As a whole, the office market in Tysons remains challenged, but declining demand for office space, a national trend in the wake of the COVID-19 pandemic, is hitting some properties harder than others.
The area’s office vacancy rate continues to climb, reaching 22% as of Sept. 30, up from 19% at the same time in 2023 and 14% in mid-2020, according to data from the Tysons Community Alliance’s (TCA) inaugural Tysons Quarterly Market Report.
Building on information in the DataHub and development pipeline launched on its website earlier this year, the TCA, a nonprofit community improvement organization dedicated to promoting Tysons, unveiled its report for the third quarter of 2024 last Thursday (Nov. 21) in a webinar that drew over 120 attendees, per CEO Katie Cristol.
Concerns about the state of the office market emerged as a dominant theme of the presentation, but some promising signs emerged as well.
“We’re seeing numbers that highlight both challenges and then also some potentially encouraging growth,” TCA Vice President of Research and Strategy Drew Sunderland said, pointing to increased leasing activity and a stabilization of rents following a few years of declines.
According to the report, tenants signed 65 leases in this year’s third quarter for a total of 559,293 square feet of office space, more than doubling the 217,748 square feet leased in Q3 2023. Led by security tech company Alarm.com’s expansion of its Boro office space to 246,000 square feet, the average lease was for 8,604 square feet and 3.7 years.
However, Tysons also saw some prominent tenants leaving or downsizing, resulting in a negative net absorption rate of 231,060 square feet compared to 16,885 square feet in Q3 2023.
A big chunk of the freed-up office came from Gannett, whose vacated headquarters at Valo Park (7950 Jones Branch Drive) went back on the market a week before the quarter ended, Stream Realty Partners co-managing director and TCA board member Jeff Roman noted. Some companies like WeWork, the accounting firm Baker Tilly and events manager Cvent stayed in Tysons but took smaller spaces.
“[That brings] our year-to-date negative absorption to over 750,000 square feet, so that is a big number,” Roman said. “In better years prior to the pandemic, we had absorptions that were over a million square feet on the positive side. So, it’s going to take us a while to get back to that.”
While the overall numbers are sobering, breaking them down by the type of office property reveals significant differences in demand.
According to Stream Realty’s data, trophy-class office buildings have a vacancy rate of 13.9% — on par with the rate of 13.14% for that category in Northern Virginia as a whole — while other classes are at 25.8%. The eight properties in Tysons that Stream classifies as trophy office are renting at an average of $61.33 per square foot, while all other buildings average $35.60.
Acknowledging that the property classifications are somewhat subjective, dictated by a building’s age, location, proximity to transit, amenities and other factors, Roman said the vacancy rate for trophy office would be as low as 6.2% without the still-empty Tysons Central building.
“There is a true flight to quality,” he said. “Companies are looking for better locations, better access, better quality of the building, space, systems, amenities, ownerships. So, as trophy space continues to dwindle, we see the [average rental] rates rising.”
With tenants jockeying for the top-tier spaces, Roman added that “a strong argument” could be made that Tysons needs new trophy office development to compete with other markets like Reston and Arlington.
Meanwhile, older offices with fewer amenities that might entice workers will likely continue to be targets for conversion and redevelopment.
“It’s sort of the haves and have-nots,” Roman said. “The tenants want as much as possible, and really, what the companies are looking for in order to … get their employees back and give them a better experience, the more that you can provide is better.”
As it did last year, the office market’s struggles stand in contrast to the growth that Tysons has seen in every other sector, according to TCA’s quarterly market report.
About 94% of the area’s residential units are occupied, even as rents continue to rise, becoming the priciest in the D.C. region. In addition, the retail vacancy rate dipped from 2.6% in Q3 2023 to 2.2% in this year’s third quarter, and hotels have returned to pre-pandemic levels with a 72% occupancy rate, up from 68% at the same time last year, TCA Associate Director of Research Kevin O’Halloran shared.
Visitation to Tysons has bounced back to 92% of pre-pandemic levels based on data from Placer.ai, an Israel-based company that uses anonymous cellphone location data to track foot traffic.
While much of that is driven by shoppers and other leisure visitors, visits to workplaces, including for retail and hospitality workers, have returned to 80% of 2019 levels, per the TCA’s report. As of August, office buildings have recovered about 58% of their January 2020 visitations, which is below the national rate of 61% but above other parts of the region, including Reston (44%), Arlington and D.C. (both 52%).
Return-to-office rates vary by the day of the week, dipping notably on Fridays, and employees who live within 10 miles of Tysons are more likely to be back in the office.
“We’re definitely seeing recovery here,” O’Halloran said. “It’s not fully back, but there’s definitely signs of improvement, and I think this may only continue with more improved return-to-work, return-to-office policies that we’re definitely seeing.”
