MARKET REPORT NORTHERN VIRGINIA OFFICE First Quarter 2017 Federal Spending: The Road to Recovery As federal spending growth and the Northern Virginia economy generates new jobs, the office market continued to recover from the downturn created by Sequestration. Not only has demand, as measured by net absorption, been growing over the last three quarters, the pace of growth has been accelerating. While a large amount of space is delivering over the next two years, vacancies should continue to decline and rental rates rise, as long as there isn t another shock to the economy from Capitol Hill. Economics During the first quarter of 2017, the Northern Virginia economy was estimated to have grown by 1.50 percent, and was on track to grow another 1.58 percent by the end of the year. This compares with 1.54 percent during 2016. Recovery in federal spending contributed to this increase. Six months into fiscal year 2017, $9.9 billion worth of contracts have been awarded in Northern Virginia. This puts contract awards on track to exceed fiscal year 2016 s level of $37.4 billion, and may approach to 2012 levels of $42.0 billion. Market Indicators Year-End Projection NET RENTAL As the Northern Virginia economy continued to expand, payrolls have also increased. During the first quarter, 9,375 new jobs were created. Of these 48.9 percent or 4,587 jobs were in office-using sectors of the economy. This puts office-using job growth to end 2017 with roughly 14,000 new jobs. This compares to 12,437 office-using jobs created in 2016. More importantly, the bulk of the office-using jobs created during the first quarter were in private sector industries. Government sectors of the economy have only contributed 439 new jobs to the office-using total as compared to 4,149 jobs coming from the private sector. Because the federal government is still trying to shrink its footprint and local governments are trying to house their employees in governmental buildings, the jobs have had little positive impact on the office market. At the current rate, the private sector, office-using part of the economy, is projected to add another 7,400 new jobs in 2017. While both economic growth and office-using employment growth point towards higher levels of absorption, there is still a lot of volatility in the economy. The primary driver of this volatility is the uncertainty associated with the federal government s ability to pass a budget and communicate spending priorities to the contracting industry. Without this, government contractors remain hesitant to engage in long term real estate decisions unless it is absolutely necessary. Summary Statistics Office Market All Classes Class A Class B & C Vacancy Rate 17.4% 17.3% 17.6% Change from (basis points) Absorption New Construction Under Construction (Million Square Feet) Asking Rents Per Square Foot Per Year -52-107 -8 1,110,537 1,214,599-104,062 379,000 340,000 39,000 5.09 4.81 0.28 Direct Asking Rates $31.89 $36.19 $28.87 Change from +$0.28 +$0.65 -$0.08
Net Absorption (Thousands SF) 1,500 1,000 500 0-500 -1,000 quarter. Construction on multiple projects could commence within the next few quarters, especially for the right size tenant. By the end of 2017, another 2.2 million square feet of space is expected to be added to the market, with a majority delivering in the third quarter when an expected 1.7 million square feet of projects are being completed. Tysons Corner and Woodbridge were the only submarkets with deliveries in the first quarter. The 340,000-square-foot office buildto-suit for MITRE delivered at 7598 Coleshire Drive in Tysons Corner, while the building at 4565 Daisy Reid Avenue, a 39,000-square-foot project, delivered in Woodbridge. Demand Over 1.1 million square feet of space was taken off the market during the first quarter of 2017 in Northern Virginia. This marked the third straight