Fairfax Sees Demand For New Offices Near Metro, But Older Suburban Properties Are Falling Behind
Office demand at some mixed-use developments in Fairfax County has proved resilient during the pandemic, but older buildings without access to transit and amenities haven't been as attractive to new tenants.
New office buildings in transit-oriented mixed-use developments in Tysons and Reston have generated leasing and investor interest as office tenants court young workers. But as these projects soak up the pandemic-weakened demand for new leases, the older suburban-style office buildings have suffered.
“There is a little bit of an imbalance between Class-B assets and Class-A trophy assets on highly amenitized locations,” Transwestern Executive Vice President Alex Hancock said. “It’s kind of become a bit of a tale of two cities.”
Hancock works on the leasing team for Reston Town Center, which has signed new deals totaling over 140K SF this year. He said he has been optimistic about the growth of the county’s office market overall, despite slow demand in recent quarters.
Northern Virginia experienced 420K SF of negative net absorption last quarter, according to Transwestern's Q3 market report. Most of this occupancy loss came from the Class-B segment, as Class-A demand was roughly flat. The two submarkets with the most occupancy loss were Tysons and Bailey's/Falls Church/Annandale, both in Fairfax County, while the Reston submarket experienced the most positive absorption with 99K SF of gains.
There are indicators the market is gearing up for a strong 2022. Fairfax County Economic Development Authority Executive Vice President Alex Iams said touring in the county is up 50% compared to the same time last year.
Iams said new-to-market tenants are looking at mixed-use developments with access to public transportation. But he said established tenants in suburban office parks have been looking to stay put as they take stock of the long-term impacts of the pandemic.
"We haven't seen an outflow of workers to new areas, and partly it's because of the maturity of our market," Iams said. "There are very well-established companies with very long track records, and the employees have enjoyed the quality of life here. ... I think we are providing a value proposition to that employee, to that talent, to keep them here."
Longtime developers in the region also say that office buildings near Metro stations have seen increased demand in recent months.
Foulger-Pratt Chairman Bryant Foulger said leasing activity is heating up Tysons Central, a 380K SF office project that the developer broke ground on speculatively in December 2019. The project sits steps from the Greensboro Metro station and mixed-use development The Boro.
"We started a few years ago, and leasing was on hold because of the pandemic, but just in the last 90 days we’ve got more interest in the building than we’ve got office space," said Foulger, speaking last week at Bisnow's Redefining the Office of the Future event in D.C.
But roughly a half-mile away from its Tysons Central project, Foulger-Pratt owns an older office building with less access to transit and amenities that hasn't experienced the same demand, he said. Foulger didn't specify at the event which building he was describing, but the firm's website only lists one other office building in Tysons, the 1900 Gallows Road property it acquired in 2019.
“We’ve added amenities, conference space and fitness center and all those things, but it’s not getting anywhere near the attention that this trophy building has gotten,” Foulger said at the event.
Farther along the Dulles Toll Road, Reston Town Center has benefited from the county's talent market combined with retail amenities and transit access.
Iams said leasing deals from the technology sector in Reston have sent a shockwave through the market over the last two years. A 400K SF deal from Microsoft last year and deals from Peraton and Qualtrics this month for 185K SF in Reston all send a strong signal that there is an appetite for dense office development in a suburban market, he said.
The county also is home to 11 Fortune 500 companies, according to Iams. Combine that with contractors, professional services and other white-collar businesses and the county maintains a high “brand loyalty” among its residents: 91% of companies surveyed by the EDA said they either wanted to stay in their current lease or expand their space in Fairfax.
“They want to stay in Fairfax, they want to keep their company in Fairfax or if it’s a piece of their company, they want to keep that in Fairfax too,” Iams said. “There’s almost a fear of missing out.”
Hancock says he and other brokers are looking at new leases like those in Reston Town Center as a bellwether to understand how tenants want to program their space today. He said he is seeing more tenants “pulling out rows and rows of cubicles and turning it into breakout rooms or collaborative spaces.”
Hancock said he doesn’t see a pandemic-related “earthquake” happening in office real estate in Fairfax County, but he does think the nature of office space will be different than it was.
“I don’t think we’re going to see some cataclysmic drop-off in absorption rate,” Hancock said. “I do think that employers are trying to understand their tenants.”
For some out-of-town investors, the talent market in the county alone is enough to drive interest. Jeff Shaw, CEO of Atlanta-based Bridge Commercial Real Estate, said he saw the county’s “war on talent” as a positive indicator for office demand before closing earlier this month on the $106M acquisition of the Willow Oaks Corporate Center in Fairfax.
The pressure that employers are feeling to attract talent away from peers is driving them to invest in heavily amenitized office spaces, Shaw said. His firm is upgrading amenities at the Fairfax office park to accommodate that pressure, he said, and he believes it will pay off as demand continues to rise.
“I'm a big believer in gateway cities. I'm a big believer in downtowns,” Shaw said. “I think that in the last several years, even before Covid, we were seeing a strong interest in companies chasing talent out into the suburbs.”
While the repeated spikes in Covid-19 cases have kept office usage relatively low, Shaw said he is seeing more people come back to work in suburban offices that have nearby residential and retail projects. He also said the remote work shift has the potential to create more leasing demand for suburban markets as companies look to open offices closer to where their employees live.
"Quite honestly, work-from-home has, in many ways, commoditized the workforce in a way where it's made it easier for larger companies to uproot and relocate, whether that's within a state or a city or across the country," Shaw said. "So I think we're going to see a lot of that, which will create opportunities in these suburban markets even more than they have before."
Iams said outside investors have continued to put money into suburban office parks, either to redevelop pre-1990s space or because they are seeing buildings that are 80% to 90% leased.
Iams believes the outlook is improving across the county. He notes the EDA set up a job board for the county that today has roughly 154,000 listings, and Iams is actively pursuing workers from other markets to come fill the many open positions.
“We’re sending out a message to the rest of the country and the rest of the world that you can have a great job and a great life here,” Iams said.