CompStak Research Analyst Emmanuel Koduah reports on the growth of the Tysons Corner submarket (to view the full report: From Corner to Center – The Growth of Tysons Corner):

From Corner to Center – The Growth of Tysons Corner

Lerner Enterprises surprised the commercial real estate world in July 2011 with an announcement of a planned office building at 1775 Tysons Boulevard. The construction of the high end, energy efficient trophy building began without any confirmed tenants or bank financing and relied on speculation and future growth potential of the Tysons Corner/McLean submarket, commonly referred to as the ‘downtown’ of Northern Virginia. In a market overcast with federal sequestration and economic uncertainty, this submarket has quietly and steadily provided a bright spot. While the DC office market has remained flat in recent quarters with starting rents around $47 per SF, the average starting rent for office space in Tysons Corner rose about 7.5% since 2012 to reach $31.65 per SF in 2013.

Screen Shot 2014-01-13 at 5.03.05 PMSo what has sparked the steady growth in this submarket? As one of the largest office submarkets in the country, Tysons Corner’s growth is not surprising, but the timing of it is. In 2011 the Fairfax County Office of Economic Development presented a 40-year plan to transform the sprawling suburban sprawling market into a high-density urban center. While this economic plan will likely spur significant growth in the future, the market was expected to face the current sluggish growth of the DC area. However, the most interesting trend at this time is the submarket’s ability to seemingly benefit from the woes plaguing the Washington DC market. Driven by growing tenant emphasis on cost efficiency, the area is developing a reputation as a lower cost alternative to the DC market, which ranks among the most expensive in the nation. Although in 2013 DC has offered a slightly better average concession package with a half month more in free rent and additional $10 per square foot in tenant improvements, DC tenants are paying a premium of $15 per square foot in starting rent for these concessions. Tysons Corner’s trophy buildings priced at the fraction of downtown DC’s costs are catching the attention of major tenants.

Screen Shot 2014-01-13 at 5.03.27 PMWhen Intelsat SA was in the market for a new location for its headquarters in late 2012, Macerich was able to lure the company into Tysons Corner as the anchor tenant for their soon to be completed Tysons Tower. The decision to sign in the new Tysons development was a major victory for the Tysons market because it showed its ability to compete with a major national office market. The leading satellite communications company was looking to downsize from its current 350,000 SF office in Uptown DC and had numerous options in DC proper. A possible destination was the CityCenter office building located in the East End of the District, a building very similar to the Tysons Tower. Both buildings are brand new, modern, energy efficient developments with prime downtown locations. However, the difference lies in the rental rates. Covington & Burling, a major law firm which signed in late 2012 to be the anchor tenant of CityCenter will pay a mid-$50s triple net starting rent. According to a 2013 Building Owners and Managers (BOMA) International research report, the Washington DC market has an average operating cost of $9.51 per square foot (likely low for a brand new trophy building), bumping Covington & Burling’s starting rent into the mid-$60s. Meanwhile, Intelsat will start with a high-$40s gross starting rent for its Tysons Corners office. After factoring rent abatement and tenant improvement allowance, Intelsat SA will pay at least 35% less annually in net effective rent over the tenure of its lease.

Screen Shot 2014-01-13 at 5.03.41 PMTysons Corner’s close proximity and access to the city, aided by the soon to be completed Silver Metro Line and lower rental rates, is grabbing the attention of other large tenants such as Cvent (which chose to remain in Tysons and relocate closer to the new Metro Line after its $135 million IPO). The expectation for future growth may also be seen in the trend of submarket tenants signing longer lease commitments. The average lease term in 2013 is just over 80 months, about 16 months more than the previous six year’s average. Additionally, higher tenant improvement allowances and free rent are given by landlords, a direct result of the increase in class A developments. With the optimism surrounding this submarket in a slow metro area economy, it’s no surprise that developers such as Lerner Enterprises and Macerich are looking to expand their footprint.

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Emmanuel***based on a report written by CompStak research analyst, Emmanuel Koduah (pictured).