This may be the worst time in the past 25 years to own an office building in Northern Virginia. At least one with space to lease.
After mostly uninhibited growth since the early 1980s — a run that produced some of America’s wealthiest counties — there are red flags popping up from Arlington all the way to Stafford County.
Consider: More than one-third of all the office space along Interstate 395 is empty. Thirteen entire buildings sit completely empty along Route 28. In Rosslyn, the biggest building in the region hasn’t found a single taker. Experts say the area is suffering from the same flat leasing environment as the District and suburban Maryland, but with some other heavy factors unique to the commonwealth piling on.
Defense cuts — beginning with the Pentagon’s Base Realignment and Closure Commission and continuing with sequestration — have led to drastic space reductions and spending cutbacks. Contractors have been forced to cut their staffs.
Worse, there is a surplus of buildings in car-centric locations so disliked by millennials that some wouldn’t be caught dead taking jobs there. Five years after the recession, the paradigm has shifted so swiftly that some of the aging suburban office parks may have to just be torn down.
“It is becoming apparent that some older buildings may never lease again,” said Nate Edwards, director of research at the real estate services firm Cassidy Turley.
There are reasons for optimism, among them the Silver Line, the possible need for more defense spending and some burgeoning tech hubs. But tell that to one of the leasing agents trying to land a deal — and don’t expect a smile in return.
Numbers tell a story
According to real estate data firm CoStar Group, there are 40 office buildings in Northern Virginia that are either completely empty or less than 1 percent occupied.
One-third of the buildings are along Route 28, a road running southwest from Interstate 66 past Washington Dulles International Airport that features some of the area’s most frequent congestion and brutal commutes.
In the past, landlords in outer-lying areas such as Route 28 have relied heavily on government contractors, but these are exactly the kind of locations that companies have been looking to close amid spending cuts. Some tenants are leaving space even though there is still rent to pay.
“In a contractor-dominant market, spending cuts have a ripple effect,” said Scott Homa, vice president for research at JLL. “You don’t need to look very far along the Toll Road or Route 28 to find cases of prime contractors just handing back the keys to leased space and consolidating their operations elsewhere.”
In turn, publicly traded real estate companies such as First Potomac Realty Trust are aggressively moving away from outer areas like Route 28.
The most disconcerting statistic, Homa said, may be Northern Virginia’s absorption — the rate at which rentable space is filled or vacated. In the past 25 years, Northern Virginia has had only three years when more space was vacated than leased, meaning it had negative absorption for the year. It has now had negative absorption more than three years running, unlike other competing markets.
Some of the oldest buildings in congested locations may have to be torn down to maximize the value of the land they are on, according to Edwards. He said more than 60 percent of offices in Northern Virginia is more than 20 years old.
“We are already seeing the ramifications of this as office buildings across the market are being torn down or retrofitted to make way for residential,” he said.
But it isn’t all older buildings in the exurbs that are suffering. Seven of the 40 empty buildings were built or underwent major renovations in the past decade. In Tysons, many of the moves to buildings near the newly opened Silver Line have been from older buildings nearby, often for less space. And some of the highest vacancy rates are in what has become a favorite of developers and investors for a decade: Arlington.
Looking to reinvent neighborhoods
Aside from Sen. Kirsten Gillibrand (D-N.Y.) referring to it as “soulless,” Arlington has been considered a model suburb by developers in recent years, as it won a series of awards for its planning efforts that led investors to bet big on new office buildings there.
Arlington has Metro stations, highway access, an increasing number of restaurants and highly rated schools. What company wouldn’t want to locate there?
But with the region undergoing such a dramatic move back to urban areas, sometimes even neighborhoods such as the Rosslyn-Ballston corridor feel too far off the beaten path. Touted for its lively neighborhoods around Metro’s Orange Line, the area’s office market has been in near free fall recently. Between 22 and 23 percent of all the office space in Arlington County — more than 8 million square feet — is vacant. That is nearly triple the rate in 2010.
Vacancy in Rosslyn is even higher — 29.7 percent, according to Cassidy Turley. The county’s largest building, at 1812 N. Moore in Rosslyn, is completely empty 10 months after completion. Government agencies, including the National Science Foundation and the U.S. Fish & Wildlife Services, are departing for less pricey Northern Virginia digs.
In the short term, Christina Winn, director of business investment for Arlington Economic Development, is battling to keep the companies she has. Among them is Opower, a software company that has become the darling of the county’s tech sector — even landing a visit from President Obama — but which is considering a move to the District to better recruit talent.
But in the long-term, Winn said she is thinking about how to reinvent neighborhoods to the point where high-end buildings such as 1812 N. Moore can get the higher rents they’ve been seeking.
“The vacancy is obviously not where we want it to be,” Winn said recently. “But it creates a really clear and interesting opportunity to shape where Arlington wants to be in 30 years.”
That’s certainly the hope in Crystal City, where vacancy is 26.7 percent — and there is a long way to go to recover from heavy losses in the most recent round of base closures and realignments.
Vornado Realty Trust, by far the neighborhood’s biggest property owner, is making a long-term play to overhaul the area as a hub for tech companies. But there are still buildings to lease — 21 of them. Steven Roth, the company’s chairman and chief executive, laid out the situation on an investors’ call in August.
“Basically, we have a fair amount of empty space in the Washington marketplace,” Roth said. “Our competitors or brethren or whatever you want to call the rest of the marketplace also has empty space. We — from a policy point of view, we will be competitive, okay? We will not let our competitors take away our tenants, and we will fight for each piece of business.”
Follow Jonathan O’Connell on Twitter: @oconnellpostbiz