Office vacancy hits 21% in Alexandria, but conversions slow commercial decline
City's aggressive conversion strategy helps reduce property value losses from negative 4% to less than negative 1% as debt capacity concerns limit capital projects
Alexandria’s commercial office vacancy rate climbed to 21.1% in the second quarter of 2025, but city officials say an aggressive office-to-residential conversion strategy has significantly slowed the decline in commercial property values.
Commercial property assessments improved from a negative 4% decline to less than negative 1%, a shift City Manager James Parajon attributed to City Council policies encouraging conversions and business retention efforts during Saturday’s budget retreat.
“If you’ll notice, we’ve slowed the trend downward,” Parajon said. “If you look at the 24, which was that negative 4%, which really had a tempering of our revenue stream, but with some of the actions council has directed us, that has chipped away a little bit down to less than 1%. That’s a measurable change.”
Morgan Routt, director of management and budget, said the vacancy rate of 21.1% compared with about 15.5% the previous year represents ongoing challenges in the commercial market.
Conversion policy shows results
Vice Mayor Sarah Bagley asked whether the conversion policy contributed to improved assessment numbers.
“I’m curious if our reception to conversions and encouragement of conversions is also absorbed somewhere in here,” Bagley said. “It reduces vacancy and theoretically increases the value of the building, you know, after the conversion.”
Parajon confirmed the policy has helped on multiple fronts.
“Absolutely,” Parajon said. “One of the council’s policies was to move forward with older office buildings that have reached their level of use. And that absorption, removing that absorption in the commercial market and putting into the residential market, it’s done a couple things.”
The conversions create more residential housing and help manage upward pressure on rental rates while improving property values, Parajon said. Multifamily properties drive some residential property growth numbers.
The commercial real estate struggles matter to residential taxpayers because as commercial property values decline, homeowners shoulder a larger share of the city’s tax burden. Real estate assessments provide 58% of city revenue, with commercial properties representing a significant portion of that tax base.
Laura Gates, deputy director of finance, noted some positive trends within commercial categories despite overall decline.
“As you’ll see in the calendar year 2026 forecast, you show an overall decline of negative 4.2% to commercial,” Gates said. “But we do have a little bit of small growth there in the office retail and services categories.”
The city’s business retention efforts also show results. Alexandria saved Systems Planning Corporation, one of its top five taxpayers, from leaving the city.
“A good example of that was Systems Planning,” Parajon said. “Council’s injection into that process and into that effort saved that company from leaving the city. Significant revenue growth coming from that particular location.”
Systems Planning’s expansion plans include nearly 1,000 new jobs averaging $160,000 annually, providing long-term commercial growth.
Parajon said major development projects at Landmark, Robinson Terminal, and the Hilco property will help address commercial challenges in the coming years.
Debt capacity concerns limit capital projects
“That’s all actually those are two really good strategies that have been working,” Parajon said. “Unfortunately, we don’t see the full effect of them for a few years. The same thing with Landmark. And you got a couple large projects that are moving forward. Robinson Terminal and then the Hillco property. They won’t solve our challenges today or tomorrow, but in the next few years they will.”
The minimal revenue growth creates severe constraints for the city’s 10-year Capital Improvement Program. Arthur Wicks from the Office of Management and Budget warned that adding all 13 priority projects identified by council members would require $125 million above planned funding levels.
“If we were to add all these additional projects, we would be within $25 million of our debt limit or at 98% of our debt capacity,” Wicks said, referring to fiscal year 2031.
The city’s debt management policy limits outstanding debt as a percentage of real estate property value. Slower assessment growth directly reduces borrowing capacity.
Revised revenue forecasts reduced available debt capacity by approximately $40 million compared with previous projections. The city bases its debt capacity on property value growth, meaning weaker assessments translate to less borrowing ability.
“Every year at this point, we’re paying off 60 to 70 million dollars in principal payments,” Routt said, explaining debt capacity mechanics. “Put aside interest for a minute, just paying off the principal parts that million. So even pushing things back a year is really finding $60 million in debt capacity.”
Council members expressed particular interest in four capital projects during planning exercises: Cora Kelly Elementary School, Fire Station 205, Chick Armstrong Recreation Center and IT system replacements.
Mayor Alyia Gaskins discussed potential coordination between city and school projects at Cora Kelly.
“I think part of why we coalesced around that was we were trying to figure out if we time our projects at the same time as ACPS,” Gaskins said. “Are there cost savings if we think differently about the size of our project, can they think differently about the size of theirs and the space and the land that’s available to them?”
However, accommodating priority projects would require reductions or deferrals elsewhere in the capital program. Wicks noted the total cost would reach $125 million to $160 million when accounting for projects extending beyond the 10-year planning horizon.
$307 million in unfunded projects
“If we tried to fit them into the 10-year plan, it’s actually higher because based off the timing that was forecasted, the West End Rec center has a piece hanging off just a year or two outside of our kind of planning horizon,” Wicks said. “That’s an additional 30 odd million dollars. Really it’s closer to 150 to 160 million of additional funding.”
The operating budget implications also concern city officials. Wicks said supporting the capital program growth requires approximately $9 million annually.
“If we were to add all these additional projects, the operating budget support the CIP haven’t grown about $9 million a year,” Wicks said. “That’s double the amount of revenue growth we’re anticipating this year. But that would have to continue every year for the next 10 years.”
The city maintains a separate list of $307 million in identified but unfunded capital projects that cannot fit within the current 10-year plan. The unfunded list spans transportation, schools, housing, infrastructure and technology needs.
Councilman John Chapman emphasized the need for shared services discussions with Alexandria City Public Schools, given financial constraints.
“As we talk about a couple examples where we’ve talked around shared services, I think as we talk about those shared services, council is in a space where we are trying to find opportunities to decrease funding or find opportunities to collaborate where we don’t have to spend as much money on white cars, shall we say, or as we talked about student transportation,” Chapman said. “The sense of urgency on the city side is around the dollars that we have to spend.”
The city projects overall revenue of $961.6 million for fiscal 2027, an increase of just $5.2 million over current levels. The minimal growth represents less than 1% and creates immediate constraints before addressing capital program needs.
Federal government uncertainty compounds the challenges. The Dr. Stephen Fuller Institute at George Mason University temporarily suspended economic forecasting due to lack of federal data but indicated the regional economy is contracting across multiple indicators.
Consumer spending dropped more than 4% in recent months as federal employees and contractors face job uncertainty. The decline affects sales tax revenue and potentially residential property values as federal workers list homes for sale.
“The uncertainty, how that’s affecting us, we are seeing more projects asking for extensions coming forward to council,” Parajon said. “The capital markets, it’s hard to invest millions of dollars in a project when there’s uncertainty around how much it will cost to build because of the uncertainty in tariffs.”
City officials plan to continue monitoring economic indicators through January, when revenue estimates must be finalized for the budget proposal expected in late February. The budget process includes multiple work sessions and public engagement opportunities through final adoption in May.
The fiscal 2027 budget takes effect July 1, 2026.