Route 28 South (Chantilly/Centreville) Submarket Q1 2019

Route 28 South Office.jpg

Overview

The Route 28 South office market is much quieter than it once was. Deliveries peaked in 2007 when 14 buildings and 1.8 million SF delivered, but construction since 2011 pales in comparison—only about 720,000 SF completed from 2011–17. One project delivered last year just north of Chantilly and added 480,000 SF to the submarket. Vacancies lingered above the metro average for much of this cycle but experienced a notable decline starting in 2015. They jumped again last year, though: UNICOM Government vacated more than 400,000 SF earlier last year. Even though demand hasn’t been noteworthy, the relatively low rents for high-quality assets could attract tenants. Investment here has dropped for several years but, 2018 still surpassed the cycle average.

Leasing

Absorption slowed significantly in 2017, a move that can be attributed to a handful of large move-outs, most notably Orange Business Services’ 124,000-SF departure from Dulles International Centre, which it fully occupied. Equally important was Cox Communications’ move out of 94,000 SF at 3080 Centreville Road in Herndon, which it also fully occupied. Move-outs continued to plague the submarket in 2018, with UNICOM Government vacating more than 400,000 SF at the UNICOM Technology Park.

In contrast, move-ins have been much smaller—the two largest since 2017 came from Advanced Health and Leidos, each of which occupied more than 51,000 SF. A jump in vacancies last year has put levels well above the metro average again.

Vacancy was on the rise for several years in the middle of the cycle, but a couple of large move-ins stabilized submarket fundamentals in 2015 and 2016. In Q4 2015, CSRA moved into 169,000 SF at Independence Center I from Fair Lakes in Fairfax, VA, providing a bump in demand. SRA International recently merged with Computer Sciences Government Services to create CRSA, the largest pure-play IT services provider serving the government sector.

Future demand may be inhibited by the lack of public transit: The nearest Metro station to the submarket is Innovation Center on the Dulles Toll Road/Airport Access Highway near the intersection of Route 28. Although this site is close to the northern boundaries of the submarket, most office inventory is located just south of Route 50, some 10 miles away. As a result, tenants may opt for more accessible locations around Fairfax County, outside of the submarket, at least until the second phase of the Silver Line Metro extension, which will stretch from Reston to Ashburn via Dulles Airport, and opens in 2020.

Rent

Attractive rents are one of the hallmarks of second-ring suburban submarkets, a fact that attracts many of the metro’s price-sensitive tenants but also tends to put a damper on growth. At about 2.5%, growth in 2018 marked another year of solid performance. Growth in 2017 was above the 2% mark as well.

Growth has been most consistent in the 4 & 5 Star category, where rents increased by more than 9% from 2016-2018. That slice also enjoys the tightest vacancy rate, and the fact that rents are too low and demand too spotty to make speculative construction pencil out means that growth can possibly continue exceeding inflation. Growth in the 3 Star slice is another story, with high vacancy weighing down growth and producing inconsistent gains. Growth over the past three years totaled about 7%.

Route 7 Corridor (Ashburn) Submarket Q1 2019

ashburn-one-loudoun-1600x900

Construction has picked up in the Route 7 Corridor Submarket after a lull from 2010–12. More than 450,000 SF delivered from 2013–17, hitting a peak last year, when more than 160,000 SF completed. While no projects are expected to deliver this year, there is about 82,000 SF under construction and anticipated to deliver in 2019. Deliveries of this magnitude are still well below those in construction-heavy submarkets, but the new product is not inconsequential in a submarket that doesn’t typically host much construction.

Demand has consistently outpaced supply here; at about 7%, vacancies are half their 2011 rate and well below the metro average. Some of this growth might stem from the submarket’s proximity to Leesburg, which experienced one of the highest population growth rates in the D.C. metro. Rents, however, have not benefited much from tightening vacancies: They increased modestly in 2015 and recorded the strongest gains of the cycle in 2016 but have sputtered since. At just over $27/SF, rents are just nearing the prerecession peak and rank in the bottom half of D.C. submarkets. On the bright side, low rents make this an affordable submarket for office space. Despite somewhat mixed fundamentals, sales volume in 2016—at about $99 million—set a record, although one sale comprised almost half of the volume. The momentum did not carry over into 2017, when only about $28 million in sales occurred. Slow sales have continued this year as well—as of mid-October, less than $18 million had recorded.

