Demand strong for commercial office space, yet vacancy rates remain high

The Lee Building in Bailey’s Crossroads.

The commercial office market in Fairfax County remained strong during the first half of 2016, according to a report released by the Fairfax County Economic Development Authority.

The majority of new leasing activity was in Tysons, Reston, and Chantilly, however, with minimal activity in the Annandale/Mason District area.

The direct vacancy rate for commercial office space rose from 16.2 at the end of 2015 to 16.5 percent in June 2016. When sublet space was included, the vacancy rate rose from 17.2 to 17.4 percent.

Vacancy rates have remained relatively constant for two years and have not dropped below 10 percent in nearly a decade.

“Although some companies have left older office space for new digs, leading to a 16.5 percent direct vacancy rate, that’s not all bad,” the report states.

“Experts say there will be a continual demand for less expensive office space,” it says. “The county has seen new building owners purchase existing properties with the plan to provide office space for companies looking for value in prime markets.”

Office vacancy rates vary widely among submarkets. Bailey’s Crossroads had the highest by far, at 47.4 percent in the first half of 2016. The next highest was Newington/Lorton with 37.3 percent. The area with the lowest vacancy rate was McLean/Great Falls, with 4.3 percent.

The office vacancy rate for Annandale was 15.5 percent, and for Seven Corners, it was 11.2 percent – both of which were below the county average.

[A workgroup formed by the Board of Supervisors issued a report last month calling for the county to make it easier for developers to reposition aging, underutilized office buildings for more profitable uses.]

“Demand for new office space continues to be strong,” the FCEDA report states. Demand for office space increased by 8.5 percent from the previous six-month reporting period. At mid-year, six office buildings were under construction, in Tysons, Reston, Vienna, Chantilly, and Fairfax Center.

As of June 30, Fairfax County was the 16th most active commercial office construction market in the nation with more than 2.4 million square feet of space under construction. Nearly 85 percent of that space had been preleased, including build-to-suit projects for Capital One, MITRE, and Navy Federal Credit Union.

Of the 19 office buildings sold in Fairfax County during the first half of 2016, just one was in Mason District – the Lee Building, at 5881 Leesburg Pike in Bailey’s Crossroads.

Looking at submarkets with the largest blocks of available office in the first half of 2016, Tysons topped the list, with 17 million square feet. Chantilly had 13 million, and Bailey’s Crossroads had 10 million. The total for the county was 71 million square feet.

The report breaks down office leasing activity for the first half of 2016 by submarket.

The top five new tenants during that period in Annandale are:

• Washington Regional Transplant Community, Heritage Center 4, 7619 Little River Turnpike –  27,800 square feet.
• Young Won Trading Inc., 4316 Markham St. – 8,800 square feet. 
• Annandale Eye Care, Annandale Center 2, 7630 Little River Turnpike – 6,000 square feet.
• Planned Companies Offices, Beauregard Square B, 6301 Little River Turnpike –  4,100 square feet.
• ROI Advertising, Heritage Office Building, 7857 Heritage Drive – 3,100 square feet. 

In Bailey’s Crossroads, the top five are all at the Skyline Center:

• Alqimi Group, Two Skyline Place, 5203 Leesburg Pike – 5,000 square feet. 
• Libya Culture Center, Skyline West, 6066 Leesburg Pike – 4,400 square feet. 
• Information Technology Solutions & Consulting LLC, Skyline City, 5113 Leesburg Pike – 2,900 square feet. 
• Empire Health Services, Skyline West, 6066 Leesburg Pike – 2,100 square feet. 
• Global Chiropractic, Skyline West, 6066 Leesburg Pike – 1,700 square feet. 

The five biggest tenants in Seven Corners in the first half of 2016 are:

• Northern Virginia School of Therapeutic Massage, Falls Church Corporate Center 3, 6402 Arlington Blvd. – 5,000 square feet.
• Computer World Services, Falls Church Corporate Center 2, 6402 Arlington Blvd. – 3,200 square feet.
• Harry Wilhelm & Co. PLC, Mark Building. 6231 Leesburg Pike – 3,200 square feet.
• Kastle Systems, Falls Church Corporate Center 2, 6402 Arlington Blvd. – 2,200 square feet.
• Millennium Dental Care, Seven Corners Professional Building, 6319 Castle Place – 2,100 square feet.

Among the trends cited in the FCDA  report:

• There’s been a proliferation of mixed-use development, including residential, office, retail, and hotel uses.
• Metro’s Silver Line is continuing to fuel demand for new office development. 
• Investment is coming in from new overseas sources, notably the Pacific Rim.