Dulles Corridor office building owners struggle with high vacancy rates
Ask Brad Cole what he is doing to attract tenants to the empty Dulles Corridor office building that he is marketing and he will tell you: "Praying. Going to church on Sunday."
Cole represents Walker and Co. in its efforts to lease 1 Dulles Corridor, a 216,000-square-foot office at 10740 Parkridge Blvd. in Reston that is, by all accounts, a very nice new building. Built in 2008, it is visible from the Dulles Toll Road and less than 10 miles from both Washington Dulles International Airport and Reagan National Airport. Cole said Northrop Grumman and Hilton Worldwide, two Fortune 500 companies, both considered 1 Dulles Corridor for their new headquarters before choosing other Fairfax County sites.
Unlike other buildings in the campus, which have tenants such as Qwest Communications and the law firm Jackson Lewis, Walker and Co. hasn't found takers for the new building at the right price. It used to be, "Building delivered. Building was leased," said Cole, who lives in Reston. "This time, building was delivered and two years later, building is not leased."
"It just amazes me that we're not doing a little better because of what a wonderful place it is to live and work," he said.
Despite rapid growth of federal government facilities, intense interest from foreign real estate investors, the presence of the country's largest federal construction project as well as one of its largest public transit projects, the Washington real estate market still has soft spots and one of them is the Dulles Corridor.
Walker and Co.'s building is just one of the newest and largest examples of "see-through" buildings, meaning essentially empty, in the area.
According to CoStar Group, more than 20 buildings in the Dulles Corridor, including Reston, Herndon, Sterling and Chantilly, are essentially empty (listing a vacancy rate that runs 98 percent or higher). In all, the properties total about 2 million square feet. Some of them are older, built in the 1980s and in need of upgrades, but others -- like 1 Dulles Corridor -- are the result of office builders who looked at the expansive growth in tech and defense contracting during the boom years and built speculative buildings that they figured they could lease later.
Now Dulles Corridor vacancies are one of the factors keeping vacancy rates in the region up. By the midway point of 2010, the Washington office market had a vacancy rate of 12.8 percent, fourth lowest in the nation but up from the year before, according to Delta Associates, a research firm. Comparatively, vacancy rates in Reston and Herndon ranged between 15 and 18 percent in the second quarter.
The outlier in the corridor is Reston Town Center, one of the only areas west of Tysons Corner that provides urban living, working and shopping opportunities that don't require driving. Cole said he would be happy to attract a tenant with an expiring lease from there but said a building on the Dulles Toll Road "doesn't appeal to people in Reston Town Center, where you can walk across the street and get your girlfriend something at Victoria's Secret or go get your iPod."
The empty buildings also have a dragging effect on the rents that landlords throughout the region can demand because even as they remain empty, the empty properties give tenants with expiring leases powerful leverage to squeeze lower rents and incentive packages for extensions from their current landlords. Paul Schweitzer, who represents office tenants at the brokerage firm Studley, said clients are being offered rent abatements, help with moving costs and other incentives.
Landlords that are not in Reston Town Center or on the Toll Road, he said, are sometimes offering space for less than $25 per square foot, even though asking rents average $29 in Reston and Herndon and $28 in the area along Route 28 South, according to CB Richard Ellis.
"If you're not being aggressive as a landlord right now, you're looking to sit on the sideline right now or you're not going to see very much activity," he said.