RESEARCH MARKET REPORT NORTHERN VIRGINIA OFFICE IN THIS ISSUE State of the Economy p.2 Leasing Activity p.3 Development Pipeline p.4 Market Breakdown p.5
Northern Virginia in Recovery... For Now Recovery from the downturn caused by Sequestration continued for the Northern Virginia office market as demand grew nearly 1.5 million square feet during the first half of 2017. While demand for the remainder of the year is forecasted to continue to grow, it will be at less than a third of what was witnessed during the first half. With the uncertainty of a Federal budget resolution, it is unclear how the Northern Virginia market will be impacted. Economics Market Indicators VACANCY Year-End Projection NET During the second quarter of 2017, the Northern Virginia economy grew by 1.05 percent, equating to a 4.27 percent annually adjusted rate. This level of economic growth has not occurred since 2005, with this increased economic activity attributed to renewed federal spending. During the 2016 fiscal year, federal spending levels rebounded from the lag created by Sequestration, topping $37.4 billion of contract awarded to the Northern Virginia economy. During the second quarter of 2017, an additional $8.1 billion in contracts were awarded were received in Northern Virginia. With $18.0 billion already awarded, federal spending as of mid-year 2017 was on pace to match the 2016 level. Despite the economic growth, job creation slowed during the quarter. Office-using sectors of the economy remained fairly flat with only 30 jobs created. Media and telecom companies shed 770 positions, the most of any sector, while companies associated with the other services category shed 640 positions. The loss of jobs in these sectors were offset by growth in other predominately officeusing industries. The professional and business services sectors generated the greatest job growth, also increased payrolls by 810 jobs. Financial services and government sectors, also increased payrolls, adding 300 and 30 positions, respectively. CONSTRUCTION Summary Statistics Office Market All Classes Class A Class B & C Vacancy Rate 17.4% 17.1% 17.6% Change from (basis points) Absorption New Construction Under Construction (Millions Square Feet) Asking Rents Per Square Foot Per Year RENTAL -23-42 -7 500,548 430,423 70,125 73,500 73,500-5.06 4.74 0.33 Direct Asking Rates $32.21 $36.75 $28.92 Direct Asking Rental Rates By Class Change from $0.20 $0.36 $0.05 $36.75 $29.59 $26.49 Class A Class B Class C 2 NORTHERN VIRGINIA OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Demand Net Absorption During the second quarter of the year, 500,548 square feet of space was removed from the market. This marks four quarters in a row of positive net absorption for Northern Virginia, bringing the trailing four-quarter absorption to 2.1 million square feet. There was positive demand in all classes of office space for the quarter. Class A space accounted for the majority of demand, with 430,423 square feet of positive net absorption. This compares to 1.2 million square feet occupied last quarter. Meanwhile, demand for Class B product was minimal with only 46,269 square feet of absorption. This compared to last quarter when 211,747 square feet of space was vacated. There was 23,856 square feet of positive absorption in Class C product during the quarter, which compared to 34,551 square feet during the first quarter. (Thousands SF) 1,500 1,000 500 0-500 -1,000 Reston and the R-B Corridor continued to be major recipients of positive net absorption in Northern Virginia due to tenant demand during the quarter. Net absorption in these two areas totaled 310,802 square feet of new demand, accounting for 62.1 percent of the quarter s net absorption. Northern Virgina Office Market Leasing Activity TENANT ADDRESS SUBMARKET CLASS LEASE TYPE LEASED SPACE Amazon Web Services (ASW) 13200 Woodland Park Drive Herndon - A New 400,677 Booz Allen Hamilton, Inc. 6361 Walker Lane Springfield/Burke - A Renewal/Expansion 