2023 Commercial Real Estate Market Review and Forecast: Loudoun, Fairfax, and Prince William County

2023 impacted commercial real estate (CRE) across the USA. This blog will describe some of the impacts and review the main reasons. We will then look closely at the CRE market in Loudoun, Fairfax, and Prince William Counties, and then consider the potential for 2024.

CRE investors and owner-operators make decisions based on current statistics, likely future performance, and advice from both national and local experts. Serafin Real Estate’s goal is to enable our clients to be as well-informed as they need to be. That way, they make the right decisions at the right time.

2023 CRE in a Nutshell

The commercial real estate market nationwide experienced a slowdown and adjustment. Inflation and interest rate hikes were two major factors that impacted the market. As a result, borrowing costs increased. They impacted operating costs, new development profitability, and, in some cases, the feasibility of some projects. Economic uncertainty dampens markets. These all had a knock-on effect on overall CRE investment volume.

• Investment activity cooled.
• Rent growth slowed across all five CRE sectors, and in some instances, there was an actual rental decline.
• Vacancy rates increased, particularly in sectors where the new supply from completed projects outpaced demand.

2023 Review Across All 5 Commercial Real Estate Sectors

We will now analyze each sector, focusing on net absorption, vacancy rates, changes in rent rates, and cap rates.

Multifamily Sector

This was the strongest sector in 2023. The demand for apartment units progressed, and rent growth slowed.

• Absorption stood at 313,416 units, representing a +33% YOY (in Q3) which exceeded the 10-year median stat.
• Rent growth slowed to between 0.6% and 0.8%, compared to 2022’s 3.9% rise.
• The vacancy rate stood at 7.4%, the highest for 10 years and representing a 0.9% increase over 2022. This number resulted, to some extent, from a 22% increase in new unit delivery.
• The cap rate averaged 5.8%.
• Washington, DC, ended the year standing at 4th in the country for net absorption, 11,543 units compared to 2022’s 8,571

Industrial and Warehouse Sector

New supply moderated vacancy rates and a slower positive rent growth.

• Net absorption stood at 178.3 MSF, down 57% compared to 2022. This number was, again, impacted by new deliveries that were 28% higher than in 2022.
• Rent growth was 7.5%. A positive figure, down from 2022’s 10.8% but higher than the pre-pandemic rate. Looking in closer detail, we see that logistics spaces saw a 7.8% increase, specialized space rent growth was 5.2%, and flex spaces saw a 3.9% growth.
• Despite the new deliveries, the vacancy rate only stood at 5.4%, reflecting pre-pandemic levels.
• The cap rate averaged 7.0%.

Office Sector

Hybrid working environments and resistance to Return to Office work resulted in a falling demand for office space.

• Net absorption was negative 62.8 MSF.
• Rent growth was also negative in many areas, averaging 0.7%.
• Vacancy rate increased by 0.2% to hit an all-time high of 13.5%.
• The cap rate averaged 8.2%.

Retail Sector

This sector remained resilient and saw the lowest vacancy rates in ten years.

• Net absorption was 54.7 million SF, a 28% decline compared to 2022. Neighborhood Centers and General Retail are the bulwarks of this sector, accounting for 83% (per November 2023) of net absorption, delivering 14.92 MSF and 30.84 MSF, respectively.
• Rent growth was modest and uneven across the subsectors and averaged 3.3%, compared to 2022’s 4.4%. Even so, 2023’s figure is higher than pre-pandemic. Neighborhood centers saw an average rent increase of 4.2%, and Power Centers saw 3.9%. General retail saw a more modest 2.8% increase.
• The vacancy rate was unchanged at an average of 4.2% and has remained so since Q2, with General Retail showing the lowest vacancy rate of 2.5%.
• The cap rate averaged 6.8%.

Hospitality Sector

This sector benefited from what the news is now calling revenge travel. Both room rates and occupancy rates are increasing, but ADR and RevPAR numbers are coming in at 2.7% below pre-pandemic levels. As of November 2023:

• The 12-month occupancy rate stood at 63.1%.
• ADR stood at $155/room.
• RevPAR reached $98.
• Sales declined in 2023, resulting in a 12-month (Nov ’22 – Nov ’23) sales volume of $26.6 billion, compared to $66.6 billion in the previous 12 months.

We will now take a closer look at Loudoun, Fairfax, and Prince William Counties’ 2023 real estate markets. We will list the basic stats for sales, net absorption, rent, vacancy rates, and cap rates in each county.

Loudoun County Commercial Real Estate Statistics for 2023

• Sales volume was $951 million. 2022’s sales volume was $1.85 billion. 154 properties were sold. The average time on the market was 8.6 months.
  Sales price per SF. Rounding to the nearest whole number, we see that:
  • 30% of sales were in the $160 – $240/SF range
  • 23% in the $240 – $320/SF range
  • 15% in the $320 – $400/SF range
  • 10% in the $400 – $480/SF range
  • 10% were above $640/SF
  • 5% in the$480 – $560 range
  • 4% in the $80 – $160 range
  • 3% in the $580 – $640 range
• 12-month net absorption stood at 149K, down 95.2% compared to 2022.
• The market asking rent price averaged $23.28/SF. An increase of 3.9%.
• The average vacancy rate was 4.4% and below the national average.
• Cap Rates averaged out at 6.3% for the year. 2022 began with an average Q1 cap rate of 5.2%, rising to 6.3% in Q3, and ending Q4 at 5.2%.
  2023’s cap rate began at 6.3%, falling to 5.74% in Q3 and rising again to end 2023 at 6.3%.
• Current inventory stands at 88.5 MSF, an increase of 0.5% compared to 2022.
• 7 MSF are currently under construction. An increase over 2022 of 30.3%.

