A Strong End to a Strong 2017 

During the fourth quarter, demand in the Northern Virginia office market surged after a third quarter lull, growing 410,722 square feet. This brought net absorption to 1.9 million square feet for 2017. New supply continued to deliver, prompting opportunities for tenants in most block sizes. While construction was at a high of 5.5 million square feet in 2016, it was down to 2.8 million at the end of 2017. Developers are expected to continue to break ground on new projects, creating even more Class A opportunities making it harder for Class B and C product to compete for tenants. 

Economy 

During the fourth quarter of 2017, the Northern Virginia economy grew at an annualized rate of 4.16 percent, the highest level since 2005. This compared with 3.83 percent in the third quarter, 3.31 percent in the second and 2.73 percent in first. As a result, the gross regional product in Northern Virginia increased by 3.51 percent for the year. Even as economic growth posted a recent high, office-using employment grew at a repressed pace, adding only 380 jobs. While at a lower pace then would be expected, it was enough to replace the jobs lost during the third quarter. In total, 6,330 new office-using jobs were created in 2017. 

Federal spending, via contract awards, underpins the Northern Virginia economy. During the first quarter of fiscal year 2018, $2.4 billion in contract awards were received by companies in Northern Virginia. This spending amounted to 7.1 percent of all contract awards in the nation, and 40.4 percent of the awards in the Washington, DC office market.

Demand


Demand for office space in Northern Virginia increased towards the end of the year with 410,722 square feet of space taken off the market during the fourth quarter of 2017. This brought annual net absorption to 1.9 million square feet. Most of the quarter’s new demand was for Class A product, in which 352,168 square feet of new absorption occurred. This compared to 182,001 square feet absorbed during the third quarter. This brought the total for the year to 2.1 million square feet for Class A product. Demand for Class B product also increased with 151,626 square feet of space taken off the market. This is in sharp contrast from last quarter when demand for Class B fell by 426,626 square feet of space. While net absorption for Class A and B space grew, demand for Class C decreased for the first time in five quarters, as 93,072 square feet of space was returned. This lowered total new demand for Class C product for 2017 to 142,908 square feet. 


Supply

Of the 2.8 million square feet of space under construction at the end of 2017, 66.1 percent was preleased. Capital One continued to put the finishing touches on t he outside of t heir building which is expected to deliver in Tysons Corner during the second half of 2018. This will add nearly a million square feet to the market. Also, the Peterson Companies is expected to deliver the 480,000-square-foot building at 13900 Air and Space Museum Parkway in the Route 28 Corridor South during the first half 2018. This building will be occupied entirely by the Federal Government.
During the quarter, three buildings delivered a total of 936,879 square feet of office space. Of these buildings, only the Navy Federal Credit Union’s build-to-suit expansion at 1041 Electric Avenue was fully committed upon delivery. The 149,098-square-foot building at 4091 Monument Parkway in the Fairfax Center submarket delivered 78.5 percent leased to Apple Federal Credit Union. The financial institution occupied three floors of the building, relocating out of 4029 Ridge Top Road. Finally, CEB Tower was the largest project to deliver. The 552,781-square-foot building located at 1201 Wilson Boulevard in the Rosslyn submarket delivered 58.1 percent leased. CEB was the anchor tenant and they relocated from within Rosslyn, consolidating their headquarters’ operations into the new trophy building. 

Vacancy

Despite new demand for office space in Northern Virginia, it was not enough to offset the impact of the new deliveries on vacancy rates. During the quarter, the overall vacancy rate increased 11 basis points to end the year at 17.9 percent. The direct vacancy remained flat during the quarter at 17.0 percent. Vacancy rose in both Class A and C space while it decreased in Class B product. The Class A vacancy rate increased from 18.3 percent to 18.8 percent during the quarter due to the delivery of new office product. With new demand for Class B space and the lack of new deliveries added to the market, the Class B vacancy rate fell from 19.4 percent to 19.0 percent during the time period. Meanwhile, Class C vacancy increased from 11.9 percent to 12.1 percent due to lower demand. 

Rental Rates

During the quarter, the direct average asking rate across Northern Virginia increased from $31.98 to $32.27 per square foot. This marked a $0.51 increase when compared to the same time last year when the rental rate was $31.76 per square foot. Asking rates increased across all three classes of office product during the quarter. The most significant jump occurred in Class A space, where it rose from $36.25 to $36.55 per square foot. This compared to the same time last year when the rate stood at $35.79 per square foot. The asking rates for Class B and C product increased from $29.60 to $29.63 and from $26.52 to $26.67, respectively, during the fourth quarter. Rent expectations in both of these product types were higher from the same period in 2016, when they were $29.56 and $26.31 per square foot. 


Outlook

Lack of funds being released by the Federal Government caused economists to lower their office-using employment growth projections for Northern Virginia. At the end of the third quarter of 2017, the market’s economy was projected to add 17,920 new office-using jobs in 2018. The growth projections were decreased to 12,630 jobs by the end of the fourth quarter. While lower than previously anticipated, the job growth projections are still robust and should generate over a million square feet of new demand in the upcoming year. Even with a million square feet of new demand projected, over 2.1 million square feet of new office product will deliver in 2018. While the majority of this space has been preleased, vacancy rates will move marginally higher as the pace of new supply exceeds that of demand.