117,176 GDIT 11111 Sunset Hills Road Reston - A Renewal/Expansion 100,000 Accenture/ASM 4050 Legato Road Fairfax Center - A Renewal 92,000 Drug Enforcement Agency (DEA) 14550 Avion Parkway Route 28 Corridor South - B Renewal 71,504 Fulcrum IT 5870 Trinity Parkway Route 28 Corridor South - A Renewal 61,125 CGI 11325 Random Hills Road Fairfax Center - A Renewal 42,000 Diplomatic Language Services (DLS) 1901 N Fort Myer Drive Rosslyn - A Renewal 41,364 DRS Technologies 21345 Ridgetop Circle Route 28 Corridor South - A Relocation 40,412 Leidos, Inc. 2650 Park Tower Drive Merrifield - A Renewal 38,767 NORTHERN VIRGINIA OFFICE MARKET REPORT COLLIERS INTERNATIONAL 3
Deliveries (Thousands SF) 700 600 500 400 300 200 100 0 Supply While multiple ground breakings are on the horizon, no new development commenced. At the end of the quarter, 5.1 million square feet of office space was under construction, with 2.1 million square feet expected to be delivered by the end of 2017. Developers have been cautious before undertaking new projects, with most requiring preleasing before breaking ground. As a result, 69.4 percent of the space under construction has already been leased. Prince William County was the only submarket where new space delivered in the second quarter. The building at 9301 Innovation Drive, a 73,500-square-foot building, delivered fully leased. Vacancy Under Construction (Millions SF) 6.0 5.0 4.0 3.0 2.0 With continued demand in Northern Virginia, the overall vacancy rate fell 23 basis points to end the second quarter at 17.4 percent. This is the lowest overall vacancy rate witnessed since the first quarter of 2014 when it stood at 17.2 percent. Vacancy rates dropped across all classes of office product during the second quarter with the largest decrease occurring within Class A product. Newer Class A space this year has been absorbed at a much faster rate than the other product. Tenants continued to move to nicer space, forcing vacancy rates lower. Vacancy rates for Class A product fell from 17.5 to 17.1 percent during the quarter. The combined Class B & C vacancy rate fell seven basis points ending at 17.6 percent. 4 NORTHERN VIRGINIA OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Rental Rates Vacancy Rate During the quarter, the direct average asking rate increased from $32.01 to $32.21 per square foot. This compared to the same time last year when the direct average asking rate was $31.53 per square foot. In line with demand and vacancy, increased asking rents for Class A product were the most pronounced, rising $0.36 per square foot to end the second quarter at $36.75. Class B product had the smallest increase in direct asking rent, rising from $29.52 to $29.59 per square foot. The Class C rate also increased $0.27 per square foot to end the quarter at $26.49 per square foot. Outlook 18.5% 18.0% 17.5% 17.0% The recovery continued in the Northern Virginia, although not at the lightning pace witnessed at last quarter. Future net absorption will be headlined by multiple major leases signed this year including Nestle for over 200,000 square feet in the R-B Corridor last quarter and Amazon Web Services signed for over 400,000 square feet in the Herndon submarket this quarter. Nestle is new to the area, moving out of California, and Amazon Web Services lease is a completely new requirement, which will take an entire 400,000-square-foot building off the market. Direct Asking Rental Rate $32.50 $32.00 Additionally, the growth in the Northern Virginia economy will moderate to about 0.90 percent quarterly for the remainder of 2017, and fall to about 0.60 percent per quarter in 2018. This is expected to continue to drive new job creation within the office-using sectors of the economy, generating new demand for office space. Over the next 18 months, office-using employment is projected to grow about 0.33 percent per quarter and add about 16,400 new jobs. This is expected to generate about 1.5 million square feet of new demand, with about