Manassas/Gainesville Multi-Family Submarket Q1 2019

Artena Manassas MF.jpg

The Manassas/Gainesville Submarket is in suburban Prince William County and has a commuter-heavy population, and while it lacks Metro access it does have the Virginia Rail Express and is traversed by major highways. The area saw an uptick in development from 2013–16, with nearly 1,300 units added, and even more is expected. Despite the influx of supply, lease-ups have been steady and solid, if not outsized, and above average rent growth has added to the submarket’s development appeal. Sales are sporadic, and it’s common for years to go by with just one or two sales, but institutional money is not afraid to target this area when a building becomes available.

Manassas/Gainesville is experiencing an economic upswing that bodes well for apartment demand. Absorption has been robust for the past five years, and despite erratic moves due to new supply, vacancy recovers quickly. Many jobs in the Manassas/Gainesville Submarket are low- to mid-income blue-collar positions, resulting in consistent demand for 1 & 2 and 3 Star apartments. For example, Micron Technologies, a large manufacturer of memory and storage technologies, has its East Coast manufacturing headquarters in Manassas. Military personnel who operate out of Fort Belvoir and Quantico also make up a sizable portion of the submarket’s renter pool. Further contributing to apartment demand is a large student-renter concentration at Northern Virginia Community College’s Manassas campus. These campuses are in an area that Prince William County has dubbed Innovation Park, which will be redeveloped as a university-oriented corporate research park with a mixed-use town center. While still in planning, the project could eventually create 8,000 jobs.

At about $1,450/month, average asking rents in Manassas/Gainesville are about 15% lower than average rents at the metro level ($1,700). With fundamentals on solid footing, rent growth this year is solid. As of Q4 2018, year-over-year growth was almost 4% higher than the average for the Washington, D.C. metro. Much of the appeal of Manassas/Gainesville comes from its affordability. Average 4 & 5 Star rents are about $1,600, a 25% discount from the metro average. Due to affordability and more manageable levels of construction, concessions are negligible compared with those in inner ring suburban submarkets or the urban core.

Construction activity has moderated since the busy period from 2013–16. Given the submarket’s solid fundamentals, encouraging lease-ups, and the strong uptick in migration of 25–34-year-olds to second-ring suburban areas, additional groundbreakings would not be a surprise. No projects delivered in 2017, but two more projects delivered earlier this year and more were under construction. According to Manassas’s economic development information, most of the undeveloped land in the area is fragmented into small parcels that would hinder larger multifamily development, hence most recent projects delivered fewer than 100 units.

Sales occur sporadically in Manassas/Gainesville, evidenced by wavering volume since 2011. As of Q4 2018, more than $100 million in transactions had been recorded, putting the submarket on pace for another record year. A portion of the volume came from the sale of the 190-unit Amberton apartments in Manassas. The asset traded as part of a seven-building portfolio that sold for $358 million. The other transaction was Aksoylu Properties’ purchase of the 3 Star 102-unit Artena Manassas. The asset, which will include 14,000 SF of retail/office space, is scheduled to deliver early this summer and traded for $17.5 million ($171,570/unit). While no properties sold in 2016, a blockbuster deal recorded last year. In July 2017, the 576-unit Point at Manassas sold for $115 million ($199,700/unit) at a 5.4% cap rate. This equates to $25 million in appreciation since it sold in July 2004 for $90 million, although that is just 1.9% compound annual appreciation. In April 2003, the property sold for $66.2 million at an 8.2% cap rate, so compared with that sale the property has appreciated at a rate of 3.95% per year.

Route 29/I-66 Corridor (Gainesville/ Haymarket) Q1 2019

Despite its location as an outlying submarket in Prince William County without direct access to a Metro station, the Route 29/I-66 Corridor has more stable fundamentals than many submarkets. Vacancies have declined since 2012, aided in part by a dearth of construction, although several potential move-outs by the likes of Aerojet, Rocketdyne, Prince William County, and the McLean Bible Church could cause the most significant vacancy expansion in half a decade. Less than 60,000 SF of space is under construction, and building isn’t expected to pick up anytime soon, since low rents make it difficult for projects to pencil out.

