Goodbye, office park; hello, downtown

Have some sympathy for Northern Virginia’s Tysons Corner. Yes, it is one of the biggest employment centers in the country and in the wealthiest part of Virginia, but it has endured years of orange traffic cones and jersey walls amid the construction of HOT lanes on the Capital Beltway and four new stations of the Metrorail system. Uncertainty from federal budget wrangling and sequestration cuts has taken a toll on the commercial real estate market here, too.

Right now “the office market is very, very quiet. There’s not a lot of commercial activity out there,” says Donna Shafer, an executive vice president with Tysons Corner-based CityLine Partners. But the quiet belies a rising momentum, in the near- and long-term.

For one thing, the construction is almost done — the HOT lanes on the nearby Capital Beltway are open and the four Metro stations will be finished in late summer.

Also, in the past year or so Fairfax County has approved several massive development projects that will create the long-planned conversion of Tysons from an office park into Fairfax County’s urban, walkable downtown. As the stations open and new commercial space comes online, Tysons will emerge a much different and presumably busier market.

The most recent major project to win county approval is called Scotts Run South, being developed by CityLine. It’s a 30-acre project across Route 123 from the McLean Metro station. Plans call for 17 new office and residential buildings totaling 6.5 million square feet of mixed-use development. CityLine also won county approval last November for another of its Tysons projects, Arbor Row, which has proposed 2.5 million square feet of mixed-use space. Already under way is Spring Hill Station, a mixed-use project of 7.6 million square feet under development by the Georgelas Group.

An existing office tenant, Capital One Financial Corp., also is expanding. It plans to add about 3 million square feet of mixed-use projects and is seeking county approval for a new 800,000-square-foot headquarters building that would be among the tallest buildings at Tysons.

By 2050, the county’s long-term plan expects Tysons to be home to 100,000 residents and 200,000 jobs. The George Mason University Center for Regional Analysis estimates Tysons has about 120,000 jobs today and roughly 21,000 residents.

Anchoring all the growth is the extension of the Metro Silver Line, which includes the four new stations. Those stations and the adjoining pedestrian bridges are up and almost completed, and trains are rolling as Metro crews test the system in preparation for opening. “I think that once those trains are running, it’s going to have a dramatic impact,” Shafer says. “The rail service is another important step in creating a place where people can live, work and play.”

In the meantime, though, the market is slowly coming out of a slump. The office vacancy rate in Northern Virginia climbed to 15.9 percent in the first quarter, up from 15.3 percent in the previous quarter with a negative net absorption of 231,000 square feet, according to a recent report from CBRE Group. That’s not a good trend, but in the same quarter a year ago negative net absorption was well over a million square feet.

“There have been a lot of issues in Northern Virginia over the past 12 to 18 months,” says Jeff Kottmeier, CBRE’s director of research. “BRAC [Base Realignment and Closing] has been going on, and it has had a big impact. If you look at the overall market numbers, a larger portion of the slower demand” is related to the relocation of military personnel to outer suburbs, he says.

Kottmeier notes that many government contractors in Fairfax have been anticipating the federal spending cuts for about a year and have been cautious about hiring and are “trying to be really efficient with the amount of space they take.”

At 15.2 percent, Tysons’ vacancy rate is better than most of the other Northern Virginia submarkets CBRE follows. Its average asking lease rate of $27.25 is lower than the region average of $30.18. The effects of sequestration may still affect market demand for the rest of the year, but Tysons stands to rebound. That uptick is expected to occur not only because new stations are opening, but also because the major construction work is done. “Two years ago that was tenants’ major concern,” he says. “We had two major infrastructure projects,  [HOT lanes and Metrorail]. It was kind of a nightmare.”

Tysons has done well lately attracting big corporate headquarters. Kottmeier says one of the bigger deals is an example of that trend and the drawing power of Metro. He’s referring to Intelsat’s decision to move its headquarters from Washington, D.C., to the new 22-story Tysons Tower, next to the Metrorail line, taking more than a third of the building’s 520,000 square feet. Intelstat has signed a 15-year lease but won’t move its 430 employees until July 2014. The building is part of a bigger Macerich development that includes a 17-story Hyatt Regency, a residential tower and retail space.

A second tenant also has signed on. Accounting firm Deloitte LLP is leasing three floors, or about 88,000 square feet — a deal that makes the property about 60 percent pre-leased.

Other projects are coming along as well. Last spring the Georgelas Group broke ground on its first building, a 25-story residential tower that should be finished by early next year, says Aaron Georgelas, a partner with the firm. The company wants to break ground by the end of this year or early 2014 on a second residential tower with 404 units at its site next to the Spring Hill station on the west side. Then the firm will try to figure out how to stage the rest of its planned residential units — 4,000 over 20 years.
Getting people to live in Tysons is the catalyst, Georgelas says. “You can create all these nifty retail centers and these town centers, but it really becomes organized” when people move in, he says. “People create place. That’s our mantra right now.”
The new CityLine development, Scotts Run South, will start taking shape soon, too. The construction of 425 apartment units is planned to begin early next year.

Shafer says it might be hard for people to grasp the scale of the overall redevelopment plan of Tysons, which covers almost five square miles. Her favorite graphic for illustrating the potential for Tysons is a map with Tysons overlaid on top of Washington, D.C. “Tysons Corner stretches from Georgetown to the Capitol. And when you think about that, think about how many different places and neighborhoods you pass through when you make that trek from Georgetown through the district,” she says. “It’s just an incredible amount of real estate.”

Capital One’s development should begin this year as well, says company spokeswoman Julie Rakes. It plans to begin utility and road construction this fall and to break ground on new construction in mid-2014, she says. The 26-acre site is next to the McLean Metro station, the easternmost of Tysons’ four stops.

CBRE’s first-quarter analysis says that so far, the arrival of transit in Tysons has not had much impact, though prospective tenants are starting to pay more attention. When the trains start running and the number of residents grows, it will be more clear what impact the development is going to have, and how fast. “We’re just at the cusp of that area being developed,” says Kottmeier.