TRANSWESTERN OUTLOOK SUBURBAN MD AT Q209

Transcription

1 TRANSWESTERN OUTLOOK SUBURBAN MD AT Q29 Recession Hammers Office Market; Rising Sublease Space Putting Downward Pressure on Rents The Suburban Maryland office market lagged during the 2nd quarter of 29, as the national recession put further pressure on market conditions. Vacancy is up 22 basis points over the past year and net absorption went negative another quarter as a handful of large tenants vacated space. Although some leasing activity remains, deals are mostly being signed by the government or health/life science-oriented tenants. These sectors continue to grow despite the recession. Given these conditions, rents declined and concessions are up in order to attract tenants. Notably, the construction pipeline has declined over the past year. Overall, despite weakening market conditions, Suburban Maryland is poised to experience long-term steady growth due to its tenant composition, particularly its focus on health care. Second Quarter 29 Market Highlights: Net absorption: Negative 138, SF, compared to the quarterly average of positive 184, SF in 28. Overall vacancy rate: 13.8%, up from 11.6% one year ago. Direct vacancy rate: 12.2%, up from 1.2% one year ago. Sublease space: Increased by 97, SF. Sublease space is 1.6% of standing inventory. Pipeline (U/C and U/R): 1.3 million SF, down from 2.9 million SF one year ago. Pipeline pre-lease rate: 44%, compared to 26% one year ago. Rents: Down 2.4% during the 1st half of 29, compared to edging up.2% in 28. Investment sales: $79 million on three sales. 1st half average sales price: $186/SF.

2 Net Absorption Net Absorption in s of SF 3, 2,5 2, 1,5 1, 5-5 OFFICE NET ABSORPTION Suburban Maryland 1997 Through First Half 29 Long-Term Absorption Average = 1.6 Million SF Net absorption totaled negative 138, SF during the 2nd quarter of 29, compared to negative 495, SF during the 1st quarter. This compares to the long-term quarterly average of 4, SF. Absorption totaled positive 735, SF during 28. Suburban Maryland experienced soft absorption during the 1st half of 29, as demand could not keep pace with tenants vacating space, particularly in Montgomery County. -1, * Source: Delta Associates; June 29. *Through 1st Half 29. Notable move-outs in Montgomery County include: Lockheed Martin vacated 18, SF at 656 Rock Spring Drive Aronson & Company vacated 41, SF at 7 King Farm Boulevard Open Text Corporation vacated 45, SF at 7 King Farm Boulevard NET ABSORPTION OF OFFICE SPACE Suburban Maryland Counties First Half 29 PB Farradyne, Inc. vacated 29, SF at 326 Tower Oaks Boulevard Montgomery Prince George's Net absorption of Class A space totaled positive 98, SF during the 2nd quarter of 29, compared to negative 23, SF during the 1st quarter. This compares to the average quarterly net absorption of positive 218, SF during 28. Frederick -6, -5, -4, -3, -2, -1, 1, 2, Square Feet