The bulk of recent demand has come from medical office users such as the Center for Vein Restoration, Nelson Dermatology, and the Vision Therapy Center of Virginia. The FBI also maintains one of its primary field offices in the Route 29/I-66 Corridor, across Prince William Parkway from Northern Virginia Community College’s Innovation Park. Despite declining vacancies, rent growth has failed to gain traction this cycle, leaving rent levels well below the pre-recession peak. Sales have been strong, though, with volume setting a record in 2016 at nearly $50 million. Sales were about $26 million in 2017, well above the historical average, but have slowed significantly this year. Most of the trades so far in 2018 have involved smaller buildings trading for a few hundred thousand dollars or less. As of mid-October, volume was just over $7 million.

gainesville 2

Manassas Submarket Q1 2019

The Manassas Submarket is expansive, stretching from Yorkshire down to Marine Corps Base Quantico, but nearly all of the inventory is in the northern portion, near Central Manassas. The submarket has one of the highest proportions of 1 & 2 Star inventory in the metro—this asset class comprises more than half of the office stock in the submarket. Vacancy has been below the metro average since 2011 but started a steep descent in 2014 due to several years of above-average demand. This demand can partially be attributed to low rents—Manassas is one of the most affordable submarkets in the metro, and rents haven’t experienced meaningful growth in years. As a result, rents are still well below the prerecession peak.

The lack of supply has also played a role in declining vacancies: One, 16,000-SF, build-to-suit office property delivered this year, the first new construction since 2013, and no projects are underway. Sales volume occasionally jumps into double-digit territory, but it’s not uncommon for it to stay below $5 million. Sales were particularly slow in 2016, when just $3.4 million was recorded. At almost $7 million, volume in 2017 was better but still failed to break the $10 million mark. As of mid-October, volume for 2018 was at roughly $6 million.

manassas office

Rare Development Opportunity in South Riding, VA

10 - DJI_0121.jpg

Aggressively price and perfectly located, we’re pleased to offer for sale a 1.224 acre parcel of land on Tall Cedars Pkwy in South Riding Virginia. With an asking price of $750,000 per acre the property is priced well below market comps and presents a rare opportunity to acquire an affordable and strategically located development site.

The FAR for the parcel allows for over 21,000 SF of development, but if coupled with the adjacent parcel’s additional 2.176 acres the new owner can develop as large a building as parking requirements will allow. With height restrictions set at 3 stories, developers can maximize square footage by building up; utilizing a smaller building footprint in order to increase the number of parking spaces. With existing infrastructure and utilities already at the site, the new owner will benefit from significant cost savings resulting in increased profit margins from future development.

The property is zoned CLI (Commercial Light Industrial) which permits a wide variety of uses from office and industrial to commercial retail and services uses. With limited zoning for medical use in the surrounding area and Inova Medical Center being located less than 3 miles down the road, the property’s CLI zoning also presents a rare opportunity for supportive health and medical services development. The property is located between East Gate Montessori school and the Goddard School, which combined serve nearly 200 families. As such the site lends itself to a variety of supportive uses such as martial arts studios, pediatricians, dentists, nail salons, coffee shops, dry cleaners, or other uses that would benefit from proximity to a daily family destination.

The property also benefits from its location across the street from the East Gate Metro Park & Ride Lot and is less than a half mile from Route 50 and East Gate Marketplace where similar pad sites have sold for over $1.5M per acre.

South Riding is one of Loudoun County’s wealthiest and fastest growing areas with over 8,300 households and 27,000+ residents) and a median household income of over $140,000/year. With population growth projected at nearly 18% over the next 5 years a new owner will likely see the property’s value appreciate over that time; making this a potential buy and hold play in addition to a development opportunity.

For more information please visit http://www.RealMarkets.com or contact Ryan Rauner, CCIM at Ryan@RealMarkets.com or 703-943-7079

09 - DJI_0119.jpg

Old Town Alexandria Submarket Overview Q1 2019

bustling-king-street-in-old-town-alexandria-with-trolley_credit-r-kennedy-visit-alexandria.jpgWith about 10 million SF of inventory, Old Town Alexandria is a relatively large office submarket, the core of which is along either North Washington, King, or Duke streets. This submarket has many historic buildings and sites, which restricts new development, particularly in the heart of Old Town. Newer, modern office construction has been on the submarket’s periphery, either along the river, north of Pendleton Street, or on the west end of King and Duke streets, near the King Street Metro station.

Office construction has been sparse since the recession, with the last delivery in 2010. On the bright side, the lack of construction has helped vacancies decline from their peak in 2011 and kept them well below the metro average. Despite relatively low vacancies, landlords have struggled to increase rents, which decreased in 2016 and 2017. Rents have shown signs of life this year, but it remains to be seen if this holds, especially given the weak absorption of late. Sales suffered for several years as well. After   blockbuster year in 2014, volume dropped for three subsequent years, failing to break $100 million in both 2016 and 2017. Sales have come back strongly this year, though—as of mid-October, more than $230 million in volume had recorded.

