The Chantilly and Centreville neighborhoods along Route 28, 10 miles west of Tysons Corner, began developing rapidly in the mid-1980s, with their office markets growing to more than 13 million square feet today. Access to Interstate 66, Route 50, the Dulles Toll Road, Route 28 and the Fairfax County Parkway connects the area to the wider Fairfax market. Accessibility to employment and a wide range of suburban amenities have driven apartment growth as well.
High-end, low-rise apartments in Centreville are taking off. Since the third quarter of 2011, effective rents have grown by 8.5 percent — the strongest showing by any neighborhood in Virginia.
Year-over-year rent concessions also declined, from 2.4 to 1.3 percent of face rents. This improvement was driven by a decline in vacancy rates during the year from 3.6 to 2.3 percent. Despite these strong current conditions, there are currently no new projects in the 36-month development pipeline. This lack of new development may position the area for stronger performance compared to those experiencing a large slate of new projects.
Tenants vacated 67,000 more square feet in Chantilly than they occupied during the third quarter, compared to flat leasing in the second quarter. The overall office vacancy (including sublet space) rate was 14.5 percent at the end of the third quarter of 2012, up from 13.9 percent the quarter prior. The overall vacancy rate for high-end (or Class A) space was 13.1 percent at the end of the third quarter of 2012, up from 12.6 percent in the prior quarter.
No new offices have been completed along the southern Route 28 corridor thus far in 2012, but there are two projects under construction or renovation in the Chantilly area. One is a 104,000-square-foot project at 14399 Penrose Pl., started before leases were secured. The other is the fully pre-leased 4801 Stonecroft Blvd. We expect limited groundbreakings for speculative projects during the remainder of 2012 and into 2013, as the vacancy rate remains elevated and demand is sluggish.
Average effective office rent in the Chantilly area decreased to $17.90 per square foot in the third quarter from $18.50 at the end of 2011. Effective rents have declined 3.2 percent thus far in 2012, compared to declining 1.1 percent during all of 2011. With limited demand, concession packages remain generous enough to put downward pressure on effective rents. We expect concession packages to remain elevated into 2013, and rents to remain under pressure in the Route 28 South area in the near-term.
There were three notable office building sales in the area from January through September 2012. Most recently, Corporate Office Properties Trust purchased 13857 McLearen Rd. for $49.6 million ($244 per square foot).
On balance, the Route 28 South-Chantilly office market experienced flat conditions during 2012. Given these conditions, effective rents continued to slide this year as vacancy remained elevated. We expect leasing to remain lackluster into 2013, as tenants remain hesitant to lease space until economic conditions improve. However, the vacancy rate should remain relatively stable due to a limited construction pipeline. Given this, the area should be able to work off some of its existing inventory and will emerge better positioned for continued long-term growth.
Grant Montgomery is senior vice president at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.