Reston And Herndon Offices Are ‘Under-Demolished’ Amid Booming Residential Demand
Reston and Herndon are at a crossroads.
With a plethora of aging office space combined with a hot rental market, the area is looking to quickly swap the asset classes, replacing old offices with new apartments. But this feat is proving complicated in today's economic environment, as rising costs and demands around parking and amenities make these deals difficult to pencil.
The two communities in Fairfax County, sitting near Dulles International Airport and roughly 25 miles from D.C., are becoming more attractive destinations for building multifamily and retail, panelists said Wednesday at Bisnow’s Future of Reston and Herndon event, held at Reston Station's 1900 Reston Metro Plaza.
“We're seeing top rents in this market, top occupancy, low turnover, and people just really want to be here,” Insight Property Group partner Mae Klinger said. “We're seeing it being as competitive as other Northern Virginia submarkets like Arlington and Falls Church.”
The Reston-Herndon area saw a 12% increase in Class-A multifamily rents over the three years ending March 31 — the largest of any submarket in the D.C. region, according to Delta Associates’ first-quarter multifamily report.
Class-A rents in the Reston and Herndon area were up 6.8% year-over-year, compared to 4% in Northern Virginia overall, while its stabilized vacancy was at 3.6%, below the Northern Virginia average of 4.2%, according to the report.
With all this demand, the obsolete office parks that dot the area are due for a reckoning, panelists said.
“The best way to describe the office market is it’s under-demolished. But it’s a-comin',” said Tom Regnell, chief operating officer of A.J. Dwoskin & Associates.
There is over 6.5M SF of Class-B office in Reston and Herndon and just over 5M SF of Class-C space. Vacancies for Class-B hover around 30%, while Class-C is around 20%, according to JLL’s Q1 ofice report.
The office-to-residential pipeline has been moving forward in the area since 2018, when the Fairfax County Board of Supervisors approved a zoning change, allowing empty suburban office buildings to be converted for other uses. But the rise in work-from-home trends during the pandemic further accelerated the momentum.
Several proposals to swap office for residential have been moving through Fairfax County’s approval process in recent months, according to Fairfax Now.
One project already underway is Reston's Isaac Newton Square. The 32-acre former office park is being converted to a 2,000-unit development spanning 10 blocks. The first 349 units are in the works from APA Properties and Peter Lawrence Co., which submitted plans in March.
The office buildings at Isaac Newton Square were demolished and the new multifamily developments will be built from the ground up. The vast majority of office-to-residential in the area is destined for the same fate, panelists said, because the low-rise, wide-floor-plan buildings aren't adaptable for new multifamily.
“‘Let's just turn every office building into an apartment building.’ It's not going to work,” Reston Station developer Comstock CEO Chris Clemente said.
“We’ve looked at doing those deals. It's a small percentage of the buildings that are built for the purpose of being workplaces that can be efficiently converted to residential.”
That means for many of these buildings, demolition is the only path forward.
“These red brick buildings, like Fairfax Business Park, all those properties are going to be scraped. They have to be,” Regnell said.
MRP Realty founding principal Fred Rothmeijer agreed. “The prior panelist says we're under-demolished with office and that's true.”
Rothmeijer pointed to the expected office-to-residential redevelopment of Worldgate, the 350K SF former home of Fannie Mae’s Northern Virginia operations, planned by his firm in conjunction with Artemis Real Estate Partners.
In January, Boston Properties paid $17.3M for a 50% stake in the 10-acre office park with the intention of razing the buildings and replacing them with residential. This deal took MRP out of the project, Rothmeijer said.
“You only have to go to the Herndon Parkway, or Fairfax — Random Hills Road, and you can see the resi coming up the road and the office soon to go. So it's pretty amazing,” Regnell said.
Rothmeijer said MRP Realty is trying to steer away from the office sector.
“Over the years, since we started in ‘05 we had been more into office and we're now totally getting out because we see that as an absolute train wreck to be honest," Rothmeijer said. "So we're focused on multifamily and being able to go when cap rates compress again and costs go down."
But building from the ground up is increasingly difficult, with rising costs of capital, labor and construction materials that have tanked prospects for many new developments.
“The Fed wanted to stem inflation on the real estate side,” Rothmeijer said. “I think they’ve done a tremendous job. I think they've choked off any new development, basically.”
On top of projects already being difficult to pencil out, there’s increased pressure on these suburban developments to up their amenities offerings, including parking — spaces that the buildings need to subsidize.
“[Residents] know they’re not downtown, so they want a little bit more, and that's often a slightly larger unit, lower rent, of course, better amenities in their units, better amenities in the building,” MV+A Architects principal Brian Szymanski said.
One of the biggest lifts for any new residential development in the area, panelists agreed, is parking. Residents view this amenity as a requirement in the suburbs, where the Metro works as a commuter rail but doesn't suffice as the only mode of transportation.
“They want to be close to the Metro so they can commute if they have to, but they still need that car. We are seeing the parking demands are still high out here,” Szymanski said.
Rothmeijer said in the District, his firm develops multifamily with as low as 0.5 parking spaces per unit. That number more than doubles in Reston, he said.
Another hurdle is getting Fairfax County on board with the changing design in landscape, panelists said. Regnell detailed his experience working with the county on designing Reston Station Boulevard, and he said he had to push for the government to see a more urban vision.
“They want it to be four lanes wide and two bike paths and it's like, ‘OK, guys, this is not walkable.’” he said. “So they're really in the sort of suburban mindset and I think they’ve really got to rotate to being, in my opinion, much more urban-focused because it’s only that dense kind of property that really pencil out at least in some of these markets.”
Jill Parks, counsel at Hunton Andrews Kurth, said the county is working through the transition but it will take time.
“They're doing everything that they can to take existing constraints and infrastructure and urbanize it, which is difficult to do in a short period of time," she said. "But I do think that they're working on that.”
CORRECTION, MAY 16, 4:10 P.M. ET: A previous version of this story incorrectly described the level of rent growth in the Reston-Herndon submarket since 2020. This story has been updated.