quarter of positive net absorption in Northern Virginia, and the most since the second quarter of 2007, when 1.2 million square feet of space was absorbed. The majority of demand was in Class A where 1.2 million square feet was taken off the market. This compares to 41,435 square feet taken off the market during the previous quarter, and 79,223 square feet of negative absorption during the first quarter of 2016. Class B space was the only sector where demand fell, with 138,613 square feet of space added back to the market. This compares to the fourth quarter of last year when 303,883 square feet was taken off the market. Class C space demand remained flat with 34,551 square feet of absorption, which compares to 145,575 square feet the previous quarter. Tysons, Reston and the R-B Corridor accounted for about 75 percent of this quarter s net absorption in Northern Virginia, totaling 832,268 square feet. Tenants continued to be drawn to these submarkets largely based on their proximity to Metro and access to a robust retail base. Under Construction (Millions SF) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Vacancy The increase in demand for office space led to a drop in overall vacancy rates falling 52 basis points from 18.0 to 17.4 percent during the first quarter. The largest drop in vacancy occurred in Class A space, falling from 18.4 to 17.3 percent. Even though demand for Class B fell this quarter, there was little movement in vacancy rates as three vacant Class B buildings were either demolished for redevelopment or converted to an alternative use. Deliveries 1,400 With all the new construction set to deliver during the remainder of the year, vacancy will continue to decline but at a slower rate than what occurred during the first quarter of 2017. 1,200 (Thousands SF) 1,000 800 600 400 Vacancy Rate 18.50% 18.25% 200 18.00% 0 (%) 17.75% 17.50% Supply Construction activity during the first quarter remained at some of the highest levels in recent history, with 5.1 million square feet currently under construction. No new buildings broke ground during the 17.25% 17.00%
Rental Rates During the first quarter, the direct average asking rate increased from $31.61 to $31.89 per square foot. This compares to the same time last year when it was $31.38 per square foot. The largest increase occurred in Class A space, which rose 65 cents to end the quarter at $36.19 per square foot. In contrast, the combined Class B and C asking rate fell from $28.94 to $28.87 per square foot. This was more than offset by the substantial jump in Class A asking rates. The trend of increasing amenities to attract tenants continued during the first quarter. While amenities such as tenant lounges are seen as necessary to attract tenants, it is unclear how utilized these new spaces/services are by tenants. Even if they are not used, it puts a property owner at a disadvantage when the building does not offer something to stand out from the rest of its competition. This is especially true for buildings that are not Metro accessible or are a little older. Direct Asking Rental Rate $32.00 Outlook Not only did the recovery in the Northern Virginia office market continue, but the pace at which the fundamentals tightened accelerated during the first quarter. Overall demand for Class A space grew based on net absorption numbers to pre-sequestration levels. With an additional 2.2 million square feet expected to be added to the market in 2017, the decrease in vacancy rates should slow down. The hardest hit sector of the office market will be lower quality space or product tucked away in greenfield locations without a substantial demand driver. This will give tenants more options for larger blocks of space at lower price points, but in less desirable locations. In the first quarter, the market looks to have benefited from the perceived