Tysons Office Owners Still Waiting For Shift To Suburbs As Leasing Remains Slow

Tysons, one of the country's largest suburban office hubs, appears well-positioned to benefit from an anticipated pandemic-related shift in demand away from downtowns. But while office developers in the market hope to capture that demand, they have yet to see it materialize.

Tysons has 31M SF of office space, the largest submarket in the D.C. suburbs, according to Transwestern. It experienced negative absorption in Q3 of 83K SF, Transwestern's latest report found, and it recorded 26K SF of negative absorption through the first nine months of the year. 

"This year has been very slow from a leasing perspective," Foulger-Pratt Vice President of Development Robert Abt said. "Deals that have been done this year were deals that started pre-COVID and the momentum carried them through. What we found is most tenants just hit the pause button."

Foulger-Pratt, in partnership with USAA Real Estate, broke ground in November 2019 on Tysons Central, a 25-story, 384K SF spec office building near the Greensboro Metro station.

The project represented the only under-construction office space in Tysons as of September, according to Transwestern. Abt said the team had the option to halt construction once the coronavirus pandemic struck, but it decided to push forward with the spec project. 

"We and our partners are very bullish about the Tysons market," Abt said. "Even with the uncertainty posed with COVID, when we probably could have stopped the project, we made the decision to move forward even with the added uncertainty because we're confident in the long-term prospects of Tysons." 

Construction on the project is scheduled to top out by February and deliver by the first quarter of 2022. Abt said he has started to see an increase in touring activity from prospective tenants over the last month as news of effective vaccines has restored some confidence to the market. 

He said the activity has largely been in the technology and government contracting sectors. The developer is looking to kick off the leasing at Tysons Central with one or two large, multi-floor tenants, rather than leasing it piecemeal to small tenants. He said he has seen a slowdown in new construction this year, so Tysons Central will be one of the only new developments with large blocks of available space when it delivers. 

"If a tenant wants new office space or wants absolutely first-class space with blocks of meaningful size, there's not much available in Tysons right now," he said. "We're very bullish about our position in the marketplace having made the not-easy decision to move forward when COVID hit, but we believe that's going to uniquely position us in the market with the blocks of space we can offer."

While Foulger-Pratt chose to push ahead with its spec office project, multiple other developers in Tysons are choosing to wait for a pre-lease before beginning construction. For some, that pre-lease has been difficult to find. 

Cityline Partners has multiple office buildings planned at its Scotts Run development. The buildings range from 400K SF to 600K SF, and Cityline Managing Director Donna Shafer said it would want to pre-lease at least half of a building before breaking ground. 

"From a development perspective, it's a little frightening to be spec on 400K SF or 500K SF of new development," Shafer said. "And from the user side, it's a little intimidating because we don't know what the workplace looks like in the coming years." 

Shafer said Cityline will likely seek flexibility from the county to reduce the density of its planned office buildings, because she doesn't see large tenants on the market that could anchor one of the new buildings as they are planned today. 

"We have sites approved for some massive office buildings. I don't think the market for those is very deep at all right now, so we're probably going to need flexibility in terms of allowing a decrease in some of that density," Shafer said. "Being able to scale that density back is an important piece of flexibility that will allow Tysons to succeed and take advantage of this opportunity coming out of the pandemic."

Tysons has the opportunity to benefit from office demand shifting away from downtown, Shafer said, but she added that it is too early to point to evidence of that trend occurring, because many companies have been delaying leasing decisions. 

"I believe there is a great opportunity because we are the best of both worlds," she said. "There is a dynamic urban center, but we still have the attributes of the suburbs."

Abt also said he sees Tysons as well-positioned to benefit from a migration away from downtown areas, but the only evidence of that shift he is seeing today is in the residential market. 

"All leading indicators suggest that moving to areas of a little bit less density but still on transit is, in fact, happening. Certainly it's happening in residential, I think there's a lot of evidence to that," he said. "I think it's very likely to happen on the office leasing side, but I think the data's too early to point to anything real specific."

The Meridian Group has future office buildings planned in its long-term Tysons pipeline, but this year it has been focused on filling the availabilities in its existing portfolio, Meridian Group Senior Vice President Katie Yanushonis said. 