3 Gross Leasing 12 GROSS LEASING ACTIVITY Suburban Maryland 2 Through First Half Year Average = 7.2 Million SF We estimate gross leasing activity will total 4.5 million SF during 29 below the 15-year average of 7.2 million SF per annum. Gross SF Leased (in millions) * Note: Data updated each quarter. *Annualized estimate. The most notable deal during the 2nd quarter was Montgomery County s sublease of 342, SF at 1 Edison Park Drive in Gaithersburg. The county signed a lease for five years and will relocate from 11 Orchard Ridge, as MedImmune purchased and plans to backfill this space. Upon lease expiration, the county intends to purchase the building for $76.3 million ($224/SF). This deal has now placed the former tenant GSX out on the market for roughly 7, to 1, SF. Number of Office Buildings BUILDINGS WITH CONTIGUOUS BLOCKS OF AVAILABLE SPACE 249 Suburban Maryland June Minimum Size of Contiguous Blocks of Space Note: Includes buildings under construction or renovation. Source: Delta Associates analysis of CoStar data; June 29. VACANCY RATES & VACANT SPACE (ALL CLASSES) SUBURBAN MARYLAND JUNE 28 vs. JUNE 29 June 28 June 29 Vacancy Rate Direct 1.2% 12.2% Sublet 1.4% 1.6% Vacant Space (Millions of SF) Direct Sublet Frederick County Prince George's County Montgomery County 1, SF 2, SF 5, SF 1, SF Another notable deal could occur in the near-term if MedImmune, actively leasing space, is successful in displacing URS Corporation from 2 Orchard Ridge. In addition, Arbee & Associates is out for space after selling 95 Wind River Lane to Broad Street upon the lease of 5, SF to MedImmune. U.S. Health and Human Services, currently located in Montgomery County, is considering moving 3, employees to Prince George s County in its search for over 935, SF. The government agency received $88 million, under President Obama s stimulus plan, to help with the relocation plan, although no firm plans have been made. According to the Montgomery Newsletter, six sites are contending for the HHS lease, two in Montgomery County and the balance in Prince George s County. Irvington Center and 56 Fishers Lane, where HHS currently resides, have submitted. The four sites in Prince George s are rumored to be Largo Commons, Town Center at Camps Springs, New Carrollton Metro, and University Town Center. There are 249 buildings with blocks of space available over 1, SF at June 29, up from 215 buildings from one year ago. Montgomery County is home to 63% of these blocks. The largest block of available space is 263, SF at 4115 Aspen Hill Road in the Kensington/Wheaton submarket. BAE Systems, which currently leases the entire building, plans to vacate the space by 211.

4 VACANCY 2% 18% DIRECT OFFICE VACANCY RATE Suburban Maryland 1971 Through Mid-Year 29 The Suburban Maryland overall office vacancy rate is 13.8% at mid-year 29, up from 12.8% at the end of the 1st quarter and 11.6% one year ago. Direct Office Vacancy Rate 16% 14% 12% 1% 8% 6% 4% 2% % MY 9 The Suburban Maryland direct vacancy rate increased to 12.2% at June 29, from 11.3% three months prior, and 1.2% one year ago. Sublease space increased 97, SF during the 2nd quarter of 29, compared to 5, SF during the 1st quarter. During 28, sublease space increased 21, SF. Sublease space is 1.6% of Suburban Maryland s standing inventory at June 29. Sublease space is rising in Suburban Maryland. Notably, American Capital Strategies put 78, SF on the market for sublease (4, SF at 76 Wisconsin Avenue, 1, SF at 3 Bethesda Avenue and 28, SF at 5425 Wisconsin Avenue). Submarket NET OFFICE ABSORPTION AND VACANCY BY SUBMARKET: SUBURBAN MARYLAND Inventory (SF) 2 nd Qtr 29 Net Absorption (SF) 2 nd Quarter 29 Vacancy Q1 29 Direct w/sublet Bethesda/CC 11,293, , 11, 121, 24, 6.1% 9.6% N. Bethesda 1,326, , (78,) (155,) 12.7% 13.6% Rockville 8,269,89 124, (129,) 144, (17,) 13.2% 14.1% N. Rockville 11,627,82 (41,) 288, 292, (115,) 12.9% 15.9% Gaithersburg 5,281,815 (135,) (132,) 87, (48,) 15.1% 15.7% Germantown 2,435,685 (27,) 52, (36,) (29,) 15.% 17.1% Kensing./Wheaton 1,46,234 51, (11,) (37,) (21,) 7.3% 7.7% Silver Spring 6,853,91 7, (147,) (76,) (62,) 7.7% 8.4% N. S. Spring/Rt. 29 2,98,145 (12,) (32,) (35,) 13, 6.7% 7.7% Total: Mont. Cnty. 6,475,65 45, 15, 382, (5,) 1.9% 12.7% Beltsville/ Coll. Prk. 5,181,784 (5,) 33, 1, (161,) 15.7% 16.4% Laurel 2,59,823 (4,) (27,) 25, (33,) 12.1% 14.4% Greenbelt 3,16,41 (113,) (33,) (154,) (3,) 21.9% 24.3% Lanham/Landover 4,951,2 (28,) 12, (123,) (65,) 19.9% 21.4% South P.G. 5,811,217 58, 72, 398, 11, 12.5% 13.5% Total P.G. Cnty. 21,469,885 (389,) 435, 156, (278,) 16.3% 17.6% Frederick Cnty. 5,692, , 335, 197, 145, 1.4% 1.8% Total: Sub MD 87,637,931 24, 92, 735, (633,) 12.2% 13.8%

