Loudoun Office Market Facing Challenges Away From Silver Line Corridor
Loudoun County's office market has some reasons for optimism, with a new federal agency lease and the Metro coming, but several developments planned away from the Silver Line corridor have had trouble landing anchor office tenants to move forward.
"No one wants to talk about your building unless you're within a stone's throw of the new Metro stations in Loudoun County," Landmark Commercial Vice President Blair White said. "It's great the Metro is coming to Loudoun County, but for all the properties that are not immediately Metro-accessible, for new development, it's virtually dead on arrival."
"When we set about that task, the office market was in a much healthier place at the time," White said. "But we weren't able to secure enough office tenants at once to induce the financing before the market really started to take a turn."
The county's office market did receive a big win last month when the General Services Administration reached an agreement to lease 445K SF for a U.S. Customs and Border Protection office at Ashburn's Quantum Park.
"That reduced the vacancy in the market, but that's such a unique, campus-style product that if it didn't go to CBP or a data center, that could have been vacant for another 10 years," Merritt Properties leasing representative Keith Wallace said.
Nevertheless, Wallace said he is more optimistic about Loudoun County's office market than he has been in his 15 years of leasing in the area.
"We're seeing more activity on the office side than I've seen in a long time," said Wallace, who primarily leases low-rise office and flex-industrial space to smaller tenants. "We're successfully leasing single-story and mid-rise office space. To talk about doing more than a handful of deals in our portfolio in a short period of time is unheard of, and we're seeing that."
But the county totaled just 27K SF of leasing activity in the first three months of 2018, compared to 1.8M SF in neighboring Fairfax County, and its falling vacancy rate has been largely attributable to a lack of new office supply. The county, Virginia's third-most populous with over 375,000 residents, currently has no office space under construction, according to Cushman & Wakefield.
The lack of construction is not due to a lack of planning. Loudoun County has multiple large-scale greenfield development sites with millions of square feet of planned office that have remained largely stalled as they try to attract companies.
Kincora, a 424-acre development at the interchange of Route 7 and Route 28 in Sterling, is approved for 4M SF of office space, plus 1,400 multifamily units, 480K SF of retail, 572 hotel rooms and a theater. Eight years after receiving approval, developers are now moving forward with two multifamily buildings, but the office component remains elusive.
Tritec Real Estate and Norton Scott, the development team behind the project, sold a 40-acre portion of the site to Cyrus One, which is building a data center on the parcel that will technically qualify as 1M SF of the site's 4M SF of planned office.
"It helps us tremendously that that's qualified as office," Tritec Vice President Patricia Mayhew said. "3M SF is still a decent amount to absorb. Obviously the market cannot absorb 3M SF today."
The development team has been actively marketing its office component and has talked to several potential build-to-suit tenants, but Mayhew said they have decided to pursue other locations. In the meantime, the developers are moving forward on other components in hopes of creating activity that will be attractive to potential office anchors.
"If you have residential and retail and you have amenities, when the office market comes back, we think we're very well-positioned," Mayhew said.
Similarly, Loudoun's Waterside development was approved for 3.4M SF of office in 2015 but has yet to break ground or announce any leases. The developer, Gudelsky Group-affiliate Chantilly Crushed Stone, went to the county in April 2017 seeking to add 400 more units to the 2,500 already planned at the site. But county planning staff voiced opposition to adding residential unless the developer could show how the housing would attract more employers to the area. The project sits about a mile from the planned Innovation Center Silver Line stop.
"I would be very skeptical of new development on that scale that's not Metro-oriented," White said. "What you see out there is remnants of projects where the county required a certain level of commercial developments to approve large master-planned communities with significant housing involved ... owners have had to ask the board to amend the uses because, with suburban office right now, the market is not there for it."
Mayhew pushed back on the notion that sites need to be next to Metro to land office tenants. While marketing Kincora to large users, she said she asked one company to survey its employees about their commutes, and less than 1% of them said they took Metro to work.
"I don't know how many of those office users, when the rubber hits the road, how much of their employee base utilizes Metro to work," Mayhew said. "We're not a Metro site, so we'll always be competing with those sites and have to prove why we're better, and we have to do it through the amenities we offer."
Neighboring Fairfax County has landed multiple companies in recent months to kick off construction on new office buildings, such as Leidos and Fannie Mae signing on with Boston Properties in Reston. But that type of large build-to-suit office tenant has been difficult for Loudoun County to find.
"When you look at the office market, we feel like there's some really good momentum, but it's not like there's a million major prospects on the trees," Loudoun County Economic Development Executive Director Buddy Rizer said. "We are in the market every single day meeting with office users. Not every office user wants the same thing and we're very fortunate we have a variety of products we can pitch. We're very confident in all of our developments we have underway."
Rizer pointed to the GSA lease and the recent expansion of existing tenants as positive signs for the county. Food service company Cuisine Solutions added 63K SF to its Sterling office in February, plus tech companies Cofense, Gravy Analytics and IT Cadre have all expanded their Loudoun offices in recent months.
Paladin Real Estate principal broker Jim Sisley, who works primarily in Loudoun County, said users seeking large blocks of space have looked at the county, but have needed to relocate sooner than the timelines for the Silver Line and planned development would allow.
"There have not been a lot of 100K SF-plus users because there aren't a lot out there, and the ones out there needed to relocate prior to the scheduled delivery of a project," Sisley said. "As these projects become closer to delivery, the ones at the Metro stops and Waterside, you're going to see the larger users increase their expression of interest."
The county's data center market remains red-hot, but the strength of that sector is starting to encroach on some sites that had previously been tapped for office and other uses. The 280-acre site once envisioned as the 14M SF International City could be turned into a data center campus.
The site's management group decided to market the property for sale in early 2017 and was reportedly under contract to sell it to data center developer QTS Realty Trust. H. Chris Antigone, who was expelled from the management group in 2016 but retains partial ownership of the site, said that deal fell through, but the managers are now in talks with another data center user.
The site, located next to the future Loudoun Gateway Silver Line station, would be ideal for mixed-use, Antigone said, but it has not had the proper zoning or enough office demand to move forward. Antigone pointed to the county's ongoing Comprehensive Plan revision, Envision Loudoun, as a process that could help make the site more feasible for mixed-use.
"The county has to make it attractive for users to come there," Antigone said. "If the county had zoned it appropriately things could be different."