After A Strong Q2, Fairfax County's Office Market Is Slowing Down
Office market experts tell Bisnow that they have seen a drop in new leasing demand in Fairfax County as the pandemic has dragged on and tenants are re-evaluating their long-term office needs.
Northern Virginia recorded 515K SF of positive net absorption in Q2, according to CBRE, while D.C. and Suburban Maryland both saw negative absorption. That occupancy growth was driven by Fairfax County, which landed a 400K SF lease with Microsoft at Reston Town Center, a 162K SF lease with Walmart Labs in Herndon and a 135K SF lease with CACI in Reston.
While those deals were the silver lining to an otherwise difficult second quarter, Fairfax County Economic Development Authority CEO Victor Hoskins said the leases had already been in the works before the pandemic.
"Microsoft and Walmart and a couple of others, we were working on those deals in 2019, they just happened to fall over into 2020," Hoskins said. "The challenge going forward is going to be new deals."
The difficulty of landing new deals appears to be delaying some major developments from getting off the ground. Clemente Development received approval in October for its View at Tysons project, featuring 1.3M SF of office space and a 600-foot tower that would become the tallest in the region.
Clemente Development President Julie Clemente told Bisnow it had initially considered breaking ground on spec, but it has now put those plans on hold because of the slowing office demand.
"There was an awful lot of momentum that came to a screeching halt," Clemente said of the prospective tenant activity for the View project. "We've definitely put that on hold while we see where the market shakes out."
Hoskins said he expects fewer office leases to be signed in the county this fiscal year, which began July 1, than in the prior 12 months. He said generating leads for new office relocations has been more difficult without face-to-face meetings and conferences, and he is seeing office tenants put decisions on hold.
"We've seen a lot of the smaller deals hit the pause button," Hoskins said. "People are re-evaluating costs and saying, 'Do I have 25% of my people telework or 50%? Do I keep the office footprint I have or do I shrink it?'"
CBRE Associate Director of Mid-Atlantic Research Wei Xie said the firm cannot share any Q3 numbers yet, but she said preliminary data shows Fairfax County experienced a "more meaningful drop" in July office leasing than it did in Q2.
"The July decline in activity was driven more by smaller leases being signed than fewer leases being signed," Xie wrote in an email. "The July market slowness can partially be attributed to paused deals that will re-engage in the next few months as tenants' lease expirations get closer and there is more clarity in return-to-work strategies."
Transwestern Senior Vice President Alex Hancock, who works on the leasing team at Reston Town Center, said there are still some big tenants looking for space on the market, but they are taking more time to make decisions. He said he doesn't expect to see more large-scale leases closing in Reston until 2021.
"On the largest end of the market, there are some tenants beginning to explore, but they're evaluating a post-COVID workplace and when the most opportunistic time is to transact," Hancock said. "They're giving themselves a little more lead time, which is why we see some tenants in the market. But the deals aren't that quick, as tenants are saying, 'We need more time to plan.'"
Clemente said the company has had some activity at its 8500 Leesburg Pike building, with three leases signed during the pandemic of between 3K SF and 5K SF. She said that building is better positioned in today's market because it was built in the 1980s and has lower rents.
"There is some softness, but we've got the kind of product that tends to be more attractive under these circumstances," Clemente said. "We've got a lot of Class-B product. ... I'm glad I'm not sitting on a whole bunch of spec space and trophy space."
While the pandemic may slow down new leasing activity in the coming months, stakeholders remain optimistic about Fairfax County's office market over the long term. The county's technology and government contracting sectors are well-positioned to grow during the recovery, but they may wait until a coronavirus vaccine is administered and people return to the office before signing new leases.
"There's just so much uncertainty about a vaccine and when exactly it will happen," Hancock said. "As soon as there's certainty, I think we're going to have good growth, especially given our concentration of technology tenants that have a federal practice whereby they need to be in the office."
Hoskins said he thinks Fairfax County will benefit from companies adopting a hub-and-spoke office strategy, adding new suburban spaces to give their employees easier commutes.
"I see Tysons, Reston and Herndon, those markets are solid. They're at Metro stations, and long term, they look really good," Hoskins said. "The key is after they roll out a COVID vaccination, what is the transition back? That's going to be the interesting part: How do we get back to the office? I think multiple markets will do well and a lot of that might be as a result of hub-and-spoke."