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Big Tech, Hub-And-Spoke Adoption Give Fairfax An Edge In Flagging Office Market

The 400K SF deal Microsoft signed at Reston Town Center in May was one of the region's biggest leasing wins during a year slowed by the coronavirus pandemic, but Fairfax County stakeholders see more big deals coming.

Arlington Economic Development Director Victor Hoskins
Fairfax County Economic Development Authority CEO Victor Hoskins

Boston Properties Senior Vice President Pete Otteni, whose firm owns Reston Town Center, and Fairfax County Economic Development Authority CEO Victor Hoskins said Tuesday on Bisnow's Reopening Fairfax County webinar they see growing momentum from big tenants, especially in the technology sector. But they are still waiting to see activity pick up from a host of smaller tenants that hit the pause button. 

"While it's hard to overstate the amount of disruption that has happened over the past few months, it is starting to feel like there's a bit of equilibrium and there is a good bit of momentum," Otteni said. "That type of high-tech tenant that has been a lot of what has driven the Fairfax market has not gone away."

Hoskins took the top job at FCEDA in July 2019 after landing Amazon HQ2 as head of Arlington Economic Development. He said his organization began working with Microsoft in November, and it faced competition from multiple jurisdictions. 

"At that time the site in Reston was only part of the competition, there was also competition in North Carolina that we were fighting, competition in Atlanta and in D.C. for that same deal," Hoskins said. "We didn't think that deal would close. It did close because of the champions we have in Boston Properties and the state of Virginia and our team."

Hoskins clarified through a spokesperson that Atlanta landed a separate deal with Microsoft, but confirmed that North Carolina and D.C. were competing for the lease that Reston won.

Clockwise from top left: FCEDA's Victor Hoskins, Walsh Colucci's Bob Brant, Boston Properties' Pete Otteni and Bisnow's Mike Ponticelli.
Clockwise from top left: FCEDA's Victor Hoskins, Walsh Colucci's Bob Brant, Boston Properties' Pete Otteni and Bisnow's Mike Ponticelli.

The Northern Virginia office market recorded 515K SF of positive absorption in Q2, according to CBRE, outperforming the District. The Dulles Toll Road was the second-most-active submarket in the country for leasing last quarter, according to JLL.

Hoskins attributed this activity in part to the "hub-and-spoke" strategy some companies are pursuing, as they look to open suburban satellite offices to keep their employees from having to commute downtown. He said FCEDA assisted in 2.47M SF of lease deals during the fiscal year that ended June 30, an 18% increase from its normal level. 

"It's because of this positioning, this hub-and-spoke opportunity, the long-term companies that are landing here, and there's a synergy building up," Hoskins said of the leasing activity. "You think about Amazon HQ2 and the companies that gather around them ... there's a momentum building in who we are."

While larger leases like Microsoft have moved forward, Hoskins said he has seen a sustained slowdown in activity from smaller companies that lease less than 50K SF. FCEDA maintains a pipeline of in-progress lease transactions, and Hoskins said about half of those deals hit pause this spring and have not moved forward. 

"I think what's going on is a re-evaluation, particularly with our smaller tenants, if you go 50K SF and under, there's a lot of re-evaluation going on," Hoskins said. "You go 50K SF and above, those tend to be still moving forward because it's a longer-range thought process ... so we're seeing the sensitivity, and it makes sense because those smaller companies are probably more sensitive to costs in the short run."

Boston Properties Pete Otteni
Boston Properties' Pete Otteni at a 2016 Bisnow event

Otteni also said he has seen a slowdown in leasing from smaller tenants. He said smaller companies feel like they will always have plenty of options available for spaces of their size and are being patient. But he is optimistic that activity will return and continue to grow the county's momentum.

"The 400K SF Microsoft lease is the one that gets the headlines, but buildings get filled by 10K SF leases just as quickly, and those are the tenants who have been more inclined to hit the pause button, wait and see what happens," Otteni said. "So that momentum is less today than the bigger tenants."

The retail market has struggled much more than the office sector during the pandemic, and Otteni said Boston Properties has been working with the retailers at Reston Town Center to help them stay alive. 

Some Reston Town Center retail tenants, including Big Bowl and Peet's Coffee, have closed permanently, RestonNow reported. But the property also has new retailers that have opened during the pandemic or are preparing to open, including color bar Madison Reed and fitness studio F45. 

"We continue to work closely with our current partners, and we continue to talk to retailers who want to come to Reston Town Center to expand," Otteni said. "So we are bullish long-term, and we are trying to do everything within our power to help our current tenants and to attract future tenants to keep Reston Town Center the vibrant, urban-suburban downtown it has always been."

Fairfax County created a $25M grant program for small businesses, and Hoskins said it received more than 6,000 applications. He said the county is now thinking about adding another $20M in grants. 

"That has been the struggle point because a lot of these companies, particularly ones that are not franchises, the independently owned boutiques, coffee shops, food services, a lot of them could not convert to delivery," Hoskins said. "That has been a really difficult place to work."