Checking In on NoVA Office Market
Buoyed by three large tech-firm leases in the Reston submarket, Northern Virginia recorded 515,000 square feet of positive net absorption in the second quarter of 2020, bringing year-to-date occupancy gains to 770,000 square feet.
But the Northern Virginia office market overall is facing the same challenges that the rest of the country faces.
Wei Xie, CBRE (CBRE)’s associate director, who manages research operations for the Washington, D.C., Northern Virginia, Suburban Maryland and Baltimore markets, noted in terms of lease executions, the NOVA market observed some slowdown as it decreased by 12 percent from its 5-year-average volume during the second quarter.
Additionally, leasing volume totaled 2.2 million square feet, a decline of 16 percent from last quarter.
“However, given the reduced tours, and the fact that Q2 activity was mostly driven by deals already well underway pre-COVID, we expect a further decline in gross leasing volume in the coming months before it rebounds,” she told Commercial Observer.
Prior to the pandemic, the market was trending up, with vacancy consistently tapering down and consecutive quarters of demand growth. Xie said that indicates a likely strong recovery for the market once the broad economy rebounds from the public health crisis.
“The immediate impact will be manifested through tenants taking a wait-and-see approach, thus leading to reduced leasing activity, as well as a potential pause on expansions and new market entries, as these decisions will likely be halted until broader recoveries are underway,” she said.
Still, the public health crisis remains the main challenge, in terms of occupiers returning to work and how workspace designs and operations will need to be adjusted.
“We expect near-term availability to increase in the coming months, both in terms of sublease, as well as prime space,” Xie said. “We are closely monitoring pricing dynamics for rents and concessions, both through data points and market sentiments. The second half of the year will give us better insights as to how pricing will reset.”
Devon Munos, Savills’ research manager for the Washington D.C., region, noted the Northern Virginia office market has managed to sustain itself during the government-mandated shutdown, outpacing D.C.’s second-quarter office demand.
“Leasing activity was buoyed by the government, government contractors and the technology sector, but the worst of the crisis’ effects may still be ahead,” she said. “After three years of gradually increasing rents and a tightening of availability in Northern Virginia, the pandemic has put a stopper on the slowly changing market fundamentals, keeping them firmly within the tenant’s favor.”
Based on second-quarter lease executions, CBRE has not observed a significant or definitive swing in concession offerings, but activity in Q3 and throughout the remainder of the year will provide a better indication in this realm.
As for specific NOVA neighborhoods, Xie expects products that were competitively positioned pre-COVID to remain more favorably situated, in terms of quality and efficiency of the space, as well as accessible and amenitized locations.
“The availability of parking spaces will likely rise in prominence, as commuter safety via mass transit has emerged as a concern,” she said. “The sophistication of building HVAC and air filtration has also become an area of attention, along with occupant health and safety.”
Michael Hartnett, senior research director for JLL (JLL)’s Mid-Atlantic division, believes the Dulles Toll Road in Northern Virginia offers the best prospects for leasing activity and potential growth.
“The concentration of government contractors provides demand certainty, given that the pipeline of contract awards and RFPs has not slowed down and is only expected to ramp up as we move toward Q4 of the current fiscal year,” he said. “We will see the Toll Road fare best in the short term due to the sustained government contracting awards pipeline in sectors like cloud computing and cybersecurity.”
He also sees National Landing and Tysons as holding strong.
“HQ2 is in the early stages of hiring, just eclipsing the 1,000 employee mark, and is in the early stages of building out its campus, with phase one (2.1 million square feet) on track to deliver in 2023,” Hartnett said. “Tysons is seeing the strongest uptick in sublet availability thus far, led by Gannett putting 90,000 square feet of sublet space on the market this past week. Spec construction is underway in Tysons (1750 Tysons Central), but new starts will be rare across the market in the short-term.”
Looking ahead, CBRE expects market fundamentals to soften further in the remainder of 2020 before a recovery in 2021.
“Given the composition of our local economy with a heavy concentration on professional services jobs and knowledge workers, our employment market has held notably steadier compared to the U.S. overall, which fares well for the office real estate market,” Xie said. “Our strong and highly educated workforce remains the backbone for the broad economic recovery, as well as the rebound of office demand. The tech sector has been a bright spot for the Northern Virginia market—which sustained through the second quarter—and we expect this to continue to serve us well as we head into recovery.”