Amenities Attract Major Tenants to Town Center

Reston led leasing activity for the quarter, landing preleases by both Fannie Mae and Leidos. Fannie Mae committed to Reston Gateway for 850,000 square feet, while Leidos preleased all of 1750 Presidents Street. Fannie Mae put it’s three Northern Virginia office buildings on the market in anticipation of their move to the more amenitized space in Reston. Leidos’ deal also confirms their commitment to provide amenities for their employees by staying at Reston Town Center and giving them access to the new Metro station. While Leidos currently have a presence in the area, the move will be to newer space, showing their willingness to pay premium rents to maintain an excellent location. 

While most new construction has been developed around access to amenities and transit, General Dynanmic has opted for a greenfield location away from the center of Reston amenity base.

 

Economy

During the first quarter of 2018, Northern Virginia’s economy grew by 0.94 percent, an annualized rate of 3.83 percent. This is the most since the recovery from the initial Sequester spending cuts. While first quarter contract awards are still being processed, the data at the end of March shows companies in Northern Virginia receiving $7.2 billion in awards. This puts the market on pace to exceed 2017 levels and is well above the pace set during the worst of Sequestration (2012-2015) when companies were awarded an average $5.1 billion per quarter.

 

Although the total workforce grew by 4,010 participants, the Metro

area’s unemployment rate fell seven basis points to 3.56 percent.

At full employment, competition for talent remained strong, making

office space and the associated amenities both within and surrounding

buildings a potential differentiator in attracting and retaining employees. Conditions are even tighter in Northern Virginia. At the end of the first quarter, unemployment ended at 2.84 percent.

 

The office-using sectors of the economy created 6,580 new jobs during the first quarter, well above the pace set in 2017. The largest job growth occurred in the professional and business services industries. This important sector added 5,120 new positions, with another 1,040 created by local and state governments. Both advocacy groups and the Federal Government shed jobs, reducing payrolls by 70 and 190 positions, respectively. 

 

Demand 

On the back of an expanding economy, especially from the renewed inflow of contracting dollars, there was more new demand for office space during the quarter in Northern Virginia since 2007. With a number of large tenants moving into new space, net absorption totaled 1.0 million square feet. 

All three classes of product were recipients of new demand during the quarter. The largest increase occurred in Class A space with 918,076 square feet of net absorption. This compares to 385,255 square feet absorbed during the fourth quarter of 2017. Demand for Class B product also increased, with 99,295 square feet taken off the market. This is a slight decline from last quarter when demand for this quality of space increased by 151,626 square feet.

While net absorption for Class A and B product increased significantly, demand for Class C remained relatively flat with just 19,096 square feet of net absorption. This compares to the previous quarter when 93,072 square feet of space returned to the market.

 

Supply 

No new space delivered during the first quarter of 2018, marking the first quarter since 2010 when no buildings delivered in Northern Virginia. At the end of the quarter, 2.8 million square feet of space remained under construction, of which 73.4 percent was preleased. Capital One continued finalizing the facade of their building in Tysons Corner, which is expected to deliver during the second half of 2018 with the entire 975,000-square-foot building being occupied by the banking institution. 

Peterson Companies will deliver the 480,000-square-foot building at 13900 Air and Space Museum Parkway in the Route 28 Corridor South submarket during the second half of the year. The Federal Government leased the entirety of the building.

While no buildings broke ground during the quarter, multiple projects are slated to commence in 2018. Construction of 4040 Wilson Boulevard, located in the R-B Corridor, is expected to start during the second quarter. The building, developed by the Shooshan Company, will have 240,000 square feet of office and will be anchored by AvalonBay. Leidos signed a lease at 1750 Presidents Street in Reston and signed a lease to occupy the entire building. It is expected to break ground later this year. Fannie Mae’s lease of 850,000 square feet at Reston Gateway will prompt additional construction.

 

Vacancy 

With a lack of deliveries and continued demand in Northern Virginia, the overall vacancy rate dropped 58 basis points to end the quarter at 17.3 percent. Vacancy rates fell across all classes of space decreased. The largest drop occurred in Class A space, where the vacancy rate fell from 18.8 to 17.7 percent during the quarter. The Class B vacancy rate dropped from 19.1 to 18.8 percent during the period, while Class C vacancy fell from 12.2 to 12.1 percent.

 

Rental Rates 

During the quarter, the direct average asking rate increased from $32.27 to $32.43 per square foot. This marked a 42 cent per square foot increase when compared to the same period last year when the rental rate was $32.01 per square foot across Northern Virginia. The combined asking rates rose in 12 of the 29 submarkets.

Class A rental rates were the only to increase out of the product classes. During the quarter, it rose from $36.55 to $37.14 per square foot. This compares to the same time last year when the rate stood at $36.40 per square foot. The asking rates for Class B and C product decreased from $29.63 to $29.54 and from $26.67 to $25.82 per square foot, respectively. 

 

Outlook 

For the remainder of  2018,  office-using jobs are expected to grow as the impact of renewed federal spending creates the need for more employees. As a result, demand is expected to grow at about the same pace as it occurred in 2017. 

Led by the nearly one million square foot Capital One building in Tysons Corner, future deliveries are expected to complete largely leased up for the remainder of 2018. Due to the limited options for high quality space, tenant demand will prompt new construction. These projects are likely to be located in well amenitized areas adjacent to Metro.