The developer still has 75K SF available at the 420K SF Boro Tower office building, and a space became vacant in October at its nearby Boro Station property. Broadband communication company OneWeb, which went through Chapter 11 bankruptcy this year, gave back 55K SF at the building, Yanushonis said. 

The bulk of leasing demand The Meridian Group has seen this year comes from the federal government, she added. It landed a 59K SF federal agency in August at its 1953 Gallows Road building in Tysons, and she said it has another 28K SF government lease in the works. 

"We're still seeing some good activity on the government side," Yanushonis said. "On the private sector side, it's bifurcated into different size ranges."

She said some smaller private sector tenants in the 5K SF-and-under range have decided to let their leases expire and continue working remotely, while midsized tenants have been kicking the can down the road with short-term renewals. 

Yanushonis said she doesn't expect tenants to fully shift from downtown, but she believes companies could pursue a hub-and-spoke model in which they open new offices that provide shorter commutes for employees who live in the suburbs. 

"We feel very well-positioned for that at The Boro," she said. "It would allow someone coming from further west to have a touch down spot in Tysons versus having to go all the way downtown, and still have access to the amenities in D.C. proper. We haven't seen that just yet, but our portfolio is well-positioned to be set up for that."

PS Business Parks Divisional Vice President Christopher Auth, whose firm's older Tysons office buildings have lower asking rents than the new developments, said he thinks they are in a position to benefit from companies looking for a cheaper alternative to Downtown D.C.

He said he hasn't seen that shift occur yet, and he expects companies will be looking more for satellite offices in the suburbs than to relocate from downtown. 

"If people are trying to use the hub-and-spoke idea where they have additional offices to de-densify their downtown location, I can see Tysons being an option," he said. "Maybe if there's a lesser rent you can pay instead of being on K Street, that's helpful."

PS Business Parks is partnering with Kettler to redevelop a Tysons office park into The Mile, and it has delivered one apartment building with another underway. The long-term plan for the project includes a redevelopment of the older office buildings into new product. 

Auth had said before the pandemic that he wasn't in a hurry to launch the new office component because the existing office is still more than 90% leased, and he said Tuesday the pandemic could potentially push the timeline back. 

"It's always tough to take money offline in order to build something that's essentially speculative," he said. "The fact that the property's running well is a factor in the timeline."

The Tysons office market this year has underperformed its nearby counterpart Reston, which has landed major deals including a 400K SF lease with Microsoft and a 196K SF lease with Volkswagen, both at Reston Town Center. 

Reston recorded 470K SF of positive net absorption through the first nine months of the year, according to Transwestern, making it the best performer of any submarket in the region. 

Transwestern Senior Vice President Alex Hancock, who works on the Reston Town Center leasing team and also represents landlords in Tysons, said there has been a noticeable difference in the two markets' performance this year. 

"We did see some good demand out on the Toll Road, notably Microsoft and Volkswagen," he said. "There was good demand out there, but Tysons was a little slower. The activity wasn't there."

Hancock said he thinks this disparity is driven by the different business sectors that are drawn to the two submarkets. 

"Tysons is heavily professional services, and Reston is heavily high-tech and cyber, so just from an industry segmentation standpoint, the better growth has been in the tech services versus the professional services world," Hancock said. 

Fairfax County Economic Development Authority CEO Victor Hoskins said he sees Tysons and Reston as poised to benefit from increased office demand during the economic recovery, though the latter has landed larger deals this year. 

"Reston and Tysons are both strong, and they're only going to get stronger when we come out of this," Hoskins said. "It's hard to say right now one is better than the other, but I'd say in the most recent transactions, you can see that Reston has been a big winner."

FCEDA works with companies considering relocating to the county, and Hoskins said he sees multiple large tenants looking at the market that could potentially anchor some of the new office developments in Tysons. 

"We're seeing large tenants," Hoskins said. "The difference we've been seeing in the market is with the 50K SF and below tenants there's a lot less traffic than 50K SF and above. The larger tenant traffic is moving apace as it always has."