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.
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.
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%.