5 OFFICE SPACE U/C OR U/R IN SUBURBAN MARYLAND JUNE 29 Submarket SF % Pre-Leased North Rockville 193, 4% Beltsville/Calv./Coll. Park 392, 1% Rockville 319, 35% Frederick County 23, 3% Silver Spring 137, 33% Total 1,271, 44% The newly delivered office project Wisconsin Place has 8, SF of sublease space by Capital Source and 17, SF by Microsoft Corporation. During the 1st quarter Fannie May placed 122, SF of sublease space on the market at 77 Wisconsin Avenue. We believe sublease space will rise further as the credit crisis has led to corporate consolidations and failing financial institutions. Notably, since the purchase of Chevy Chase Bank by Capital One, additional sublease space could appear at 751 Wisconsin Avenue. The Bethesda/Chevy Chase market has been socked with rising sublease space, as roughly 1.1 million SF in this submarket is occupied by financial institutions a sector that has been impacted by the credit crisis. The overall Class A vacancy rate is 15.1% at June 29, up from 13.3% at March, and 12.3% one year ago. Suburban Maryland s direct Class A vacancy rate is 12.6%. Square Feet in 's LEASING ON RECENT DELIVERIES AND PROJECTS U/C OR U/R SF Available SF Pre-Leased or Leased Suburban Maryland 26 Through 29 63% 33% 36% 17% 44% st Half 29 2nd Half 29 Recent Deliveries Note: Recent deliveries are based on % leased upon delivery. Projects U/C or U/R Construction There is 1.3 million SF of office space under construction or renovation in Suburban Maryland at June 29, compared to 2.9 million SF one year ago. 44% of space under construction at June 29 is pre-leased, a rise from 26% one year ago. The current pre-lease rate is about average, as the 1-year average pre-lease rate is 53%. With slow market conditions, for the next 24 months new development projects would appear warranted only for very special projects at superior locations or with a sizable tenant in place. There was one groundbreaking during the 2nd quarter of 29, after two silent quarters. A Class A building at 327 Ballenger Center Drive in Frederick started construction on 121, SF during the past three months. During 28, construction started on 926, SF. Clarett Group is planning a 224, SF at 45 East-West Highway in the Bethesda/Chevy Chase submarket. The plan will include a McDonald s, which is currently in operation at the development site. Another project planned for this submarket is JBG s Woodmont East, a 2, SF building at the corner of Woodmont Avenue and Bethesda Avenue.

6 Deliveries totaled 77, SF during the 2nd quarter of 29, compared to 661, SF during the 1st quarter. Deliveries totaled 1.9 million SF at 36% leased upon delivery in 28. PROJECTED Supply v. Demand We project the overall office vacancy rate in Suburban Maryland will edge down from 13.8% to 13.3% during the next 24 months. We expect vacancy to decline modestly over the next two years, as Suburban Maryland has already experienced a swift rise in vacancy due to projects delivering to market and the current pipeline has declined with pre-leasing rising. Vacancy will decline only modestly as demand will remain slow during the balance of the year due to the impact of the national recession. We expect leasing will pick up pace during 21 as the economy recovers and more jobs are added to the Suburban Maryland market. Rents EFFECTIVE RENT CHANGES SELECTED SUBMARKETS IN SUBURBAN MARYLAND DECEMBER 28 TO JUNE 29 Submarket Rent Change Bethesda/Chevy Chase -1.8% Silver Spring -3.% North Bethesda -3.4% Source: Delta Associates; June 29. Suburban Maryland office rents declined 2.4% during the 1st half of 29, compared to rising 1.% during the 1st half of 28. The rising amount of sublease space is starting to put downward pressure on rents. Prince George s County experienced a 2.7% decline in rents during the past six months, as overall vacancy has climbed to 17.6%. This compares to Montgomery County s rent decline of 2.3%, as overall vacancy is now 12.7%. With deteriorated market conditions and frozen credit markets, developing new projects has become a difficult and riskier task. At year-end 28, to construct a suburban office project, the minimum rent needed was $48./ SF. Given current market conditions, we expect inking leases at this rate will become increasingly difficult. Concessions to tenants increased during the 2nd quarter of 29, as competition to sign tenants is intense. The average TI cost for new space increased 25% to approximately $3/SF during the past six months, for all classes of space. The average free rent offering rose to 4. months, from 3. months at year-end 28.

