How Arlington Developers, Officials Aim To Bring Down Its 23% Office Vacancy

Arlington has long been known for its office towers that rise above the skyline of neighboring D.C., and for decades it has drawn companies from the nation's largest defense contractors to Nestlé to Amazon. But today, the county's office market is facing a reckoning. 

The pandemic-driven shifts in office use have exacerbated the county's already-high office vacancy. The county's 37M SF of office space had a 23.2% vacancy rate as of the second quarter, according to CBRE, one of the highest in the region, ahead of Fairfax, Loudoun and Prince William counties. 

“The market is not easy,” Monday Properties Executive Vice President Jennifer Burns said Thursday at Bisnow’s Future of Arlington County Event at 3601 Wilson Blvd, an office building owned by LaSalle Investment Management. 

"It’s a challenging time to be an office owner and a developer, and all of us are acutely aware of that," she added. 

This summer, Monday Properties defaulted on a loan backed by a billion-dollar Rosslyn office portfolio. Burns didn't comment on the status of the portfolio. 

Meanwhile, JBG Smith expects 1M SF of its National Landing office space to become vacant by the end of next year as Amazon employees move from temporary leases into the company’s new HQ2. 

“We have some challenges in the next couple years,” Ballston Business Improvement District CEO Tina Leone said. “It’s going to maybe get harder before it gets better.” 

While the county has a surplus of office that will need to be dealt with, panelists argued that the area's mixed-use identity makes it well-positioned to handle the challenge, and they say efforts are already underway to bring down the vacancy. 

“With the combination of the county providing incentives and flexibility and the BID providing that kind of overlay and attraction to businesses and explaining why you want to be there, I think there will be a shift in where people occupy in our region, and I do think Arlington will come out a net winner over time,” Dweck Properties President and Chief Development Officer Andy Vanhorn said. 

Last January, the county board approved an initiative to expand uses for commercial buildings, an effort to fill underperforming space while adding more amenities. The Commercial Market Resiliency Initiative allows for such buildings to include uses like animal boarding, breweries, makerspaces and educational facilities. 

“Zoning ordinances in Arlington looked a lot like elsewhere, which were about restricting activity,” Arlington County Board Chair Christian Dorsey said, adding that this prevented many commercial buildings from adding new uses. 

“So we tried to loosen up some of those restrictions,” he said. 

In addition to filling vacant space, those new uses could attract employees to actually come back to the office as they look for amenities within buildings or nearby that make the task of coming in more manageable. 

“I think the way to go about it is to provide flexibility that people need to live their lives and provide those amenities that they really need, where they need it,” Leone said. 

“I’m talking about childcare. I’m talking about having kids near your office, in your building so parents have an easier time managing that part of their lives,” she added.

Burns said she has already seen the impact of zoning flexibility on Monday Properties’ office buildings in the area. The office owner, the largest in Rosslyn and one of the largest in the region, signed an indoor playground, Scramble, to one of its Shirlington properties, replacing a ground-floor gym. 

Burns said that Arlington’s new zoning guidance allowed the new use “without a tremendous amount of hurdles for that tenant to work through for that use.” 

Before the pandemic, getting approval for that play space would have taken between nine and 18 months, Dorsey said. Under the new process, he said permitting time is generally reduced by two-thirds or three-quarters.

“The ability to be able to deliver that kind of certainty to a potential tenant, that’s huge,” he said. “And that’s something we identified, probably a little more slowly than some of the commercial property owners would have liked, but we’ve gotten there, and I think the results will definitely bear fruit.”

In addition to the flexibility on the zoning side, panelists said Arlington has a number of factors that make it especially appealing to residents and office users who want to live near where they work. 

“We have a very balanced mix of uses for downtown areas. Typically, you don’t see that, but Arlington actually planned for a pretty roughly even mix of office and residential,” National Landing BID President Tracy Sayegh Gabriel said.

“And we’ve seen during the pandemic, that’s been our lifeblood, to have residents and people working from home working in our district,” she added. “And I think that puts us lightyears ahead of lots of downtown areas.”

Dweck Properties is bullish on Northern Virginia for exactly that reason. The mostly residential owner repositioned almost its entire portfolio to the area, Vanhorn said, selling assets in Montgomery County and in the District. Dweck now owns 7,200 units in the region, with the vast majority concentrated in Northern Virginia and nearly half of its portfolio in National Landing. 

“We believe we are in one of the brighter spots nationally,” he said.  

Dorsey said "there's more work to do," adding that in his home state of New York, he has seen vacant big-box stores transform into pickleball facilities. 

“I’d love to see that in Arlington, for any investors in the room,” he said. 

Conversions are also a strategy that panelists said could be made easier in the county. 

"[In] Alexandria, every commercial property, if you’re outside of a tiny little flood zone, can be automatically converted and used as multifamily,” Stream Realty Managing Director Anthony Chang said. “It’s no surprise that Alexandria is a top three jurisdiction in the country in conversions and repurposing and the demolition to change office use into residential use.” 

“So if Arlington can steal that playbook, that would be incredible," he said.