3.9 m.s.f of Lease expirations in National Landing offers opportunity for challenged submarkets
As National Landing evolves into a tech hub, its historically dominant tenant bases will find challenges in renewing due to rising rents
July 31, 2019
- As National Landing evolves into a tech hub, its historically dominant tenant bases will find challenges in renewing due to rising rents. With the arrival of HQ2, rents have increased 15.7% over the last three quarters in what used to be a value alternative for the federal government, government contractors and nonprofits/associations. The three largest tenant bases have leases totaling 3.9 million s.f. expiring from 2021 to 2025.
- Federal Government: Of the 3.9 million s.f. of expirations, the federal government makes up 2.6 million s.f. With the restrictions of the $39 GSA prospectus cap and requirement of metro access, the options for the federal government are slim. As demand heats up and supply remains constricted due to the rising cost of construction, the federal agencies forced out of National Landing will have to look to value alternatives such as the I-395 corridor, Fairfax Center and Springfield submarkets. GSA loosening the prospectus cap or the metro requirement as a response to macroeconomic trends in Northern Virginia should offer federal government tenants more options.
- The Baileys Crossroads submarket where Skyline is located already is home to a few government agencies including the Fish and Wildlife Service, Department of Defense and Social Security Administration. The submarket’s elevated vacancy rate of 40.8% and ten-minute drive to the Pentagon could make it a good off-Metro option for Department of Defense offices priced out of Crystal City.
- Government Contractors: For government contractors, revenues are based on winning contracts and can translate into growth or contraction. The Pentagon outsources 53% of its budget to contractors, which would equate to $380 billion for FY 2020 nationally, the highest total in 10 years and 4.8% higher than FY 2019 levels. Northern Virginia will receive an outsized portion of those contracts as the Pentagon’s shifting priorities favor the region’s defense sector over that of its peers. Some contractors are required to be located within distance of the agencies they service. 1.1 million s.f. of contractor expirations in National Landing could drive additional demand in those same submarkets as contractors follow the agencies.
- Nonprofits/Associations: Since 2015, 11 of the 17 tenants that have left DC for Crystal City have been non-profits or associations. For tenants in this industry, proximity to DC is important, but they could retain easy access by moving a few Metro stops down the blue and yellow lines to Alexandria. There are already over 400 nonprofits and associations located in Alexandria.
- Struggling submarkets in Northern Virginia will be given a second chance as tenants who preferred discounted value alternatives are priced out of National Landing. As tech and coworking companies continue to opt for space along the Silver Line, landlords in challenged submarkets will start to see an uptick in demand.
Source: JLL Research