7 Due to easing market conditions, we expect rents to decline by 3% to 4% in 29 as vacancy rises. We believe rents will be under pressure by the rising amount sublease space coming on the market. The Bethesda/Chevy Chase submarket could experience a notable decline in rents, given sublease space is 3.5% of its standing inventory, if this space does not backfill quickly. We anticipate rents will stabilize in 21, as the economy recovers and tenants start seeking space. Investment Sales There were three notable investment sales, totaling $79 million, during the 2nd quarter of 29, compared to $18.7 million on one transaction during the 1st quarter. Sale prices averaged $186/SF during the 1st half of 29, compared to $348/SF in 28. The decline in price per square foot was due to limited sample size. Notably, The JBG Companies purchased 1 Choke Cherry Road for $43.5 million ($191/SF) after selling it to Morgan Stanley for $55 million ($241/ SF) in 25. With tenants vacating space and limited leasing activity, some office buildings have become distressed assets. Notably, UBS Real Estate Investments has taken back 391 Calverton Boulevard from GHP Office Realty. Verizon vacated this 123, SF building during the 1st quarter of 29. GHP Office Realty attempted to sell this property for $18.8 million ($153/SF) and lowered to $11 million ($89/SF) with no deal achieved. It is now on the market for $8.8 million ($71/SF). We expect limited investment sale activity and more distressed assets during the remainder of the year. With softening market conditions and tight credit markets, finding buyers will be a difficult task. However, we expect investors to seek assets in Suburban Maryland over the long-term because of steady and predictable performance.

8 Land Sales There were no notable land sales during the 1st half of 29. The most recent significant sale occurred during the 3rd quarter of 28, when Guardian Realty purchased.6 acres at 8711 Georgia Avenue for $5.3 million. Guardian plans to build a 152, SF building on this site, which is currently a parking lot. However, the company has attempted to woo the Park and Planning Commission to this site for its future headquarters. Office land sales totaled $6.1 million on two notable deals in all of 28. With modest demand and tight credit markets, we expect minimal land sales during the balance of the year. Suburban Maryland Office Market Outlook The Suburban Maryland office market should continue to moderate during the balance of the year. Although we expect 3,1 new jobs to be added to the Suburban Maryland economy in 29, we believe tenants will refrain from expanding leased space until consumer and business confidence regains traction in 21. The February Federal stimulus bill should generate demand by late 29/ early 21, as a portion of receiving agencies are located in Suburban Maryland National Institutes of Health, Food & Drug Administration, and Health & Human Services. Another boost could arrive through Federal budget increases focusing on health and life science research and sustainable energy. We expect vacancy to decline modestly over the next two years to 13.3% rising through 29, but declining slowly in 21. We project further hardships for the Suburban Maryland office market during the balance of the year, given the share of financial institutions particularly in Bethesda/ Chevy Chase. However, this hit should be short-lived, as history shows tight market conditions with desire to lease in this submarket. Rising sublease space should continue to limit rents, as we project rents to decline by 3% to 4% in 29 with concession offerings limiting effective rents. We expect available space to remain elevated in 21. However, given the reduced pipeline and anticipated demand in 21 rents should decline at a reduced pace next year. Overall, we anticipate Suburban Maryland will experience slowing conditions in the near-term, but is well poised for steady, long-term growth as health, life sciences and energy are of growing importance.

