Northern Virginia’s Office Market – Overbuilt or Under-Demolished?

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Submarkets for Leasing in Tysons, Chantilly, Reston Are Strongest

Tenants occupied nearly 100 million square feet of office space in Fairfax County by the end of last year, according to the Fairfax County Economic Development Authority 2016 real estate report.

“That is more than the total office space located in Arlington, Loudoun and Prince William counties, and the cities of Alexandria, Fairfax and Falls Church combined,” the report noted.

With a total inventory of nearly 120 million square feet of office space, Fairfax County ranks as the second largest suburban office market in the United States, behind Orange County, California, which is nearly twice as large with three times the population.

Office leasing activity in Fairfax County during 2016 amounted to nearly 11 million square feet, the highest since 2013, reflecting the strength of the Tysons Corner, Reston and Chantilly submarkets.

Consequently, county vacancy rates dropped from 17.4 percent in July of last year, to 16.8 percent by the end of 2016. Nevertheless, nearly 20 million square feet of office space remained available on the market in Fairfax County heading into 2017.

Just as economists are noting that Northern Virginia’s economic growth is slipping, developers have renewed construction activity in 2017. While current vacancy rates held steady during the first six months of 2017, they are likely to increase as the new construction comes on line, putting pressure on landlords’ anticipated lease rates.
“With a total inventory of nearly 120 million square feet of office space, Fairfax County ranks as the second largest suburban office market in the United States.”
Higher vacancy rates can be a benefit for real estate agents representing potential tenants, however, making it easier to find desirable offices in quality locations. Past periods of low vacancy rates, for instance during the 1980s when rates hovered in the 5 percent range, caused major new tenants such as AOL to look elsewhere for offices when they were not able to find appropriate space in Fairfax County.

A new study on the Washington Region’s Competitive Advantages by local economist Dr. Stephen Fuller, head of the Stephen Fuller Institute at George Mason University, concludes, “The Washington region’s economy has slowed its pace of growth and experienced a less-favorable mix of job growth, and income growth leading to a net negative domestic migration rate.

“The ranking of the region for domestic and international commercial real estate investment has significantly declined,” Fuller noted.

Despite Fuller’s caution, there are currently 52 million square feet of new office space under construction in Fairfax County, making it the 15th most active market in the nation for office construction.
Even though 58 percent of new office space is already leased or will be occupied by the new building’s owners, these moves into new offices will leave vacancies in the owners’ current offices.

Commenting on the ongoing construction, Fuller explained, “The office market is clearly overbuilt, especially considering the slow growth in the region’s economy for the past six years, and the slow growth of office-using jobs.
“Technologies such as telecommuting are reducing the demand for office space, and will continue to do so going forward,” Fuller added.

With new construction seemingly outstripping current demand, Realtors® may question whether the county’s office market is becoming overbuilt, or is it more accurately under-demolished?
The answer is a little bit of both.

According to the Fairfax County report, about 62 percent of the county’s current office inventory is more than 20 years old, much of it built during the building boom of the 1980s. Unfortunately much of the older inventory is spread across the county, reflecting the business and transportation patterns of that era, rather than the current hotspots along Metro corridors.
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Fairfax County reports that less than 2.5 million square feet of older office space is scheduled to be demolished throughout the county in the next several years, although renewed construction at Tysons Corner is seeing multi-story mixed-use projects replacing car dealerships, older hotels and one-story retail shops.

Summarizing a Washington Post’s weekend Real Estate section article on June 23, 2017, Roger K. Lewis, professor emeritus of architecture at the University of Maryland, pointed out that demolition may be justified for any of these reasons:
1.    Functional Obsolescence – a building, because of its configuration or location, no longer meets the needs of the owners or tenants.

2.    Technical Obsolescence – the building’s mechanical or construction materials have deteriorated and it is not affordable to maintain or replace them.

3.    Site Underdevelopment – the building is undersized or substantially less than current zoning might allow.

4.    Renovation Unfeasibility –it is too expensive to rehabilitate or renovate an existing building and is more cost effective to replace it with new construction.

Nevertheless, saving buildings that are historically significant or that preserve the historical architectural integrity of a community may prolong the life of some buildings, Lewis noted. Certain buildings may also be cost effective to rehabilitate or repurpose, rather than demolish.

Many of the older buildings are also paid off by their owners and can absorb lower rents and still be profitable and extend their useful lives.

As commercial development reaches older, now secondary markets, Realtors® familiar with seeing houses in those areas being demolished and replaced by more modern and valuable stock, may increasingly see commercial buildings undergo similar changes.
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