Fairfax County Commercial Real Estate Statistics for 2023

• Sales volume totaled $2.2 billion, down from 2022’s total of $3.5 billion. 305 properties were sold with an average of 8.6 months to go under contract. Sales price per SF. Rounded, it gives us:
  • 31% of sales were in the $200 – $300/SF range
  • 21% in the $100 – $200/SF range
  • 14% in the $300 – $400/SF range
  • 11% in the $400 – $500/SF range
  • 11% were above $800/SF
  • 6% in the$500 – $600 range
  • 3% in the $600 – $700 range
  • 3% in the $700 – $800 range
• 12-month net absorption rate stood at a negative 1.7 MSF, down 286.7% compared to 2022.
• The market asking price for rent/SF averaged $30.89, an increase of 1.3% over 2022.
• The average vacancy rate was 12.9%, up 0.7% on 2022.
• Cap Rates stood at 6.7%, up 0.4%. 2022 began Q1 at 6.75%, rising to 7.2% in Q2 and falling to just above 5.5% to end Q4.
  2023 began Q1 at 5.5% and rising to 6.75% in Q4.
• The current inventory is 207 MSF, equaling 2022’s inventory.
• Units under construction are down 29.2% compared to 2022, standing at 7 MSF.

Prince William County Commercial Real Estate Statistics for 2023

• Sales volume in 2023 totaled $696 million, down from 2022’s sales of $965 million. 167 properties were sold, with an average of 10.8 months to sell.
  Sales price per SF. (rounded) shows:
  • 30% of sales were in the $180 – $270/SF range
  • 21% in the $90 – $180/SF range
  • 15% in the $270 – $360/SF range
  • 12% in the $360 – $450/SF range
  • 8% were above $720/SF
  • 7% were in the$450 – $540 range
  • 3% in the$540 – $630 range
  • 3% in the $630 – $720 range
  • 3% in the $700 – $800 range
• 12-month net absorption of 1.9 MSF showed an increase of 67.9% over 2022.
• The market asking price for rent was up 4.2% compared to 2022, at $22.69/SF.
• The average vacancy rate was 3.6%, down slightly by 0.6%.
• Cap Rate stood at 6.2%, up 0.4% compared to 2022.
  2022 began with a cap rate of 6%, rising in Q2 to 10.6%. It fell in Q4 to 5.3%.
  The 2023 average cap rate fell slightly from 5.3% to 5.1%. No published stats are currently available for Qs 3 and 4, but the rate rose to an average for the year of 6.2%.
• The current inventory is 55.7 MSF, up 3% compared to 2022.
• Units under construction are down 59.2% compared to 2022, standing at 1.1 MSF.

Summary Comment and Expected CRE Trends for 2024

2023 saw the average cap rate in each of the three counties lower than the national average of 6.95% (taken from the average of all four subsectors.) It is an old adage that if Northern Virginia were a country, its economy would make it the 48th largest in the world. The potential for the CRE market is relatively firm compared to many other major US economic centers.

Looking ahead:

• The office sector is likely to see further reductions in occupancy. Hybrid working does not seem to reduce performance, and promotions are not inclined towards those who work more in offices. Modern offices with modern amenities and pro-tech cost-reduction processes will likely remain in demand. 
• The multifamily sector is likely to see growth. Many people currently prefer to rent rather than buy, so another potential trend will be that older offices will be purchased and converted into apartments.
• The retail sector should see the average 4% vacancy rate continue. General retail, strip centers, and power centers should see continued success.
• Rent growth in the industrial sector will likely remain above 5%, with warehouse and distribution centers seeing the highest rent growth.
• Hotels should see 2024 as a relatively stable year, but occupancy rates are still expected to remain at or below 65%.

Northern Virginia’s international business base, heavy involvement with technology lines of business, and access to DC suggest it is a place for longer-term investment. The above national pay rates and the high proportion of families with children also suggest the childcare and education markets will remain strong.

Get Smart With Serafin Real Estate

To maximize the profit on CRE decisions, both investors and owner-operators must make the right decisions at the right time. This involves forward planning, interpreting the market details, and linking them directly to your business goals.

Achieving that position demands another element – connecting with a successful and experienced specialist who can advise, caution, and recommend as appropriate. Serafin Real Estate not only understands the local market but continually researches data and publishes it so clients and potential clients stay updated on what is happening in Northern Virginia.

Our reports on current CRE performance and future trends give you the background so our advice makes sense and enables you to put it into the current context and make the most appropriate and timely decisions.

Stay Updated!

2024’s economy is still uncertain for several reasons (lower interest rates, international tensions, November’s election, etc.), so it will pay to be ready and have accurate and up-to-date statistical information linked to current, in-depth advice. Serafin Real Estate thoroughly understands the local market and always seeks new ideas to benefit our clients.

Please contact us to learn more about Northern Virginia’s CRE market or to sign up for our monthly market and other reports.

Additional statistics and trend information were taken from:
NAR Report https://www.nar.realtor/commercial-market-insights
J P Morgan https://www.jpmorgan.com/insights/real-estate/commercial-real-estate/commercial-real-estate-trends