Northern Virginia’s growth and its impact on federal leasing activity
According to JLL Research, Northern Virginia reported its highest positive net absorption in nearly a decade by the end of 2019.
From Arlington to Herndon, the economic upswing following 2008 continues to spur growth throughout many parts of Northern Virginia. According to JLL Research, the region reported its highest positive net absorption in nearly a decade by the end of 2019. Spearheaded by the “War on Terror,” the last comparable development and expansion period came from government and defense contractors vying for space in the early 2000s.
Today, Fortune 500 companies joined the fray, tapping into the highly educated workforce of the Washington, DC metropolitan region while garnering proximal influence on political decision-makers. While Northern Virginia massively develops as a result, the Office of Management and Budget pushes for a reduction in federally leased inventory both nationally and regionally. The migration of agencies out of Metro DC urged by initiatives of elected officials would leave Northern Virginia as an obvious winner, but what stakes are affecting the General Services Administration’s (GSA) activity throughout Northern Virginia and where are federal tenants settling as a result? Here are a few insights.
1. A brand-new submarket
With the announcement of National Landing, the game drastically changed for all players involved. Owners and developers are lining up to get a slice of the new submarket siphoning off parts of Crystal City and skyrocketing rents to upwards of 20-25% more than where they were prior to the announcement.
With a $39-per-square-foot prospectus cap in place for federal leases in Northern Virginia, GSA is quickly being priced out of a market that was previously considered the more affordable alternative to downtown Washington, DC.
2. Setting sights on Silver
Private-sector growth is primarily driven by an evolving technology industry gaining ground in the D.C. metro, but particularly in Northern Virginia. Stiff competition for space is most severe along public transit lines with access to Metro. Fortune 500 companies opt for these spaces to ease the commuting strain in a region with the second longest average commute time in the U.S. Demand has driven the removal and repositioning of over 8.6 million square feet of office supply to higher and better uses.
The supply and demand imbalance are having a negative effect on GSA’s current and future office opportunities in the area. According to JLL Research, federal tenants represented only 13% of all growing leases in Northern Virginia since 2015. Of that, a miniscule 2% was along the Silver Line. With Metro-accessible office availability dwindling and rental rates steepening, GSA is left with no choice but to branch out beyond public transit corridors.
3. Spreading beyond the veins
Submarkets experiencing sluggish growth throughout this economic cycle compared to their Metro-accessible neighbors are finally seeing some rising tides as a result. While there is more availability able to meet the prospectus cap, most are outside the required half-mile distance to the Metro. Despite this, an opportunity presents itself for GSA relocations as well as small and large-scale consolidations to these off-Metro localities.
“As the private sector continues to push up rents on-Metro, GSA will increasingly consider submarkets that have been all but written off in recent years, including Bailey’s Crossroads, the I-395 corridor or exurbs like Loudoun County and Prince William County that offer plenty of opportunities for consolidations,” said Michael Hartnett, senior director for JLL’s Mid-Atlantic research team.
For more insights on the Northern Virginia federal leasing market, read more on JLL’s Federal Perspective at http://bit.ly/JLLFederalPerspective.
