Northern Virginia Office Owners Searching For Solutions To Historic Vacancy Rate
As new, mixed-use office towers rise along the new Metro corridor in Fairfax County, some landlords are concerned about another sky-high aspect of the market: office vacancies.
Northern Virginia’s vacancy rate as a whole is at an all-time high, but the problem is particularly acute along the Dulles Toll Road, where the overall vacancy rate is also at an all-time high and reached 22.3% in the first quarter, according to CBRE. Now, owners of Class-B and commodity buildings losing tenants to new construction are increasingly breaking up floors and building out office suites to entice new tenants.
“The commodity space that is leased quickly for us is the space that is broken up into spec suites,” Tim Steffan, Comstock’s executive vice president of asset management, leasing and development, said at Bisnow’s Future of Reston and Herndon event on Thursday. “That's the only way we're seeing activity.”
Boston has found success with big-name tenants in its marquee new development. Fannie Mae and Volkswagen signed for 922K SF at Boston Properties' new Reston Next project, and are due to move in this year.
But the two tenants left behind leases worth a combined 1.2M SF in their former Northern Virginia spaces. Those two moves alone accounted for 57% of total occupancy loss for the quarter and helped push the vacancy rate up 60 basis points, CBRE reported.
The market is still active. Orr said over half of the tenants in the market he’s seen are looking to relocate to a better-quality product, often downsizing in the process. That’s benefited areas like Reston Town Center, largely controlled by Boston Properties, where Orr reports a vacancy rate around 5%.
Another big Reston officeholder, Comstock has also seen strong leasing in its new offices. The firm recently signed Qualtrics International to an 85K SF lease at Reston Station, which is now 94% leased, Steffan said.
Those properties' performance has come at the expense of Class-A buildings in the area, which in Reston and Herndon have a higher vacancy rate, at 24.7%, than Class-B buildings, which are 22% vacant.
“It’s in my recent experience that tenants are looking for free space,” Steffan joked at the Bisnow event. “That may not be different decade to decade, but there was a little pushback, and I think now the tenant reps see that there's less blood in the water than there was a year ago or two years ago.”
But to keep activity going at Comstock's older office buildings, Steffan said the firm has had success breaking large floors into smaller spec suites and leasing them up piecemeal, signing five deals with small office tenants for more than 35K SF in total over the past year.
He said that strategy has proved particularly successful in the Commerce Metro Center portfolio, an older office park opposite the Dulles Toll Road from the newer Reston Station development that Comstock acquired in 2019.
Building out spec suites isn't cheap: Cathy Delcoco, a vice chairman at CBRE, said she has seen construction pricing for spec suites reach $127 per SF.
"They're still going to build them, because they're attracting tenants, but the pricing is just out of sight right now," Delcoco said.
Other improvements, including a tight amenity package, are also still effective in enticing new tenants, Delcoco said. She pointed to JBG Smith's Reston Town Center West project, where the developer invested in a 40K SF retail center and started to see more momentum with new tenants, even at higher rents.
"All of a sudden that project was transformed," Delcoco said. "Everyone can't add 40K SF of retail, but the B product, they need to be innovative and use their imagination and act."
Big retail and experiential tenants are also looking at the submarket, further spurring activity. Craig Dixon, co-founder and co-CEO of sports and entertainment venue St. James, opened a 25K SF club at Reston Town Center on Saturday.
Dixon said that ever since he worked as a lawyer at Cooley's Reston Town Center office, he'd thought of returning to the area when the right product and opportunity presented itself.
"There are a lot of attractive submarkets in this region, but we want to be at the heart of mixed-use development," Dixon said. "As we thought about launching this new product, we couldn't think of a better place to do so than in Reston."
Delcoco said she expects some of the larger obsolete office blocks in Fairfax County to eventually be converted to residential — spec suites can only make up so much ground with the reality of 2022's office market.
County leaders are betting the new office buildings, which have been concentrated in dense, mixed-use developments near Metro, will continue to attract tenants interested in the county’s large labor pool, said Victor Hoskins, president and CEO of the Fairfax County Economic Development Authority.
Hoskins said Reston is better positioned for walkable development than sister markets like Tysons because it was master-planned from its founding with trails, parks and other public spaces in mind.
That will make Reston attractive to modern office tenants interested in a live-work-play environment, the kind no longer just associated with a city but with D.C.’s growing suburbs as well, Hoskins said.
“We have an incredible, incredible group of companies already, and the technology worker is here. What we have to do is a better job of explaining to the client they are here,” Hoskins said. “The bottom line is if you want innovation, you come here.”