• Sun. May 19th, 2024

Empty Offices Could Become Breweries, Labs and Distro Hubs Under Arlington Zoning Change

Bynewsmagzines

May 1, 2023
The Rosslyn, Virginia, skyline in Arlington County across the Potomac River from Washington, D.C. (iStock)

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Offices have become the weakest link in commercial real estate, and the sector’s distress is rippling out from individual investors to the economy at large. But Arlington, Virginia, isn’t going to let 9 million square feet of prime real estate simply collect dust.

The otherwise thriving, mixed-use suburb of Washington, D.C., is enacting zoning changes that will allow vacant offices to be occupied by breweries, makerspaces, arcades, laboratories, vertical farms and more.

Just like everywhere else, Arlington has an empty offices problem — except worse. Offices in the Washington, D.C., submarket have long been oversupplied and remote work is only widening the gap, according to Marc McCauley, Arlington’s director of real estate development.

At 22% and rising, Arlington’s vacancy rate is nearly 1,000 basis points more dire than the already dismal national average. Remote work has exacerbated the issue, but the whole Northern Virginia region had been experiencing negative net absorption even before the pandemic — dipping only as low as the mid-teens at the height of Arlington’s winning bid for Amazon HQ2 in 2018, McCauley told LoopNet. “Even under the best return-to-work assumptions, the question everyone’s asking is ‘what level of structural vacancy is here to stay forever?’”

Empty buildings are obviously the woes of property owners and investors, but they’re a municipality’s problem too. With 40 million square feet of office space on just 26 square miles of land, every vacant inch impacts Arlington’s economy.

“Arlington’s tax base on the real estate side is 50% residential and 50% commercial,” said Kate Bates, president and CEO of the Arlington Chamber of Commerce. “We’re extremely reliant on revenue from commercial markets and especially the office market to fund … you name it — schools, parks, social services — that even a small change can throw us really off balance.”

Rather than wait while leasing brokers struggle to secure wary office tenants, the county kicked off a rezoning campaign dubbed the Commercial Market Resiliency Initiative last fall, which is aimed to make it easier for businesses of all kinds to occupy buildings previously zoned exclusively for office use. “Uncertainty is really forcing creativity, and creativity is a great thing,” Bates said.

The use categories that have been proposed and in some cases approved so far (McCauley says there’s more to come) include micro-fulfillment centers, higher education, animal boarding, artisan beverage making and distributing, artisan workshops, urban agriculture, gaming and indoor recreation, audio-visual production, flex R&D and wet laboratories, medical and dental practices, food delivery services and ghost kitchens.

“The changes are intended to allow new uses ‘by right’ instead of either being outright forbidden or dependent on a site plan review or long-range planning amendment,” Bates said. “That’s a very long, costly process for businesses.”

Some of the new use categories will almost seamlessly fill empty office space, McCauley said. Colleges and universities, for example, can easily adapt to office floorplates. “Making that process easier will help landlords attract those types of tenants. Amazon’s HQ2, for example, is going to continue to drive the tech talent discussion. Many universities across the country will want to have at least a satellite presence in that pipeline, with students lining up to train in these areas.”

Other uses, such as urban agriculture, will take a little more thought, he said, but will also potentially fill vacant space without requiring extensive renovations.

Some of the other businesses that the county envisions occupying these properties are less about easily filling vacancies and more about supporting the mixed-use neighborhood and its existing long-term office leases. “The discussion everyone’s having is how you get people to come back to work and fill office buildings, and one of the strategies we have is ramping up our placemaking efforts,” McCauley said.

Distilleries and wineries will enhance an area’s vitality and support other local businesses, McCauley continued. Those users will probably primarily go into traditional ground-floor retail spaces. “Makerspaces, which we’re calling artisan workshops, for example, is kind of an older concept, but we still think it’s an important part of our creative, mixed-use economy and our entrepreneurial base. Yet before, we hadn’t allowed that outside of light industrial areas.”

The initiative should also help get some light industrial uses into hard-to-lease office spaces, Bates said, such as buildings that don’t have good storefront access or even garages, for instance.

Highest-and-best use always plays a role, though. “The issue is going to be whether these types of tenants will pay the same rent as an office user,” McCauley said. “Property owners sometimes say, ‘the space has been vacant so long, I’m just going to wait and hope that an office tenant comes in.’”

But every inch forward helps. New use categories won’t transform the city, Bates continued, but will be supplementary. “It’s interesting because oftentimes you’re talking about a small amount of vacancy within a particular building.”

McCauley elaborated. “That 22% vacancy doesn’t mean we have a bunch of empty buildings and a bunch of full buildings. We have a lot of buildings that are 70% to 80% occupied; a floor here and a floor there,” he said. That’s a big reason why conversions of offices to much-needed residential development — and especially middle-income housing — mostly don’t work. “The challenge is that as a landlord, the cost of vacating your building with existing leases for the risk of conversion doesn’t make sense a lot of the time.”

In addition to the fact that many of these office properties are at least partially occupied, another significant hurdle to residential conversion is the well-documented floorplate issue.