Alexandria Multi-Family Overview Q1 2019

potomac yards apt

Old Town/Potomac Yard Multi-Family Submarket Q1 2019

Amazon’s new home in Crystal City is expected to be a huge boon for this neighboring submarket. Because of the historical Old Town and the transforming Potomac Yard, the submarket offers potential Amazon employees with the best of both worlds: a small town, suburban escape and a fast-paced, metro-accessible urban community.

Potomac Yard is in northern Alexandria and included in the National Landing naming proposal. It is also the site of the future Metro station. The new station faced numerous delays, but Metro expects the station to open by late 2021 or early 2022. When complete, the project could potentially spur up to 13 million SF of new development.

The Old Town neighborhood, on the other hand, has an older, smaller inventory, but still benefits from its two Metro stations and the town’s historic fabric, which attracts both Millennials and empty nesters. Both neighborhoods benefit from strong demand, which has helped compress vacancies after expanding because of new supply.

Alexandria/I-395 Multi-Family Submarket Q1 2019

Amazon’s new headquarters in neighboring Crystal City and the looming construction pipeline could begin to change this historically affordable submarket. Indicators across almost every key performance metric were green at the end of last year. Most exceptional was 3.6% year-over-year rent growth in 2018. Occupancies and rents are continually boosted by the submarkets affordability and accessibility, which is contributing to significant investment activity this cycle.

Investors filled the void with the absence of development. From 2010–18, Alexandria/I-395 was the most active submarket, as more than $3.7 billion changed hands. This represents about 9% of all Washington D.C. investments and is about 30% higher than Outlying Fairfax County, which recorded about $2.5 billion in sales volume in that same time. Thanks to blockbuster deals, which included the Lincoln at Old Town and The Arbors on Duke, sales volume cleared almost $700 million in 2018, leading all D.C. metro submarkets.

Potentially because of low asking rents, developers overlooked this submarket for most of the cycle. Since 2010, less than 1,500 units delivered, significantly lower than neighboring Crystal City/Pentagon City, which delivered more than 900 units in Q2 2016 alone. But over the past three years, rent growth averaged about 2.7%, prompting developers to take a second look. Four projects are set to add about 4% to the current inventory, one of the highest percentages outside of D.C. proper.

i-395 mf 1

“New Town” Alexandria Submarkets Q1 2019

Alexandria Submarkets.png

I-395 Corridor Q1 2019

The Base Realignment and Closure (BRAC) proceedings and a lack of Metro access have had a devastating effect on the I-395 Corridor Submarket. The submarket suffered negative demand in five of the nine years of the current cycle, leading to skyrocketing vacancies. As part of BRAC, the Defense Information Intelligence Agency relocated from the I-395 Corridor to Fort Meade, vacating about 430,000 SF in 2011 and another 165,000 SF in 2014. The submarket never recovered from those move-outs, and the aging stock has only exacerbated the problem—nothing has been built since 2011, and the average building is more than 40 years old.

That being said, a couple of projects are underway, which will add a modest amount of office space. Upon delivery, though, there will be plenty of competition from other landlords, since the vacancy rate is among the highest in the metro. These issues have caused notable rent losses since 2012, resulting in rents that are still below their pre-recession peak. That being said, rents showed some signs of life in 2018. Institutional capital will occasionally enter the market and boost volume, but most trades of late involve local investors selling smaller buildings.

Eisenhower Ave Corridor Q1 2019

The Eisenhower Ave. Corridor is a moderately sized submarket with a high exposure to federal agencies. Despite the departure of the Department of Defense, the submarket added another federal agency in the National Science Foundation last year. Another federal agency, the U.S. Patent and Trademark Office, occupies about 2 million SF, equal to almost 40% of submarket inventory. Limited construction, moderate absorption, and a high proportion of 4 & 5 Star properties have helped competitive vacancies drop below the metro average, a significant improvement since 2012. Regardless, rents suffered losses each year from 2014–16 and essentially stayed flat last year; however, things have looked better in 2018. As of late October, rents had increased by about 3%.

Sales have been infrequent for the past 10 years, and it was not unusual for only a couple of transactions to close annually. While volume in 2015 was more than one and a half times the submarket’s historical average, 2016 fell back to the norm: Three transactions accounted for about $27 million. In 2017, sales ground to a complete halt, but have rebounded strongly this year—as of late October, nearly $83 million had recorded.

Huntington/Mount Vernon Submarket Q1 2019

i-395 office.jpg