Q&A: Savills’ Devon Munos Discusses Impact of COVID-19 on Northern Virginia Leasing
A new report by Savills reveals that COVID-19 uncertainty will test the Northern Virginia market fundamentals going forward.
Devon Munos, Savills’ research manager for the Washington, D.C., region, told Commercial Observer that the COVID-19 crisis may persuade occupiers to rethink popular densification trends as personal health and social distancing is now top of mind for businesses.
The company’s Q1 market report showed prior to COVID-19, overall asking rent reached $35.11 per square foot, an increase of 12.9 percent. The Q1 figures for the region show that Northern Virginia recorded 2.8 million square feet of leasing activity, well above the five-year average of 2.4 million square feet. The increased demand was the result of government contractors, which accounted for 37.8 percent of activity during Q1. The technology, advertising, media and information (TAMI) sector followed 33.7 percent.
Amazon had the top transaction for the quarter, with the signing of a full-building lease at 2100 Crystal Drive in National Landing.
The report noted that the pandemic threatens to overturn this strong start to leasing in 2020. Deals of this nature may be waning due to the coronavirus crisis, Munos said, and proposed development projects that have yet to secure an anchor tenant and begin construction will likely be put on hold as developers wait for more economic and office market clarity.
Commercial Observer: How would you best characterize the Northern Virginia market in the wake of the coronavirus pandemic?
Devon Munos: Unprecedented. This is a health crisis unlike anything we’ve ever seen before, that has resulted in a region-wide shutdown and disruption to all communities and businesses. I think we are all operating as best we can given the pervasive uncertainty, but first and foremost the focus is and should be on health and safety. This will be felt differently sector by sector (retail clearly different from office) and industry by industry. It is too soon to really know or predict what the impact will be on the other side of the pandemic.
What was the market looking like pre-COVID 19? What leasing numbers did we see?
Prior to any COVID-19 related slowdown, the Northern Virginia office market was starting 2020 on stable footing. In recent years, the market has seen some tightening in availability which allowed for rent growth, but this has been a correction in the market after years of inflated availability and reduced rents due to the effects of BRAC and sequestration from years prior.
In Q1, Savills tracked 2.8 million square feet of leasing activity for the quarter, well above the five-year average. Government contractors and technology sector tenants were particularly active.
How will a decrease in leasing activity impact the market for the foreseeable future?
Current circumstances have forced businesses with upcoming real estate decisions to take a step back as they reevaluate immediate capital, workforce, and real estate needs. No one has clarity on how long this will extend or when and how we may return to physical workplaces. This will likely lead to a decline in leasing activity in the coming quarters until there is a more certain path forward.
The report talks of the underlying strengths of the Northern Virginia office market which should provide some cushion and sustained leasing activity. Can you elaborate on why this market is better than some others around the country?
Yes, one bright spot on the other side of this event will likely be the strength of the region’s core tenant base of government and related sectors, which provides a safeguard relative to other metropolitan regions. In times of crisis, the government and related businesses often become more active, providing resiliency against a volatile economy. However, this has not been tested in a pandemic situation before, so the amount of cushion this will provide is yet to be seen.
How have asking rents changed this quarter and what do you expect to see from rents going forward?
It is too early to see any real change in average asking rents. A re-pricing would be a result of an ongoing lack of demand and declining transaction volume eventually pressuring landlords to reduce their rents. No one knows what the market impact will eventually be and severity will depend on how long the pandemic goes on for and what trajectory it takes. Looking at previous downturn periods, times of uncertainty often create unexpected opportunities for tenants. The Northern Virginia office market is already skewed tenant-favorable, and it is likely that occupiers will see continued favorability with an increase in options and ongoing generous concession offerings over the coming quarters after the crisis has passed.
What sort of opportunities might tenants have if the economic interruption should continue into the fall?
Space returning to market — whether sublease space, space from companies forced to close, vulnerable coworking space — tenants that are in the market in the fall will benefit from an increase in space options and tenant-favorable terms as owners focus on attracting and retaining occupiers.
The report talks of the prospect of some proposed development projects being put on hold. What are the factors that will decide this?
This will depend on the ability for construction to proceed based on a number of factors — safety first, as well as any funding concerns, material availability and cost, labor availability and cost, etc. Also, with a likely slow in demand, owners may be reluctant to move speculative construction forward without tenant(s) already committed to the space.