economic growth of 1.5 percent, according to the Alexandria real estate research firm Delta Associates. The region’s growth rate is expected to hold steady next year, while the nation’s gross domestic product growth slows to a scant 0.2 percent.
“There are people being laid off all around the country, the economy is tight all around the country,” said Jim Dinegar, president and chief executive officer of the Great Washington Board of Trade. “The lending is down, the opportunity to secure credit, the retail environment, right on down the road. It does affect greater Washington, [but] we are not as bad off as other regions in the country. That might not make people feel better — but we are not Phoenix or Detroit or even New York.”
The Washington-Baltimore-West Virginia region posted a 4.1 percent unemployment rate in September, a slight drop from a month before and well below the national average of 6.1 percent, according to the U.S. Bureau of Labor Statistics. And the region added 35,400 jobs in the fiscal year that ended in July, according to Delta Associates.
That’s not to say Northern Virginia, the District and Maryland don’t face some troubling trends. Local and state governments built budgets that didn’t foresee sharp drops in home values and consumer spending, racking up billions of dollars worth of shortfalls and setting the stage for thousands of layoffs.
Home sales prices continue to fall. The National Association of Realtors says the median sale price of single-family homes in the region dropped in the third quarter to $332,700, down from $438,000 during the same period last year and $370,300 in the previous quarter.
After years of being one of the best office markets in the country and enjoying packed office space, the region’s vacancy rate is starting to climb. The amount of vacant office space in the region ticked up to 10.1 percent in the third quarter compared with 8.6 percent a year before, according to Delta Associates.
For this market, oversupply becomes a concern when that rate reaches about 10.5 percent, said Elizabeth Norton, vice president of Delta Associates and head of mid-Atlantic research for the firm.
“It’s pretty much slowing demand,” she said. “We have a lot of office space available right now because of new construction.”
One of the biggest strengths of the region lies in the need for federal contractors to locate close to the government agencies they serve. But federal procurement growth has dramatically decelerated since 2003.
“The federal government certainly plays a huge role in our recession resistance, just because of the amount of procurement spending that occurs in this area compared to other metro areas,” Norton said.
The incoming Obama administration raises questions of the future of procurement dollars, which reached $59.9 billion this year. Basu is skeptical that defense and homeland security funding will increase, though he expects growth in other domestic contracting sectors like education, the environment and urban development.
He said the financial collapse might have a benefit for the local economy.
As auto manufacturers, financial gurus and consultants descend on the city to help shape billions of dollars in industry bailout deals, Basu sees a boon to the area job market.
Dinegar sees another local growth industry sprouting from the crisis.
“I see growth in regulatory area, and greater Washington, as I remind people, does red tape very well,” Dinegar said. “It’s a specialty of ours.”
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Base realignment seen as boon, though not clear how much
The Defense Department’s realignment of military bases is expected to buttress the region’s battered economy and fuel new construction as thousands of new workers find a home in Fairfax and Montgomery counties.
Local officials, while grousing about new traffic, have looked to the 2005 Base Realignment and Closure orders as a way to spur development and commerce at a time when vacant office space is an increasingly common sight across the Washington suburbs.
In Virginia, Fort Belvoir has begun construction on facilities that will accommodate some 12,000 new jobs, and supervisors are mulling allowing large-scale development around the base that could bring thousands more contractors.
Montgomery County is preparing Bethesda National Naval Medical Center to absorb most of D.C.’s Walter Reed Army Medical Center, which is scheduled to close in 2011.
Underscoring just how coveted the thousands of new military jobs can be, Fairfax County and Alexandria officials recently quarreled over which jurisdiction would gain an additional 6,200 workers from the Washington Headquarters Services. Alexandria eventually won out.
Despite the added jobs, Anirban Basu, an economist who heads the Baltimore economic consulting firm Sage Policy Group, predicts overall office vacancies in the region to rise.
“Base Realignment and Closure isn’t the end-all be-all,” Basu said.
Other areas within the Washington region are expected to suffer because of BRAC, most notably Arlington, which will lose 17,000 jobs, mostly in Crystal City.
Overall, the realignment will cause 14,000 civilian and 4,900 military departures from the region, while bringing an influx of 20,000 civilian and 7,300 military personnel, according to Army spokesman Dave Foster.