another 400,000 square feet occurring during the remainder of 2017. ($/SF Gross) $31.50 $31.00 With an additional 2.1 square feet of space coming to the market by the end of the year, vacancy rates will not fall as far as of new Supply surpasses new Demand. New space continues to be well preleased with 72.5 percent of the space expected to deliver by the end of the year already committed. A lot of the preleasing activity was generated by tenants relocating out of lesser quality buildings. With low demand for the second tier product, there is no certainty that this space will be backfilled. There are plenty of developers seeking out tenants willing to upgrade their space. As a result, new construction is expected to remain high, and opportunities for tenants will open up in Class B space. NORTHERN VIRGINIA OFFICE MARKET REPORT COLLIERS INTERNATIONAL 5
Northern Virginia Office Market Class A MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING Carlyle/King St Metro 5,063,447 - - 700,000 7,730-2,347 11.1% $41.21 Eisenhower Ave Corridor 128,000 - - - - - 0.0% n/a I-395 Corridor* 2,674,222 - - - 30,538 59,743 40.3% $32.61 Old Town 745,672 - - 100,000 3,406-3,302 13.2% $31.75 Alexandria City Total 6,826,806 - - 800,000 10,453 11,452 19.6% $39.34 ARLINGTON COUNTY/FALLS CHURCH CITY Crystal City/Pentagon City 4,130,646 - - - 31,554 89,756 20.3% $40.50 Falls Church** 85,000 - - - - - 0.0% n/a Rosslyn/Ballston Corridor 14,511,770 - - 894,548 203,450 442,282 18.3% $44.28 Arlington County/Falls Church Total 19,258,705 - - 894,548 239,717 552,348 18.5% $42.99 FAIRFAX COUNTY/FAIRFAX CITY Annandale 200,000 - - - - -22,152 40.6% $31.50 Fairfax/Oakton 4,054,972 - - 149,098-26,384 10,104 23.0% $30.14 Herndon 7,141,205 - - - 4,638 2,870 22.5% $32.05 McLean - - - - - - n/a n/a Merrifield 4,602,284 - - - -14,475 16,281 22.3% $33.82 Reston 10,711,927 - - 368,413 52,897 244,182 8.5% $34.72 Route 28 Corridor South 8,770,397 - - 665,000 124,572 297,851 9.9% $27.97 Springfield/Huntington 2,298,732 - - - 36,661-2,653 34.6% $37.25 Tysons Corner 14,543,400-340,000 1,555,419-86,328 291,541 14.7% $40.54 Vienna 216,324 - - 235,000 - - 8.3% n/a Fairfax Area Total 53,792,487-340,000 2,972,930 118,089 860,356 16.2% $34.78 LOUDOUN COUNTY Leesburg/West Loudoun 470,939 - - - - 74,062 11.2% $28.50 Route 28 Corridor North 5,236,983 - - - -3,104 46,358 19.5% $24.98 Route 7 Corridor 1,040,737 - - 71,466-6,739-9,050 17.2% $27.23 Loudoun County Total 6,748,659 - - 71,466-9,843 111,370 18.6% $25.32 PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARK Manassas 73,000 - - - 2,563 5,712 11.0% $18.00 Route 29/I-66 Corridor 624,325 73,500 73,500-65,990 61,507 3.7% $24.00 Woodbridge 323,172 - - - 3,454 3,454 29.6% $26.87 Prince William Area Total 1,020,497 73,500 73,500-72,007 70,673 12.4% $26.38 NORTHERN VIRGINIA TOTAL 87,647,154 73,500 413,500 4,738,944 430,423 1,606,199 17.1% $36.75 * I-395 is split between Arlington County, Fairfax County and Alexandria City ** Falls Church is split between Fairfax County and Falls Church City SECOND QUARTER 2017 OVERALL QUICK STATS 6 17.4% Vacancy Rate 500,548 Absorption 73,000 New Deliveries $32.21 Direct Asking Rate NORTHERN VIRGINIA OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Northern Virginia Office Market Class B & C MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING Carlyle/King St Metro 2,661,862 - - - 20,270-10,839 10.3% $36.17 Eisenhower Ave Corridor 608,763 - - - 1,008-1,871 20.4% $23.23 I-395 Corridor* 6,215,955 - - - 10,649 8,689 35.1% $29.96 Old Town 4,954,688 - - - -10,465-5,457 11.1% $30.44 Alexandria City Total 11,443,984 - - - 4,868-30,155 16.9% $30.96 ARLINGTON COUNTY/FALLS CHURCH CITY Crystal City/Pentagon City 8,843,203 - - 242,100 24,501 21,184 17.4% $35.24 Falls Church** 2,194,708 - - - -33,767-32,293 13.0% $22.36 Rosslyn/Ballston Corridor 9,576,877 - - - 9,177-37,580 22.5% $39.92 Arlington County/Falls Church Total 20,280,170 - - 242,100 35,268-27,099 19.1% $36.71 FAIRFAX COUNTY/FAIRFAX CITY Annandale 