pro-business actions from the White House remains to be seen whether these will have a positive effect to the overall economy in the near future. However, demand growth in Northern Virginia is dependent upon Congress s ability to pass legislation. Despite both houses of Congress and the White House controlled by one party, not much work has been accomplished on the Hill in 2017. $31.80 ($/SF) $31.60 $31.40 $31.20 $31.00 FIRST QUARTER 2017 QUICK STATS Class B 40.3% 17.4% Vacancy Rate 1,110,537 Absorption 379,000 New Deliveries Class A 44.9% $31.89 Direct Asking Rate 4,587 Office Jobs Created 5.1 Under Construction (Million Square Feet) Inventory by Class Class C 14.8%
Northern Virginia Office Market Class A MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Carlyle/King St Metro 5,063,447 - - 700,000-10,077-10,077 11.2% $41.18 Eisenhower Ave Corridor 128,000 - - - - - 0.0% n/a I-395 Corridor* 2,674,222 - - - 29,205 29,205 41.4% $31.47 Old Town 745,672 - - 100,000-6,708-6,708 13.7% $30.59 Alexandria City Total 6,826,806 - - 800,000 999 999 19.7% $39.10 ARLINGTON COUNTY/FALLS CHURCH CITY Crystal City/Pentagon City 4,130,646 - - - 58,202 58,202 21.1% $40.10 Falls Church** 85,000 - - - - - 0.0% n/a Rosslyn/Ballston Corridor 14,511,770 - - 894,548 238,832 238,832 19.7% $44.57 Arlington County/Falls Church Total 19,258,705 - - 894,548 312,631 312,631 19.8% $43.16 FAIRFAX COUNTY/FAIRFAX CITY Annandale 200,000 - - - -22,152-22,152 40.6% $31.50 Fairfax/Oakton 4,054,972 - - 149,098 36,488 36,488 22.3% $29.97 Herndon 7,141,205 - - - -62,203-62,203 22.3% $29.98 McLean - - - - - - n/a n/a Merrifield 4,602,284 - - - 30,756 30,756 22.0% $33.21 Reston 10,711,927 - - 368,413 191,285 191,285 9.0% $35.04 Route 28 Corridor South 8,770,397 - - 665,000 173,279 173,279 11.3% $27.83 Springfield/Huntington 2,298,732 - - - -39,314-39,314 36.2% $37.80 Tysons Corner 14,543,400 340,000 340,000 1,555,419 477,127 477,127 12.9% $39.80 Vienna 216,324 - - 235,000 - - 8.3% n/a Fairfax Area Total 53,792,487 340,000 340,000 2,972,930 781,090 781,090 16.0% $34.11 LOUDOUN COUNTY Leesburg/West Loudoun 470,939 - - - 74,062 74,062 11.2% $27.00 Route 28 Corridor North 5,236,983 - - - 49,462 49,462 19.5% $25.09 Route 7 Corridor 1,040,737 - - 71,466-2,311-2,311 16.6% $26.55 Loudoun County Total 6,748,659 - - 71,466 121,213 121,213 18.5% $25.34 PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARK Manassas 73,000 - - - 3,149 3,149 14.5% $23.00 Route 29/I-66 Corridor 550,825 - - 73,500-4,483-4,483 2.8% $26.28 Woodbridge 323,172 - - - - - 30.6% $26.87 Prince William Area Total 946,997 - - 73,500-1,334-1,334 13.2% $26.69 NORTHERN VIRGINIA TOTAL 87,573,654 340,000 340,000 4,812,444 1,214,599 1,214,599 17.3% $36.19 * I-395 is split between Arlington County, Fairfax County and Alexandria City ** Falls Church is split between Fairfax County and Falls Church City
Northern Virginia Office Market Class B & C MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Carlyle/King St Metro 2,661,862 - - - -31,109-31,109 11.0% $35.67 Eisenhower Ave Corridor 608,763 - - - -2,879-2,879 20.6% $24.73 I-395 Corridor* 6,215,955 - - - -1,960-1,960 35.2% $30.13 Old Town 4,954,688 - - - 5,008 5,008 10.9% $30.58 Alexandria City Total 11,443,984 - - - -35,023-35,023 16.9% $31.17 ARLINGTON COUNTY/FALLS CHURCH CITY Crystal City/Pentagon City 8,843,203 - - 242,100-3,317-3,317 17.6% $34.91 Falls Church** 2,194,708 - - - 1,474 1,474 11.5% $22.45 Rosslyn/Ballston Corridor 9,576,877 - - - -46,757-46,757 22.6% $39.50 Arlington County/Falls Church Total 20,280,170 - - 242,100-62,367-62,367 19.2% $36.58 FAIRFAX COUNTY/FAIRFAX CITY Annandale 1,671,540 - - - 14,912 14,912 12.4% $21.91 Fairfax/Oakton 9,376,431 - - - 53,050 53,050 18.3% $23.58 Herndon 4,992,181 - - - -36,592-36,592 17.2% $24.03 McLean 1,558,716 - - - -23,687-23,687 10.7% $31.96 Merrifield 4,100,879 - - - 51,180 51,180 