How Vornado’s Skyline portfolio tells the story of office vacancies region-wide

DevelopmentBy Daniel Lagana (Guest Contributor) March 21, 2017

The Skyline building in Fairfax.  Image by Google Maps.

A giant office complex in Fairfax is sitting empty, and it recently sold for far less than its assessed value. This is becoming more common in our region’s outlying areas thanks to the economic shifts that have happened over the last decade along with a growing demand for office space near transit.

Vornado’s Skyline portfolio, which is made up of eight buildings, is an enormous 2.6 million square foot office park located on Leesburg Pike (also known as Route 7) in Bailey’s Crossroads, an area of Northern Virginia where Arlington County, the City of Alexandria, and Fairfax County meet. Skyline was built in 1977 as a development with office, residential, and a small retail shopping mall that was replaced by a Target store in 2002.

At its peak, the Skyline portfolio was one of Fairfax County's most valuable properties, and a wealth of tax-revenue assessed at $680 million. On December 21, 2016, the Skyline portfolio sold at auction for $200 million to a group of noteholders at the Fairfax County Circuit Court. The sale of Vornado's Skyline portfolio completed what had been the long and slow decline of the office park.

Office vacancies plague the DC region. Here’s why:

How did Skyline get there? Skyline's rise and fall is not atypical in Fairfax County, nor is it, for that matter, for the Washington region. Rather, its history aligns with the county's economic trajectory, where many suburban office parks, poorly positioned in a shifting office market, have met a similar fate or face a similar future to Skyline. (To be clear, I’m using suburb to mean “not near transit.”)

What happened to Skyline has also affected office parks throughout Fairfax County: In short, a few factors came into play to ensure Skyline’s fate:

BRAC dealt the complex its first blow, and an exodus of major tenants followed (from which it never recovered); a similar thing happened in Crystal City in Arlington. But unlike Crystal City, Skyline possesses neither rail transit nor a substantial Business Improvement District focused on revitalizing the area. Skyline was going to be the Fairfax County terminus of the Columbia Pike Streetcar, but Arlington County cancelled that project.

Also, sequestration lead to a sharp decline in federal contract awards. The reduction in federal spending resulted in businesses closing or downsizing, which led to a sharp rise in office space vacancies across the region’s more suburban jurisdictions.

Suburban offices are losing their desirability, and losing it fast

The tectonics of the office market are shifting: Increasingly, people desire to work and live in close proximity, and working remotely and conducting business over the internet is far more efficient. For example, a lot of federal contractors either work at a client’s site or telework, so there’s just not as much of a need for office space.

Suburban office parks left vacant due to the sequester and BRAC now face a new and shifting market driven by technological change and urbanization: One that prioritizes accessible transportation, notably rail, is proximal to dense and multifamily housing, and allows for telework. That technological change results in less office required per worker. In 2013 the average amount of office space required per worker was 150 square feet, compared to 225 square feet only three years prior (a caveat: available square feet increases during recessions as company work forces are trimmed but rent is still paid on office space).

Commercial demand for these buildings isn’t likely to go up, but that doesn’t mean they’re useless

Fairfax County's office vacancy rate stands at 17.4%, including sublets, or just over 20 million square feet. That 20 million square feet of vacant office space will likely never see the kind of occupancy it once enjoyed. Office parks not positioned along a transportation corridor, such as the Silver Line, face a dim future.

For example: The Skyline portfolio is 2.6 million square feet. However, according to the Fairfax County Economic Development Authority's Mid-Year 2016 Report, there are nearly 1.7 million square feet of office space under construction in the Tysons and Reston submarkets, both located along the Silver Line Corridor.

Additionally, that same report shows 476,913 square feet of office space delivered in the first half of 2016. In sum, 2.16 million square feet of office space was delivered or was under construction along the Silver Line Corridor in 2016 alone!

This is a tale of two extremes: robust demand for office space along transportation corridors and an excessive oversupply of space in suburban office parks. Firms demand quality office, but need less space per worker, compounding the dislocation in demand between transit orientated development and suburban office parks.

And therein lies the enduring and vexing question for area planners: What will Fairfax County and other municipalities across the region do with the excess and unoccupied office space?

Recent projects offer some answers. A derelict office building in Bailey's Crossroads, not far from Skyline, recently became a school. Office space in Alexandria, also not far from Skyline, was recently re-purposed into affordable housing.

Excess office supply provides an attractive option for local governments grappling with the dearth in affordable housing (transportation, however, remains a central issue). Additionally, co-working spaces have successfully converted office spaces, but many of those require transit and a young-ish workforce.

In a recent research report, Newmark Grubb Knight Frank, a commercial real estate advisory, found that 14%-22% of the US suburban office space is obsolete. Some offices will find ways to rehabilitate themselves and offer amenities to their tenants. However, most will simply remain empty, and their fate remains one of the most challenging questions for area governments.