1,671,540 - - - 7,768 22,680 9.4% $21.26 Fairfax/Oakton 9,365,736 - - - 9,830-10,254 19.0% $23.55 Herndon 5,002,981 - - - -50,661-87,253 18.4% $24.07 McLean 1,558,716 - - - 5,732-17,955 10.4% $32.12 Merrifield 4,117,181 - - - 50,179 101,359 13.2% $26.75 Reston 7,957,358 - - - 45,278 64,874 15.7% $26.85 Route 28 Corridor South 5,446,719 - - - -172,759-159,994 22.7% $23.63 Springfield/Huntington 5,811,913 - - - -3,703-56,536 15.7% $23.72 Tysons Corner 14,450,847 - - - 125,162 77,347 21.8% $29.16 Vienna 1,156,445 - - - -8,877 13,814 4.1% $25.49 Fairfax Area Total 59,871,338 - - - -10,814-52,831 19.1% $26.18 LOUDOUN COUNTY Leesburg/West Loudoun 1,836,700 - - 63,000-4,241 36,857 5.9% $22.49 Route 28 Corridor North 4,349,124 - - 20,000 36,480 12,994 16.5% $21.08 Route 7 Corridor 3,296,564 - - - 22,442 14,522 6.3% $24.62 Loudoun County Total 9,482,388 - - 83,000 54,681 64,373 10.9% $21.83 PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARK Manassas 1,904,309 - - - -19,771-23,567 9.6% $22.39 Route 29/I-66 Corridor 2,035,714 - - - 6,981 12,662 10.1% $18.40 Woodbridge 2,239,279-39,000 - -1,088-50,454 10.7% $22.52 Prince William Area Total 6,179,302-39,000 - -13,878-61,359 10.2% $20.36 NORTHERN VIRGINIA TOTAL 107,257,182-39,000 325,100 70,125-107,071 17.6% $28.92 * I-395 is split between Arlington County, Fairfax County and Alexandria City ** Falls Church is split between Fairfax County and Falls Church City Class A 45.0% 31 Office Jobs Created 5,064,044 Under Construction Class C 14.7% Class B 40.3% Inventory by Class NORTHERN VIRGINIA OFFICE MARKET REPORT COLLIERS (Square INTERNATIONAL Feet) 7
Northern Virginia Office Market All Classes MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING Carlyle/King St Metro 7,725,309 - - 700,000 28,000-13,186 10.8% $39.84 Eisenhower Ave Corridor 736,763 - - - 1,008-1,871 16.9% $23.23 I-395 Corridor* 8,890,177 - - - 41,187 68,432 36.6% $30.30 Old Town 5,700,360 - - 100,000-7,059-8,759 11.3% $30.60 Alexandria City Total 18,270,790 - - 800,000 15,321-18,703 17.9% $33.50 ARLINGTON COUNTY/FALLS CHURCH CITY Crystal City/Pentagon City 12,973,849 - - 242,100 56,055 110,940 18.3% $36.90 Falls Church** 2,279,708 - - - -33,767-32,293 12.5% $22.36 Rosslyn/Ballston Corridor 24,088,647 - - 894,548 212,627 404,702 20.0% $42.52 Arlington County/Falls Church Total 39,538,875 - - 1,136,648 274,985 525,249 18.8% $39.67 FAIRFAX COUNTY/FAIRFAX CITY Annandale 1,871,540 - - - 7,768 528 12.8% $25.18 Fairfax/Oakton 13,420,708 - - 149,098-16,554-150 20.2% $25.34 Herndon 12,144,186 - - - -46,023-84,383 20.8% $28.49 McLean 1,558,716 - - - 5,732-17,955 10.4% $32.12 Merrifield 8,719,465 - - - 35,704 117,640 18.0% $31.28 Reston 18,669,285 - - 368,413 98,175 309,056 11.6% $30.72 Route 28 Corridor South 14,217,116 - - 665,000-48,187 137,857 14.8% $25.49 Springfield/Huntington 8,110,645 - - - 32,958-59,189 21.0% $29.40 Tysons Corner 28,994,247-340,000 1,555,419 38,834 368,888 18.2% $33.26 Vienna 1,372,769 - - 235,000-8,877 13,814 4.8% $25.49 Fairfax Area Total 113,663,825-340,000 2,972,930 107,275 807,525 17.7% $29.72 LOUDOUN COUNTY Leesburg/West Loudoun 2,307,639 - - 63,000-4,241 110,919 7.0% $23.72 Route 28 Corridor North 9,586,107 - - 20,000 33,376 59,352 18.1% $23.58 Route 7 Corridor 4,337,301 - - 71,466 15,703 5,472 8.9% $26.01 Loudoun County Total 16,231,047 - - 154,466 44,838 175,743 14.1% $23.96 PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARK Manassas 1,977,309 - - - -17,208-17,855 9.7% $22.28 Route 29/I-66 Corridor 2,660,039 73,500 73,500-72,971 74,169 8.6% $18.51 Woodbridge 2,562,451-39,000-2,366-47,000 13.1% $24.07 Prince William Area Total 7,199,799 73,500 112,500-58,129 9,314 10.5% $21.21 NORTHERN VIRGINIA TOTAL 194,904,336 73,500 452,500 5,064,044 500,548 1,499,128 17.4% $32.21 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 7900 Tysons One Place, Suite 260 McLean, VA 22102 +1 703 394 4800 colliers.com/washingtondc 8 North American Research & Forecast Report Office Market Outlook Colliers International