Tysons Looks To Draw New Office Anchors To Kick-Start Developments, Bring Down Vacancy
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The developer behind Scotts Run had courted Amazon and Apple in hopes of landing an anchor for its planned 8M SF Tysons development, but neither of those panned out. Cityline Partners now continues to search for a tenant to kick off construction on the project's office component.
Cityline is one of several developers with major Tysons office projects waiting in the wings, hoping to sign pre-leases before breaking ground. One under-construction project, The Boro, has achieved success by luring tenants from older Tysons office buildings, but top developers say they hope to land more large tenants from outside the market to jump-start projects and bring down the vacancy rate.
The Tysons office market has a total inventory of roughly 23M SF, according to CBRE, larger than many U.S. cities. With an 81.4% occupancy rate, the market has over 4M SF of vacant office space. Last year, it recorded a total of 342K SF of positive absorption, according to CBRE, making it one of the best performing submarkets in Northern Virginia.
"There is some old product that will continue to drag up the vacancy, but the underlying growth is definitely there," CBRE Research Manager Wei Xie said.
Cityline Partners Managing Director Donna Shafer, who will speak Jan. 24 at Bisnow's Tysons State of the Market event, said despite losing out on Amazon and Apple, there are still other opportunities to land large corporate users. She said there are two large users quietly looking at the market that could take multiple buildings, and about three others on the market large enough to kick off a single building. She said the demand includes a combination of users looking to relocate from within Northern Virginia and from outside the market.
"I think there will be continued demand from new entrants that will bring those buildings that have come through the approval process, bring them online," Shafer said. "We're all subject to the whims of the market — and of course the market is going to slow down at some point, I don't think we're immune to that — but I do feel that we are well-positioned to continue to take advantage of opportunities."
Scotts Run has a hotel with boutique brand Archer that Shafer hopes will break ground this spring and a multifamily component from Skanska that is moving through the approval process. But Shafer said they office component will not break ground until it has leases signed.
One Tysons developer who has not completely ruled out speculative office development is Foulger-Pratt. The developer secured an equity partner, USAA Real Estate, in September for its $200M Tysons Central that will bring nearly 400K SF of office space to the Greensboro Metro station. Foulger-Pratt Chairman Bryant Foulger said the firm has not made a final decision on whether to break ground speculatively or wait for a lease.
"Certainly going spec is a nerve-rattling experience," Foulger said. "But at the same time, we've seen the projects that start are the projects that get leased and we're encouraged by the number of tenants in the market and the size of those tenants."
Foulger expects his project to benefit from its location in between the Greensboro Metro station and The Boro, a large mixed-use development that has achieved significant leasing success since since starting construction on its office tower. Meridian Group and Rockefeller Group in October landed KPMG to lease 168K SF at the 20-story Boro Tower, bringing it over 60% pre-leased, following earlier leases with law firm Hogan Lovells and media company Tegna.
All three of those tenants are moving to The Boro from older buildings in the Tysons area, a trend that has helped Boro Tower lease up and could benefit other office projects planned along Tysons' Metro stations.
"Tenants are looking for all the advantages in workplace solutions that new construction can deliver," Rockefeller Group Mid-Atlantic Regional Development Officer Hilary Allard Goldfarb said. "That includes things like transit-served locations that are highly amenitized with both indoor and outdoor experiences."
But relocations from within Tysons leave older buildings in the market without tenants and don't help bring down the vacancy rate. Goldfarb said there are tenants looking at Boro Tower from other parts of Northern Virginia outside the market that could lease some of its remaining 135K SF.
"I think the vitality of a market to ensure the supply-demand balance requires net new demand to complement new supply," Goldfarb said. "I don't think the strength of the market requires it in the short term, but the long-term strength of the market would benefit from it."
Multiple developments are planned near Tysons' Spring Hill Metro station that also hope to benefit from new entrants to the market.
Clemente Development is going through the approval process for a 3M SF development near the Spring Hill station that would include the region's tallest tower, a 600-foot-tall, 921K SF office building. Georgelas Group has a large-scale project in the works nearby that includes plans for 5M SF of office space. Another Spring Hill development site that is approved for over 2M SF of office is being marketed for sale by Newmark Knight Frank.
Tysons signed a number of new leases last year and experienced strong overall absorption, potentially signaling growing momentum that could bode well for new developments going forward.
Software company Appian in April signed a 200K SF lease at Valo Park, moving from Reston Town Center. Valo Park, the former Gannett headquarters now owned by Tamares, also landed the Air Line Pilots Association in October.
Coworking provider Industrious late last year signed a 27K SF lease at 1660 International Drive in Tysons. That adds to the existing coworking sector in Tysons that includes a MakeOffices and a 93K SF WeWork, which opened at Lerner's 1775 Tysons Blvd in 2017.
Lerner in August signed a 23K SF lease at 1600 Tysons Blvd. with Arconic, which is moving its headquarters from New York.
JLL Managing Director Brian Tucker, who represented Lerner in the WeWork and Arconic leases, expects Tysons' office market will benefit from increased defense contractor budgets and growing activity from technology companies in the coming years.
"I do believe we're going to see increased demand," Tucker said. "We're not going gangbusters, but there is a consistent and steady flow of activity in Tysons."
Tucker said the vacancy rate in Tysons is largely elevated due to older, obsolete buildings that do not have proximity to transit or retail amenities that tenants desire, whereas the new Metro-adjacent developments have experienced success.
"It's a tale of two cities," Tucker said. "When people deliver state-of-the-art buildings, they lease. Those who are bullish enough to put their foot in the water to build a new building have been rewarded handsomely."
Schafer, Goldfarb, Foulger and Tucker will be among the speakers Jan. 24 at Bisnow's Tysons State of the Market, to be held at 1600 Tysons Blvd.