Of all the pushback that’s come from the community, that lack of housing supply has been the biggest issue, McCauley said. “People ask, ‘why don’t you just start converting these things to housing’ and it’s usually that they don’t understand the details of how you convert an office building.” If building owners can do it, he added, Arlington is all for it. “But we just don’t have the supply of buildings where that’s feasible.”

If a site plan needs to change while under construction, however, McCauley said Arlington’s regulations aim to make that as easy as possible. “We always remind people that conversion of an existing structure is one thing, but we also allow for [pivots in site plans] that serve the same purpose; it takes obsolete office out of the supply and then adds residential as a much-needed use.”

Other than the housing issue, the process has been moving forward with very little controversy, Bates said. “Your average Arlington citizen doesn’t even realize how restrictive the current zoning code is. We’ve gone through extensive processes to ensure each of these categories makes sense for the community.”

Animal boarding, for one, was an initial, short-lived concern among stakeholders given the amount of noise it might impart on residents. “In this case it’s not only to support businesses,” McCauley said. “This is also related to return-to-office as well, because everyone during the pandemic got dogs, and it’s a nice amenity to drop your dog off near your home or your workplace rather than having to drive 20 miles out of the way. We think it’s an important part of our placemaking.”

Rather than being confined to the outskirts of the city in light industrial areas, District Dogs, for example, wanted to be positioned in a mixed-use neighborhood. Zoning previously limited its current location on a ground floor of a mixed-use building to three dogs per night, McCauley noted. “That isn’t sustainable from a business model standpoint. We’ve also spoken to several other prominent dog boarding facilities like Dogtopia that are very interested in our commercial mixed-use district.”

Residents were also concerned about truck traffic from light industrial uses. “The first phase, which passed the county board last October, permitted last-mile delivery hubs, and [micro-fulfillment convenience delivery service] Gopuff was able to set up and start to provide last-mile delivery to the community,” Bates said.

“Folks that are paying the rents to live and work in Arlington are going to expect the level of convenience that their friends in Austin and San Francisco and New York have, and so part of it is about providing that amenity base,” McCauley added.

But that doesn’t necessarily mean more trucks, McCauley explained, noting it’s a hyper-local convenience service. The zoning provision stipulates a minimum percentage of trips must be made by foot or bike.

The same goes for the breweries, distilleries and wineries. “We’re not imagining 200,000-square-foot bottling plants,” McCauley said. “The market will take care of that — there are plenty of places with cheaper land and better access to distribution markets.” Instead, the zoning change will attract urban beverage makers by allowing them to have “both revenue streams they need to succeed — a tasting room and restaurant, along with the ability to ship a few cases out the back in a van. They couldn’t do that before.”

The basic approach is similar when it comes to the commercial kitchen concept Arlington has proposed, McCauley continued, but the county is still going through its processes to determine how to write the regulations for such a broad category. “Shared commercial kitchens run a spectrum of business models, from food trucks and entrepreneurs that go to farmers markets, to Uber Eats and Grubhub-based ghost kitchens, to full-fledged operations with job training,” he said. “So, those have different impacts and that’s why we’re taking a little more time just to make sure we’re managing those impacts.”

Research and development and flex space is another use case Arlington is still refining. “Think AI testing, robotics labs and wet labs. Right now, the zoning code sees those as industrial uses and we want to allow them in our office buildings by right,” McCauley said.

Urban agriculture is a use case that’s already been approved, though. “This isn’t going to fill millions of square feet of office space,” McCauley said. “But there are agricultural startups that want space in an office building where they can also do R&D.”

The zoning change aims to facilitate a local supply of fresh produce for grocery stores and the farm-to-table concept, McCauley continued. “High-end restaurants, for instance, want to grow their own vegetables right above the restaurant. It doesn’t cost as much and doesn’t require pesticides because you can control the environment.”

The city is in “constant discussion with property owners about how these ideas could fit into their buildings,” McCauley said. “There are obvious concerns about water supply and soil load on floors, but the technology is getting leaner and leaner with things like hydroponics and revolving water cycles.”

While the remaining use cases go through the final stages of county board approval, stakeholders like McCauley and Bates are already gearing up to bring more creative uses to the table. “Things evolve so quickly that we don’t know what the businesses of even the near future are going to look like,” Bates said. “Businesses need as many tools as possible in their toolkit, and allowing more of these usages is just one of them. It boils down to allowing new and expanded uses of land and commercial districts for the 21st-century businesses that the zoning code didn’t imagine.”

The chamber has been pushing hard to see the county flip the zoning ordinance from a list of specific allowable uses in commercial districts to a list of certain prohibited uses, Bates noted.

Looser zoning will help fill office vacancies and make Arlington more competitive in attracting tenants, Bates asserted. “Fairfax County, for instance, adopted a modernized zoning code in 2021 which allowed for micro-fulfillment, for example. So really without these changes, we would run the risk of lagging behind our neighboring communities.”

“We want to hear from anyone who has a great idea for building or land uses that we haven’t covered yet,” McCauley concluded, “because we want to make sure our regulations allow for it.”

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