The 136-million-square-foot Northern Virginia general purpose, multi-tenant office space market finds itself in a holding pattern at the midpoint of 2012. Rents are flat, although up year-over-year, and vacancy has increased slightly. Net absorption is down, but still slightly positive. Cassidy Turley points out that BRAC (Base Realignment and Closure) vacanacies “have taken their toll on some Northern Virginia markets.” Colliers describes the Northern Virginia office market as “stagnant” in the second quarter.
The vacancy rate for general purpose, multi-tenant office space increased by 30 basis points in the second quarter of 2012, Reis reports. The 14.9% rate is unchanged year-over-year. The rate has been in the upper 14.0% range since 2010. This market is accustomed to double-digit vacancy rates, so the current level could be considered a cause for caution, rather than alarm. Class A vacancy is reported at 14.0%, down 40 basis points year-over-year but up 10 over the quarter. The Class B/C rate of 16.0% is up 40 basis points for the quarter and up 30 year-over-year. Moody’s Economy.com reports an office employment increase of 5,389 jobs year-over-year in the second quarter, a gain of 1.0%. Further office employment increases are expected through the end of 2012, a good sign for office use. However, Cassidy Turley notes “decelerating growth in office-using employment” in its August 2012 report on the metro D.C. office market, a trend that could continue.
Colliers says the market is in “a state of uncertainty,” reporting second quarter vacancy rate of 15.4%, down 10 basis points from the prior quarter. Cushman & Wakefield reports “the overall vacancy rate in Northern Virginia increased to 18.0%, its highest rate since the third quarter of 2003.” The rate is up 300 basis points year-over-year. Reis expects vacancy to finish 2012 at 14.7%, with gradual declines to follow.
SUPPLY AND DEMAND
Net absorption has been irregular in the Northern Virginia office market. The total for the years from 2002 to 2011 was 11.4 million square feet, or about 1 million per year. New construction was about double those amounts for the same time span, however, thus accounting for the prevailing high vacancy rates. For 2011, Reis reports 889,000 square feet were added while net absorption was 326,000 square feet. In the first half of 2012, 879,000 square feet were added within Reis submarkets (523,000 in the second quarter) but demand remained behind, at 179,000 square feet (32,000 in the second quarter). Construction thus continues to outstrip demand. There is, moreover, a big difference by class, with second quarter net absorption at plus 257,000 square feet for Class A properties and minus 224,000 for Class B/C. Abundant newer buildings are luring tenants from older properties.
Another 108,000-square-foot building completed construction in August. Current reporting accounts for 2.4 million square feet under construction, of which another 60,000 square feet is due to complete by the end of 2012. Reis’ quarterly forecast gives a 2012 completion total of approximately 1 million square feet. Demand, however, is expected to regain the upper hand. Reis forecasts completions to average 1.8 million square feet from 2012 to 2016, for a total of 9.1 million square feet. For net absorption, 10 million square feet of demand are projected for 2012 to 2016, averaging about 2 million square feet per year.
“Leasing activity in Northern Virginia is likely to fall lower in the face of federal cutbacks and political uncertainty,” Studley, Inc. noted in its report on the D.C. office market. Jones Lang LaSalle reports year-to-date net absorption at nearly 1.2 million negative square feet. Colliers reports net absorption was “modestly positive” at 260,195 square feet. Cushman & Wakefield reports a year-to-date net absorption total of negative 1,564,348 square feet. “Rightsizing within government contractors impacted all major jurisdictions of the region, although most notably in Northern Virginia,” according to Jones Lang LaSalle.
Reis reports second quarter 2012 average asking and effective rents of $31.87 psf and $26.51 psf for office space in Northern Virginia. Both measures are unchanged over the quarter; asking rents are up 0.8% and effective rents are up 0.9% year-over-year. Rental gains were limited in 2011, as the year ended with gains of 1.9% asking and 2.2% effective, and so far 2012 has not shown much strength. Effective rents remain lower than they were before the recession. For Class A rents, the second quarter asking average of $35.42 psf is up 0.8% over 12 months but down 0.1% for the quarter. Class B/C asking rents are reported at $27.04 psf, unchanged over the quarter but up 0.6% year-over-year.
For its Northern Virginia market, Jones Lang LaSalle reports an average asking rent of $30.57 psf, with a rate of $32.65 psf for Class A and $29.53 psf for Class B. “Asking rents have yet to respond to the increase in the supply of in the supply of available space, and are actually still increasing overall,” reports Cushman & Wakefield. “With few exceptions, this is more a function of large blocks being added at above-market rents or in new construction rather than landlords raising rents,” according to this source. Cushman & Wakefield reports a direct asking rent of $31.90 psf, up 3.2% year-over-year. “The average rental rate continued its upward swing during the second quarter of 2012, finishing at its highest rate since year-end 2008,” according to Colliers. “The overall asking rate averaged $30.77 psf, up from $30.49 psf in the first quarter and $30.41 psf in the fourth quarter of 2011. Class ‘A’ rental rates averaged $34.08 during the second quarter, up from $33.86 psf the quarter prior. Class ‘B’ rents increased to $29.20 psf from $29.05 psf.” Looking forward, Reis forecasts only modest rental increases of 1.2% asking and 1.3% effective for all of 2012. These gains are actually down from first quarter’s projections. Not until 2014 does Reis forecast an annual effective increase of over 3.0%.