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Arlington Office Market Continues To Surge A Year After Amazon Selection

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Arlington County landing Amazon HQ2, a selection announced one year ago this month, has helped move its office market in the right direction after years of struggles.

Amazon HQ2
A rendering of the two 22-story towers Amazon plans for the first phase of HQ2

The office vacancy rate in National Landing, the newly branded area comprising the Crystal City and Pentagon City neighborhoods, dropped from 19.6% in Q3 2018 to 16% as of Sept. 30, the lowest level since 2012, according to JLL

Office rents in the National Landing submarket increased 18.6% over the last 12 months to $43.89 per SF as of Q3, according to JLL. The submarket this year has reached the highest average rent in its recorded history. 

JBG Smith, the developer partnering with the tech giant on its second headquarters, executed 1M SF of new leases in the National Landing area — including about 585K SF from Amazon — and another 400K SF of lease renewals in the eight months following the announcement, according to the REIT's Q2 earnings release in August. The REIT has yet to disclose its Q3 financials.

"Activity has been awesome," JBG Smith Senior Vice President Brian Cotter said. "Whether directly or indirectly, the spotlight [from Amazon] has certainly helped."

Brookfield's Dave Bevirt, ESA's Ana Molina, OTJ Architects' Roger Sola-Sole, Arent Fox's Sean Glynn and JBG Smith's Brian Cotter
Brookfield's Dave Bevirt, ESA's Ana Molina, sshape's Roger Sola-Sole, Arent Fox's Sean Glynn and JBG Smith's Brian Cotter

Cotter, who will speak Nov. 14 at Bisnow's Future of Arlington County event, said he has seen strong interest from the technology sector and from government contractors, given the proximity to the Pentagon.

He also has seen strong activity from colleges. Beyond the $1B campus Virginia Tech is building out, the University of Maryland signed a lease with JBG Smith to open a Discovery Center in Crystal City, and George Mason University is seeking a development partner for a new 400K SF building in Virginia Square. The Virginia Tech's campus is planned for Alexandria's portion of Potomac Yard, also part of National Landing. 

"Institutional universities are an industry vertical where we have seen a lot of prospective interest," Cotter said. 

Avison Young principal Nick Gregorios, who works on Northern Virginia office leasing, has also seen strong interest from universities in the area, and he thinks the talent pipeline the colleges will create is helping attract more office tenants. 

"A lot of people are very excited and bullish long-term about Virginia Tech's campus and what that's going to do here," Gregorios said. "UMD is opening a new facility, and we've heard a few other universities and colleges out there that are national names poking around."

The office building at 241 18th St. South, where Amazon and University of Maryland are leasing space
The office building at 241 18th St. South, where Amazon and the University of Maryland are leasing space

Gregorios said the tenant makeup of Arlington has shifted from the public sector base it has relied on in years past. 

"Arlington used to be more of a government town and it's really changing; it's a lot more private sector," he said. "Particularly in technology, education and cybersecurity, you think of Reston and Herndon having a major footprint of those, but you have a lot of the smaller, early stage companies in Arlington."

One factor that has helped foster this technology sector expansion in Arlington, Gregorios said, is coworking. He said he has brokered leases with tenants moving out of coworking into traditional offices ranging from 2,500 SF to 15K SF. 

"A lot of the growth is being fueled and helped out by coworking, it's allowing groups to grow faster," Gregorios said. "Once you get to eight or 10 people, you may start to explore traditional office opportunities."

The increasing demand for office in Northern Virginia, combined with a slower pace of new development than the District is experiencing, has helped Arlington improve relative to its neighbor across the river. The vacancy rate in the National Landing area had hovered around 20% for several years, but now at 16% vacancy it is closer to that of the District, which JLL peggged at 13.4% as of Q3. 

The improving market dynamics have allowed landlords to increase rent in the county to record-high rates. The National Landing rent of $43.89 is moving closer to D.C., but still a relative value compared to the District's $59.65 per SF average rents, according to JLL. 

"There has been less resistance to increasing rent," Gregorios said. "Many folks make a commitment to the area on the expectation that it's going to improve, and because of that they're willing to pay up for well-located highly amenitized projects."

Brian Cotter and Nick Gregorios will speak Nov. 14 at Bisnow's Future of Arlington County event at Ballston Exchange.