9 Net Absorption in s of SF 3,5 3, 2,5 2, 1,5 1, , FLEX/INDUSTRIAL NET ABSORPTION Suburban Maryland 1997 Through First Half 29 1-Year Average = 1.1 Million SF Flex/Industrial Rents Decline Modestly with Negative Absorption The Suburban Maryland flex/industrial market experienced moderating conditions during the 1st half of 29. During the past six months tenants limited leasing, causing overall vacancy to climb 1 basis points and absorption to turn negative. Rents reacted by ticking down. Notably, the construction pipeline is down significantly compared to a year ago. Overall, the Suburban Maryland flex/industrial market is positioned for steady longterm growth due in part to a burgeoning bioscience industry, despite some short-term weakness. Source: Delta Associates; June 29. FLEX/INDUSTRIAL NET ABSORPTION AND DELIVERIES BY PRODUCT TYPE Suburban Maryland First Half 29 Bulk Warehouse Flex/Warehouse Flex/R&D Deliveries Absorption Square Feet in s Mid-Year 29 Market Highlights: Net absorption: Negative 758,, compared to positive 596, SF in 28. Sublease space: Decreased by 244, SF during the 1st half. Sublease space is 1.% of standing inventory. Overall vacancy rate: 12.3%, up from 9.8% one year ago. Direct vacancy rate: 11.3%, up from 9.1% one year ago. Pipeline (U/C and U/R): 366, SF, down from 913, SF one year ago. Pipeline pre-lease rate: 5%, compared to 49% a year ago. Rents: Down.9%, compared to declining.8% during 28. Investment sales: No significant sales in the 1st half of 29. Net Absorption: Below Average Net Absorption of Flex/Industrial Space Suburban Maryland 1ST HALF 29 (Square Feet) Submarket All Space Built Prince George's Co. (517,) (563,) Montgomery Co. (16,) (165,) Frederick Co. (81,) 33, Sub. Md. Total (758,) (695,) Source: Delta Associates; June 29. Net absorption of flex/industrial space in Suburban Maryland totaled negative 758, SF during the 1st half of 29, compared to positive 596, SF during 28. This compares to the 1-year annual absorption average of 1.1 million SF per annum. Each property type experienced negative absorption during the past six months. Bulk Warehouse experienced negative 388, SF due in part to Circuit City Stores vacating 393, SF at 1431 Mattawoman Drive and Mattress Discounters Corporation vacating 15, SF at 9822 Fallard Court. Both buildings are located in Prince George s County.

10 FLEX/INDUSTRIAL GROSS LEASING ACTIVITY Suburban Maryland 2 Through 29 Available sublease space decreased 244, SF during the 1st half of 29, after rising 436, SF during 28. Sublease space is 1.% of the standing inventory. Gross SF Leased (in millions) Year Average = 4.9 Million SF Net absorption of newer space (built after 1987) totaled negative 695, SF in Suburban Maryland during the 1st half of 29, compared to positive 797, SF during 28. Gross Leasing Number of Buildings * Note: Data updated each quarter Suburban Maryland June 29 *Estimate. FLEX/INDUSTRIAL BUILDINGS WITH CONTIGUOUS BLOCKS OF AVAILABLE SPACE Bulk Warehouse Flex/Warehouse Flex/R&D We estimate gross leasing activity to total 3. million SF in 29, when the numbers are finalized, below the 1-year average of 4.9 million SF per annum. The most notable new deal during the 1st half of 29 was 98, SF at Distribution Drive in Prince George s County. The George W. Allen Co. inked this five-year deal. There are 277 buildings with contiguous blocks of available space over 1, SF. Prince George s County is home to 51% of these blocks. The largest block is 54, SF of flex/warehouse space located at 634 Sheriff Road (Building A) in Landover. 5 1, SF 2, SF 5, SF 1, SF 22 Vacancy Minimum Size of Contiguous Blocks of Space Note: Includes buildings under construction or renovation. Source: Delta Associates analysis of CoStar data; June 29. Suburban Maryland s overall flex/industrial vacancy rate increased to 12.3% at mid-year 29, from 11.3% at year-end 28, and 9.8% one year ago. FLEX/INDUSTRIAL VACANCY RATE Suburban Maryland 1998 Through Mid-Year 29 The direct vacancy rate is 11.3%, up from 1.% at December 28, and 9.1% one year ago. Flex/Industrial Vacancy Rate 13% 12% 11% 1% 9% 8% 7% Overall Direct Suburban Maryland s overall flex/industrial vacancy rate in newer space is 15.3% at mid-year 29, up from 13.2% at year-end 28, and 11.4% one year ago. The direct vacancy rate in newer product is 13.5% at June 29. 6% MY 29

