No longer a question, the suburban office renaissance is happening. The DC metro area’s suburban office market’s pulse beats stronger than ever with recent big leases signed by marquee tenants in Montgomery County and Northern Virginia. New trophy mixed-use projects are attracting interest from across the region, while older properties are being thoughtfully repositioned to attract tenants. On February 28, 2017, the ULI Washington Young Leaders Group’s Education Committee hosted a vibrant discussion on the region’s suburban office market, moderated by Newmark Grubb Knight Frank’s managing director Sandy Paul.
Sandy kicked-off the discussion with a presentation on the findings of is NGKF’s recent Suburban Obsolescence Study of obsolete office products across the country. The report found that 18% – approximately 800 million SF – of the suburban office space in the nation’s 50 largest metropolitan areas can be considered obsolete. Locally, NGKF estimates that 38 million SF of suburban office space in the DC metropolitan area can also be considered obsolete, due to such factors as isolated site location, aging building, or lacking competitive building or neighborhood amenities. In light of these constraints for obsolete office space, Sandy Paul noted that he is seeing a bifurcation of the suburban office market, both locally and nationally, where new or repositioned Class A product near transit and located in a highly amenitized neighborhood is leasing well, and obsolete suburban office projects are going to see increased vacancy rates and may need to find new uses such as schools or data centers.
Zach Wade of MRP highlighted the necessity of being located near transit in a suburban location. He noted that the company’s recent acquisition of the Liberty Park complex near the Phase II Silver Line metro station at Innovation Center in Herndon would attract businesses that want to be located in the suburbs, nearby executives who reside north and west of DC, and also located near metro stations in order to recruit younger employees who want to continue to live in DC or the R-B Corridor. He sees the project’s location and accessibility as key to its marketing success, in addition to repositioning the project with updated amenities.
James David of Loudon County Virginia’s Economic Development agency also highlighted that the county needs to change the regulatory framework to encourage more walkable places and to ease the approvals process for new office projects in the county. He sees transit and the completion of Phase II of the Silver Line as a huge new opportunity for the county and highlighted the Ashburn and Loudon Gateway stations as two areas that have a combined 5 million SF of new development in the pipeline today. On the topic of economic development incentives, James said that incentives alone cannot turn a poor location into a A+ site.
Anthony Chang of Washington REIT echoed the business case for investing in transit-oriented development: transit sells. He said that his company is focused on investing in projects that have strong transit accessibility and demographic trends that will support lease-up of those projects. People are looking for an authentic experience that is more of an urban environment, and they will pay a premium for it. He also posed the idea that “suburban” is losing meaning as more projects and traditional suburban locations adopt a more urbane feel. Anthony sees leasing momentum in suburban office projects; in 2016 there were five new growth and expansion leases signed in Washington REIT’s Silver Line projects, compared to zero in 2015. Net effective rents are also up over 30% compared to last year at these sites.