11.6% $26.74 Reston 7,957,358 - - - 19,596 19,596 16.3% $26.85 Route 28 Corridor South 5,457,943 - - - 12,765 12,765 19.5% $23.30 Springfield/Huntington 5,811,913 - - - -52,833-52,833 15.6% $23.56 Tysons Corner 14,450,847 - - - -47,815-47,815 22.7% $29.07 Vienna 1,156,445 - - - 22,691 22,691 3.4% $25.89 Fairfax Area Total 59,866,155 - - - 31,117 31,117 18.9% $26.53 LOUDOUN COUNTY Leesburg/West Loudoun 1,836,700 - - - 41,098 41,098 5.7% $23.16 Route 28 Corridor North 4,349,124 - - 20,000-23,486-23,486 17.3% $21.31 Route 7 Corridor 3,296,564 - - 15,000-7,920-7,920 7.0% $25.06 Loudoun County Total 9,482,388 - - 35,000 9,692 9,692 11.5% $22.14 PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARK Manassas 1,904,309 - - - -3,796-3,796 8.6% $21.89 Route 29/I-66 Corridor 2,035,714 - - - 5,681 5,681 10.4% $18.08 Woodbridge 2,239,279 39,000 39,000 - -49,366-49,366 10.7% $22.01 Prince William Area Total 6,179,302 39,000 39,000 - -47,481-47,481 10.0% $19.90 NORTHERN VIRGINIA TOTAL 107,251,999 39,000 39,000 277,100-104,062-104,062 17.6% $28.87 * I-395 is split between Arlington County, Fairfax County and Alexandria City ** Falls Church is split between Fairfax County and Falls Church City
Northern Virginia Office Market All Classes MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Carlyle/King St Metro 7,725,309 - - 700,000-41,186-41,186 11.2% $39.47 Eisenhower Ave Corridor 736,763 - - - -2,879-2,879 17.0% $24.73 I-395 Corridor* 8,890,177 - - - 27,245 27,245 37.1% $30.37 Old Town 5,700,360 - - 100,000-1,700-1,700 11.2% $30.58 Alexandria City Total 18,270,790 - - 800,000-34,024-34,024 18.0% $33.57 ARLINGTON COUNTY/FALLS CHURCH CITY Crystal City/Pentagon City 12,973,849 - - 242,100 54,885 54,885 18.7% $36.53 Falls Church** 2,279,708 - - - 1,474 1,474 11.0% $22.45 Rosslyn/Ballston Corridor 24,088,647 - - 894,548 192,075 192,075 20.9% $42.43 Arlington County/Falls Church Total 39,538,875 - - 1,136,648 250,264 250,264 19.5% $39.65 FAIRFAX COUNTY/FAIRFAX CITY Annandale 1,871,540 - - - -7,240-7,240 15.4% $24.82 Fairfax/Oakton 13,431,403 - - 149,098 89,538 89,538 19.5% $25.21 Herndon 12,133,386 - - - -98,795-98,795 20.2% $27.35 McLean 1,558,716 - - - -23,687-23,687 10.7% $31.96 Merrifield 8,703,163 - - - 81,936 81,936 17.1% $31.63 Reston 18,669,285 - - 368,413 210,881 210,881 12.1% $30.73 Route 28 Corridor South 14,228,340 - - 665,000 186,044 186,044 14.5% $25.15 Springfield/Huntington 8,110,645 - - - -92,147-92,147 21.4% $29.34 Tysons Corner 28,994,247 340,000 340,000 1,555,419 429,312 429,312 17.8% $32.81 Vienna 1,372,769 - - 235,000 22,691 22,691 4.1% $25.89 Fairfax Area Total 113,658,642 340,000 340,000 2,972,930 812,207 812,207 17.5% $29.57 LOUDOUN COUNTY Leesburg/West Loudoun 2,307,639 - - - 115,160 115,160 6.8% $24.43 Route 28 Corridor North 9,586,107 - - 20,000 25,976 25,976 18.5% $23.69 Route 7 Corridor 4,337,301 - - 86,466-10,231-10,231 9.3% $25.86 Loudoun County Total 16,231,047 - - 106,466 130,905 130,905 14.4% $24.08 PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARK Manassas 1,977,309 - - - -647-647 8.8% $21.91 Route 29/I-66 Corridor 2,586,539 - - 73,500 1,198 1,198 8.8% $18.38 Woodbridge 2,562,451 39,000 39,000 - -49,366-49,366 13.2% $24.07 Prince William Area Total 7,126,299 39,000 39,000 73,500-48,815-48,815 10.4% $20.95 NORTHERN VIRGINIA TOTAL 194,825,653 379,000 379,000 5,089,544 1,110,537 1,110,537 17.4% $31.89 FOR MORE INFORMATION David Parker Regional Managing Director +1 202 728 3541 david.w.parker@colliers.com Robert Hartley Director of Research +1 703 394 4852 robert.hartley@colliers.com Miles Rodnan Research Analyst Northern Virginia Copyright 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International 8045 Leesburg Pike, Suite 401 Tysons Corner, VA 22182 +1 703 394 4800 colliers.com/washingtondc 1 North American Research & Forecast Report Office Market Outlook Colliers International