11 Construction Flex/Industrial Space UNDER CONSTRUCTION Suburban Maryland JUNE 29 Submarket SF % Pre-leased Prince George's County 56, 35% Montgomery County N/A Frederick County 31, % Sub. Md. Total 366, 5% There is 366, SF of flex/industrial space under construction or renovation in Suburban Maryland at mid-year 29, down from 913, SF one year ago. Projects under construction, and due to deliver in Suburban Maryland during the remainder of 29, are currently 5% pre-leased. Only one new project broke ground during the 1st half of 29. A 31, SF bulk warehouse started at 63 Solarex Court in Frederick during the past six months. This project is due to deliver during the 2nd half of the year. Starts totaled 474, SF during 28. FLEX/INDUSTRIAL LEASING ON RECENT DELIVERIES AND PROJECTS U/C OR U/R Suburban Maryland 26 Through 29 We anticipate groundbreakings to remain limited during the balance of the year due to weaker market conditions and lenders tightening credit in a softer economy. Square Feet in 's SF Available SF Pre-Leased or Leased 42% 21% 45% 4% st Half 29 2nd Half 29 Recent Deliveries Note: Recent deliveries are based on % leased upon delivery. 5% Projects U/C or U/R 387, SF of flex/industrial space delivered at 45% leased upon delivery in Suburban Maryland during the 1st half of 29. This compares to 1.8 million SF delivering at 45% during 28. Supply v. Demand We project Suburban Maryland s overall flex/industrial vacancy rate will edge up to 12.5% at mid-year 21, from 12.3% today. Due to a sharp decline in pipeline projects, we believe new supply will outpace demand only modestly. Product Type Average Asking Rents Sub. Md. Flex/Industrial Space (NNN/SF/Annum) Year-End 28 Mid-Year 29 % Change Bulk Warehouse $6.44 $ % Flex/Warehouse $6.88 $ % Flex/R&D $12.82 $ % Rents Flex/industrial rents edged down.9% during the 1st half of 29, after declining.8% during 28. All product types experienced rent declines during the past six months, with flex/r&d experiencing the greatest decline at 1.2%. Suburban Maryland rents should continue to decline during the 2nd half of 29. Although we project vacancy to edge down 1 basis points over the next year, vacancy remains elevated. We expect slow market conditions to hamper rent growth, as the national economy recovers from the recession.

12 Investment Sales There were no notable investment sales in Suburban Maryland during the 1st half of 29. This compares to $157 million ($17/SF) on 14 transactions during 28. Suburban Maryland accounted for 28% of total sales volume for flex/ industrial product in the Washington metro area during 28. The investment sales market has been weak across most metros and most product types as availability of credit is limited. Land Sales There were no notable land sales during the 1st half of 29. This compares to three transactions during 28, totaling $9.2 million. Notably, Panattoni Development Corporation purchased 51.5 acres from Marlo Furniture Company at 123 Prince George s Boulevard in 28. The sale closed for $6.3 million at $2.81 price per land SF. The land can support up to 55, SF of industrial development. We expect few land sales during the balance of 29, as market weakness should persist at least through 21. Suburban Maryland Flex/Industrial Market Outlook The Suburban Maryland flex/industrial market should experience moderating conditions during the balance of the year. Although we anticipate recovery in late 29, conditions will not stabilize until 21, as the national economy regains its footing. We project vacancy will edge up to 12.5% by June 21, from 12.3% today. Given this, rents should decline, as there is currently 9.5 million SF on the market and tenants remain hesitant to lease space. Overall, Suburban Maryland s flex/industrial market is well positioned for long-term, stable growth. We anticipate growth in the flex/r&d market, as the State of Maryland advances biotechnology in the state.

13 TRANSWESTERN OUTLOOK REGIONAL HEADQUARTERS 67 Rockledge Drive Suite 4A Bethesda, MD WASHINGTON, dc 1667 K Street, NW Suite 3 Washington, DC NORTHERN VIRGINIA 8614 Westwood Center Drive Suite 8 Vienna, VA BALTIMORE-WASHINGTON CORRIDOR 67 Alexander Bell Drive Suite 35 Columbia, MD Outlook is published quarterly by Delta Associates, the Research Affiliate of Transwestern Commercial Services, the Washington/Baltimore metropolitan area s largest full service real estate firm. Every effort has been made to ensure accuracy; however, Transwestern Commercial Services is not responsible for any errors or omissions. DELTA associates 5 Montgomery Street Suite 6 Alexandria, VA