Forecaster Warns N. Virginia May Be ‘Behind the Curve’

One of the region’s foremost economic forecasters warned Tuesday that Northern Virginia may be “behind the curve” in planning its next economic driver, once the defense contracts buoyed by the war in Iraq expire and the war winds down.

John McClain, senior fellow at George Mason University’s Center for Regional Analysis, said that “tunnel vision” by some of the area’s leading defense contractors may be preventing them from innovating at a pace rivaling other areas of the country. He made his comments to the monthly luncheon of the Falls Church Chamber of Commerce.

McClain said that leaders of government, industry and academia need to “put their heads together” to plan for what will sustain growth in Northern Virginia once the war in Iraq ends, or in the event that a new administration in Washington, D.C. might deemphasize the role of outsourcing government functions.

“Whether it be energy, or biomedical, or green technologies, the emphasis is going to have to be on something other than defense,” he said. Between 2002 and 2006, government defense contracts grew at a 10 percent annual rate in Northern Virginia, and although that growth rate slowed to three percent in the last two years, McClain said, it is still the primary driver of the regional economy.

He said that there is no indication from either major presidential candidate yet about their “outsourcing philosophy,” noting that if the next president “does a 180 degree change” from the last 28 years’ of emphasis on outsourcing, it could have the biggest impact of all on the region, as well as the nation.

That would compound the problems associated with what he said will be negative growth in the economy through 2009, with conditions not returning to “closer to normal” until 2010.

But he added that “parameters of the equation” for growth projections are changing, as people decide they don’t want to live far from their jobs, and are willing to accept higher densities and smaller houses.

That could make the Tysons Corner Task Force plans for doubling the office and residential space in the next 50 years work, he said, although the Center for Regional Analysis’ initial evaluation of the plan was that it couldn’t sustain its residential growth goals. McClain’s colleague at the Center is Dr. Steven Fuller, who has spearheaded studies of the regional economy commissioned by the Falls Church Economic Development Authority and the Chamber of Commerce.

He said that the regional office market is “softening” as a follow-on to the housing downturn, with vacancy rates climbing from nine to 12 percent.

The housing downturn will not bottom until the last of the sub-prime adjustable rate mortgages reset to higher rates, a process that will not end before the end of the year. The problem began manifesting itself, and sub-prime mortgage lending was not curtailed until almost two years ago, he said. Since resets normally don’t kick in for two years, there are still more in the pipeline that will lead to considerable foreclosures.

Rising unemployment linked to the credit crunch and global economic slowdown will exacerbate the foreclosure problem, as well, he added.

While housing values in the District of Columbia and inside the Beltway in Northern Virginia and Maryland have remained relatively stable, they’ve dropped dramatically in areas like Prince William County, McClain noted, making the D.C. Metropolitan Region the victim of the sixth-highest rate of housing foreclosures nationally, behind only Los Angeles, Phoenix, Miami, Las Vegas and San Francisco. This was after the region had the lowest rate of foreclosures in the entire U.S. only two years ago.

Average housing prices have declined 31 percent in Northern Virginia, and the number of homes on sale for less than $400,000 has tripled. In Prince William County, which he called “the eye of the storm” in the region, the average housing price has dipped from $415,000 to $285,000.

In the last four months in Northern Virginia, he said, 4,500 construction jobs have been lost, mostly due to the housing slowdown, along with another 1,500 in the retail trade and 2,000 in financial services.

While the area’s unemployment rate remains the lowest in the U.S., at 4.1 percent, it is still up from 3.3 percent a year ago. Only Houston and Dallas outperform the D.C. region, overall, in job creation, with 40,000 new jobs between September 2007 and September 2008.

Nationally, McClain said, “2009 will be worse than 2008,” noting that (Former Federal Reserve Chairman) Alan Greenspan’s “irrational exuberance” between 2002 and 2006 created the current crisis. Job growth turned from two million annually to a net loss of 600,000 jobs in 2008. “In this national environment, I wouldn’t want to be anywhere by the D.C. region,” he said.