Herndon
- RBA: 12,815,207 SF
- Vacancy Rate: 15.7%
- 12 Month Net Absorption: 307,000 SF
- Average Asking Rent: $31.83
- 12 Month Rent Growth: 2.8%
Herndon is one of the most exciting submarkets in the DC metro, quietly nestled in the shadow of neighboring juggernaut Reston; however, with the delivery of the 2nd phase of the Silver Line in 2020, Herndon is poised for explosive growth. Historically, Herndon has suffered from an “address stigma,” which is more relative (compared to Reston) than objective. Herndon has over 7,600,000 SF of 4 & 5-Star properties many with prominent visibility along the Dulles Toll Rd and Route-28. Rates for these properties increased by a whopping $1.00/SF (2.86%) from last quarter ($35.02/SF to $36.02/SF) and average rents increased by $0.63/SF (2.02%). Even 3-Star properties saw a $0.20/SF increased from last quarter ($25.73/SF to $25.93/SF). On top of that, Herndon’s metro accessible properties command rates higher than the average market rate for both Reston and Tysons Corner. That’s not all.
Herndon has been plagued by high vacancy since Q1 2016 when the submarket saw a 3.7% jump in the rate in one quarter from 12.5% to 16.2%. Vacancy peaked at 18.7% in Q2 2017 and then fell to 14.5% just 3 quarters later (Q1 2018). Just when things were looking up, vacancy again skyrocketed by 3.7% in 2018; ending the year at 18.2%. The submarket’s rollercoaster ride is the result of large-scale move-outs, the most recent being Time Warner Cable vacating 13820 Sunrise Valley Dr in 2018 when it was acquired by Charter Communications. Herndon has endured stormy weather for nearly 4 years; however, recent and significant leasing activity (including at 13820 Sunrise Valley Dr) has brought vacancy back down to 15.7% and should indicate an end to Herndon’s vacancy woes. Projections have rates dropping to 12.1% in the next 12 months likely due to the delivery of the 2nd phase of the Silver Line.
Amazon may have chosen National Landing as the site for its HQ2, but its subsidiary Amazon Web Services (also known as Vadata) is quietly making Herndon its unofficial headquarters in the DC metro. On October 4, 2019, AWS purchased 13600 EDS Dr for $54,000,000. The 400,000 SF office building sits on 57.05 acres along Route 28 (the property was assessed at $80,676,490). The company established One Dulles Tower (13200 Woodland Park Rd) as its east coast hub in 2017 when it leased the entire building (403,622 SF). Remember 13820 Sunrise Valley Dr that contributed to the spike in the submarket’s vacancy rate? AWS leased the entire building (268,240 SF) in May of this year.
The reason for all this is Herndon’s strategic location. The submarket provides access to two major north-south and east-west transportation nodes: Route 28 and the Dulles Toll Rd, respectively. Herndon is situated between two of the largest industrial submarkets in the area: Route 28 North and South. Tech giants like AWS are continually building and leasing more data center space and neighboring Loudoun County and the area known as Data Center Alley is home to the largest concentration of data centers in the world. In addition, Amazon’s disruption of the retail industry has directly benefited the industrial market by increasing the need for storage and distribution space as well as last-mile delivery. Herndon’s proximity to over 47,200,000 SF of industrial inventory and Dulles International Airport along with its inventory of 4 & 5-Star properties make it an ideal choice for Amazon and others.
With the opening of Herndon’s two metro stations (Herndon Station and Innovation Station) next year, the submarket will be immediately connected to Dulles International Airport and the greater DC region by public transit. Reston and Tysons Corner have already begun syphoning demand from closer-in submarkets (Rosslyn-Ballston Corridor) since phase-1 of the Silver Line delivered because of their relative affordability and new supply of trophy, 4 & 5-Star properties. Herndon has similar quality product and is even more affordable.
Considering these recent developments, it should come as no surprise that Herndon led all Virginia submarkets in sales over the last year with almost $1,000,000,000 deployed over the past 3 years. Despite this, Herndon’s average market cap rate (6.3%) is still above the metro and its average sales price per square foot is below that of Reston and Tysons Corner. As a result, Herndon presents a rare opportunity for investors to “buy low” in a submarket in the early stages of a complete transformation. There are more than two dozen projects proposed and in April 2019 the Town of Herndon approved Penzance Properties’ first mixed-use redevelopment at 555 Herndon Pkwy. This project, located right at the new Herndon Metro Station, will include a high-rise office building and two high-rise residential towers. This is just the beginning for Herndon. The combined forces of the Amazon effect, AWS’ growing office and data center needs, and a regional shift in employment growth into the cyber-security, IT, and high-tech fields could see Herndon join the ranks of Reston and Tysons Corner as one of Northern Virginia’s premier office submarkets.
