The 2020 proposed Defense budget a positive sign for Northern Virginia’s evolving economy
President’s Trump’s proposed budget for FY 2020 would allocate $718 billion for the Department of Defense.
May 01, 2019
- President’s Trump’s proposed budget for FY 2020 would allocate $718 billion for the Department of Defense, marking the fifth consecutive year-over-year increase and breaking the previous all-time Defense budget allocation of $691 billion set in FY 2010.
- Since 2010, a lot has transpired in defense-centric Northern Virginia. The Budget Control Act, starting in FY 2011, ushered in an era of spending caps and sequestration, driving occupancy losses totaling 5.1 million s.f. 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.
- What does this proposed budget mean for Northern Virginia? For starters, on average, 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. 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 where Northern Virginia is a leader among its peers.
- Moving into FY 2020, Northern Virginia will capture a disproportionate share of the contracts focused on these sub-sectors, with the local market already controlling 40% of government cybersecurity contracts for instance. As those dollars flow to contractors, enhanced leasing prospects will form along the 82.8 million-s.f. 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 s.f. of future occupancy growth to the market, with an average lease size of 29,362 s.f.
- Of the eight largest contract opportunities in the Defense budget ahead, seven are tech-centric, including the $10 billion JEDI clou- computing contract and numerous information architecture contracts, all of which will drive strong net-new office demand in Northern Virginia totaling at least 2 million s.f. in occupancy growth over the next 24 months from those drivers alone, according to JLL’s projections, with not just the large-cap prime contractors on the Toll Road growing their footprint, but a slew of sub-contractors located along that new demand corridor growing as well. This environment will fuel a landlord-centric 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.
Source: JLL Research