Amazon’s recent announcement that employees will be required to return to the office five days a week has sparked significant interest in the real estate and business communities. This policy shift is part of a larger trend where tech giants and other major corporations are encouraging—or mandating—employees to return to in-office work after several years of remote and hybrid arrangements.

In this article, we’ll explore the potential impacts of Amazon’s return-to-office policy on Northern Virginia’s still soft office leasing market, particularly in regions like Arlington, home to Amazon’s HQ2, focusing on office space demand and commercial leasing trends.

Local Office Leasing Market Still Soft

The Washington, D.C. market’s vacancy rate continued to rise through the second quarter of 2024, hitting 19.8%. A large part of this net occupancy loss was from WeWork vacating three buildings totaling 131K square feet. The trophy space market is doing much better, with a vacancy rate of 13.6% in the second quarter of 2024. And there is only one trophy class building under construction in Washington, D.C., so the somewhat good news is there is not a big pipeline of vacant new buildings entering the market.

The Northern Virginia market also had a rising vacancy rate, hitting 23.1% in the second quarter of 2024. But like D.C., there are very few new buildings coming available soon. There are only three buildings in the pipeline, which is the lowest level in decades. In Fairfax County, before the pandemic, there were typically about two million square feet of office space under construction each year. That number is much lower now and fewer projects are in the planning stage. Note also that older buildings are being demolished and often being converted to multifamily housing. Therefore, even with the current high vacancy rates, there are fewer and fewer new “trophy” class office projects coming to the market. This results in a flight to quality which makes the overall numbers possibly a bit misleading for the tenants looking for the most desirable space with the best amenities.

For the market as a whole, the lack of new buildings online, together with a possible return to working in person as evidenced by the Amazon move, should eventually lead to a gradual correction to more historical occupancy percentages. Return to office rates are presently about 65% of 2019 levels, so if there are changes to that dynamic it will be a positive factor for the market. The Amazon news could have a ripple effect as smaller firms follow their lead, depending on how the labor market plays out in the near term.

Amazon’s Growing Presence in Northern Virginia

Amazon has solidified its footprint in Northern Virginia, especially with its HQ2 in Arlington, a $2.5 billion investment that is already reshaping the region. With Phase 1 of HQ2 completed and Phase 2 underway, the company’s commitment to the area is evident. The return-to-office mandate means that tens of thousands of Amazon employees will now occupy office spaces on a full-time basis, significantly increasing foot traffic in the area and, by extension, demand for supporting infrastructure like restaurants, transportation, and housing.

Amazon’s long-term development plans in Northern Virginia, including additional office towers and campus spaces, is a bright spot in the region’s commercial real estate market. This recent return-to-office announcement may not necessarily accelerate the timeline for these impacts, but it will provide a needed morale boost to those who work in the local office leasing market.

The Real Estate Market in Northern Virginia: Pre- and Post-Pandemic

Before the pandemic, Northern Virginia’s commercial real estate market was on an upswing, thanks in large part to Amazon’s HQ2 announcement in 2018. However, like many regions, the onset of COVID-19 drastically reduced demand for office space as companies adapted to remote work. Office vacancy rates rose sharply, with many companies downsizing their physical footprints or adopting hybrid work models that didn’t require full office occupancy. Relatedly, the valuations of office buildings drastically declined, creating mortgage defaults that are still being worked through across the market.

For example, an office building located at 4075 Wilson Boulevard, in the Ballston submarket of Arlington, recently sold for $27.6 Million. This is less than thirty percent of its sales price from 2019, which was $91.2 Million. Office buildings throughout the region (and country) are facing similar devaluations. And for sure, some markets are in much worse shape. An office building in downtown Minneapolis recently sold for just $46.5 Million, which was an astonishingly 91% lower than just five years ago. Throughout the country, lenders and property owners are working through the resulting issues, as the lower valuations cause defaults under their loan covenants and a near inability to refinance. Instead, many buildings are either being foreclosed or given back to their lenders. And buildings that are not near a resolution between their lenders and owners are often in a no-man’s land where they cannot enter into new transactions – the owners do not want to put more cash into an investment property, by way of tenant improvement allowances, for example, that they may not own after the next maturity date.

The higher vacancy rates and lower valuations also will have a significant impact on local tax revenues. Real estate taxes provide most of Arlington County’s annual revenues and typically residential and commercial property owners each share about fifty percent. This year and going forward the expectation is that residential owners will have to pay a higher share. Future lower assessments on the commercial side will result in lower county tax revenues (or force higher taxes on residential owners) and will require budget cuts if not addressed. This problem is made worse when you realize that the trend is to replace older and highly vacant office buildings with multi-family residential, resulting in a need for more county services with lower tax revenue.

Implications for Businesses and Investors

For real estate investors, Amazon’s decision to return to in-office work creates both opportunities and challenges. Commercial real estate investors, particularly those with assets in Northern Virginia, may benefit from increased demand for office spaces, leading to higher rents and potentially greater property values.

However, this also comes with challenges for businesses that have grown accustomed to remote or hybrid work models. Those companies may face higher costs associated with leasing office spaces or may need to re-evaluate their business models to accommodate the growing shift toward in-office work environments. For smaller businesses, the return-to-office trend could prompt a search for more affordable office spaces in the area, increasing competition for properties in nearby suburban markets like Alexandria and Tysons.

The Future of Northern Virginia’s Office Market

Amazon’s return-to-office policy marks an example of a continuing shift in the way businesses operate in Northern Virginia, with any increase in the percentage of in-person workforce helping the struggling office market. Investors and business owners should keep a close eye on office space trends, as Amazon’s policy could set the tone for the region’s commercial real estate market in the coming years.

If you have questions about commercial real estate leasing or financing in Northern Virginia, including deeds-in-lieu of foreclosure or other foreclosure alternatives, please contact John Kelly at 703-284-7251 or jkelly@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Any views or opinions expressed herein are those of the authors and are not necessarily the views of the firm or any client of the firm.