Fairfax Center Submarket Q4 2019

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Fairfax Center

  • RBA: 7,796,6925 SF
  • Vacancy Rate: 22.2%
  • 12 Month Net Absorption: 13,200 SF
  • Average Asking Rent: $30.29
  • 12 Month Rent Growth: 3.3%

The Fairfax Center submarket is mainly comprised of the areas known as Fair Oaks and Fair Lakes (and coincidently is where I was raised and currently live). The area is centrally located with convenient access to Route 50, I-66, Route 29, and the Fairfax County Parkway; making nearly every destination within Northern Virginia less than a 30-minute drive. Fair Oaks Mall, Fair Lakes Shopping Center, Fairfax Corner, and Fairfax Towne Center offer over 3,000,000 SF of retail amenities and the submarket is also home to Fair Oaks Hospital and medical campus. Despite these positive features, Fairfax Center has suffered over the past decade due to BRAC, sequestration, and move-outs by large, government contractors. Emerging trends in office leasing are likely to contribute to these woes due to the submarket’s lack of access to public transit.

At 22.2%, Fairfax Center’s vacancy rate is 9.4% higher than the DC metro average, but it is actually down from its peak of 24.3% in 2017. The downturn started in 2007 when, over the next 4 years, the submarket experienced 849,200 SF of negative net absorption (approximately 11% of total inventory) the result of sequestration and a shift towards small business in federal contracting, which caused anchor tenants like Northrop Grumman and ManTech to vacate large blocks of space. Just as the submarket was starting to recover in 2011, posting 4-straight years of positive absorption, SRA International vacated 290,000 SF at the end of 2015 due to its merger with CSC.

Fairfax Center’s availability rate paints an even bleaker picture of the current state of the submarket and its possible future. 4 & 5-Star properties comprise 57% of the submarket’s inventory and while the vacancy rate is 18.8% the availability rate is 25.2%. Similarly, 3-Star properties, which comprise over 40% of total inventory, have a vacancy rate of 28% with a whopping 32.7% availability rate (nearly 1/3). Combined the submarket has over 2,100,000 SF available (28% of total inventory).

The submarket’s “recovery” is being driven by smaller tenants with the average lease being less than 10,000 SF; however, it is unlikely that small-tenant leasing will be able to make a significant impact on submarket fundamentals in the near future. Furthermore, the submarket is still vulnerable to large-scale move-outs. CGI occupies over 200,000 SF at 12601 Fair Lakes Cir and their lease is set to expire in February 2021. General Dynamics signed a short-term renewal of the entire 185,581 SF at 12450 Fair Lakes Cir in 2018; indicating that it is likely to reduce its footprint over the coming years.

Despite this all, rent growth over the past 12 months was 3.3%. This can mostly be attributed to the submarket’s 4 & 5-Star properties, which was over 4.5%. This can be attributed to a number of factors, one of which is rising construction costs. Many spec suites and build-to-suits today can cost more than $70/SF. This has caused many landlords to increase their minimum lease terms and/or increase rental rates to either increase the amortization period or reimbursement timeframe. In addition, some owners are repositioning older assets; updating common areas and adding building amenities such as fitness facilities, tenant lounges, etc. so that they might compete with similar assets in Reston and Tysons Corner. This can involve huge capital outlays, which are reflected in the property’s asking rate.

Another factor contributing to the oxymoronic rent growth figures, is likely competition amongst tenants for small blocks of space. Fairfax Center has 12 buildings that have at least 25,000 SF of contiguous space available. Landlords are likely still holding out hope that they will be able to lease these blocks to full-floor tenants so that they do not have to incur the costs of multi-tenanting the floors. To “multi-tenant” a floor, landlords must create a common area corridor that provides ingress and egress to all tenants on the floor (per code) as well as access to bathrooms. Landlords with underperforming assets may be unwilling or unable to incur the significant, up-front expense to demise their spaces to adapt to the submarket’s changing tenant profile.

The “good” news for Fairfax Center is that there has been little to no supply-side pressure to exacerbate the submarket’s vacancy issues. Only 2 buildings have been built since 2008: Inova’s medical office building on Fair Oaks Hospital’s campus and the Apple Federal Credit Union building at Fairfax Corner. The only proposed project is the Peterson Companies’ 2nd phase of Fairfax Corner; however, this is indefinitely on-hold due to weak preleasing activity.

Fairfax Corner is a perfect example of the impact of public transit amidst changing workforce demographics and demand trends. As baby boomers continue to require and millennials make up an increasing percentage of the employment base, access to metro is becoming a requirement. Some millennials in Arlington and DC do not own cars, limiting them to metro-accessible employment centers. Employers that do not locate their business in such submarkets risk greatly reducing the talent pool from which they’re able to draw. Even though Fairfax Center is more affordable than submarkets like Reston and Tysons Corner, asking rents will likely need to decrease further to compete for tenant demand to compensate for its lack of access to public transit. Unfortunately, this drop in asking rates is more likely to be the result of (continued) elevated and/or increased vacancy rather than a proactive strategy by submarket owners.

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