RESEARCH MARKET REPORT SUBURBAN MARYLAND OFFICE IN THIS ISSUE State of the Economy p.2 Leasing Activity p.3 Development Pipeline p.4 Market Outlook p.5 Market Breakdown p.6
Two Massive Deals Highlight Suburban Maryland Third Quarter Andrew Wellman RESEARCH ANALYST SUBURBAN MARYLAND Suburban Maryland captured two of the largest tenants in the DC region in the third quarter of 2017. Marriott, after an exhaustive search that centered around the Bethesda market, finally decided to lease 720,000 square feet at 7750 Wisconsin Avenue in the heart of Bethesda. It was rumored that Marriot expanded their search to outside of Maryland, but likely, Bethesda was the one-and-only choice from the start. It was a huge win for Maryland to retain one of the largest private sector tenants in the region. Perhaps an even larger win for Maryland in the third quarter was the decision for the United States Citizenship & Immigration Services to relocate to One Town Center on One Capital Gateway Drive in Prince George s County. They signed for 574,767 square feet and will be moving from several locations in the District, the largest being over 250,000 square feet at 111 Massachusetts Avenue, NW. It is not the first Federal tenant to leave the District and likely not to be the last as the Federal Government attempts to both shrink their footprint and reduce rent costs for all future leases. Economy During the third quarter of 2017, the Suburban Maryland economy grew by 0.78 percent, an annual adjusted rate of 3.18 percent. This was the fourth quarter in a row where gross regional product was greater than three percent. Despite this economic expansion, quite a few office using jobs were lost. The financial and government sectors lead the decline. During the quarter, about 1,860 jobs were lost by government agencies and about 330 were lost by financial institutions. These losses were offset by other sectors of the office-using economy. The professional and business services industries added about 550 jobs, while the companies associated with the media and other service sectors added about 180 jobs. Market Indicators VACANCY CONSTRUCTION Office Market All Classes Class A Class B & C Vacancy Rate 15.6% 16.0% 15.2% Change from (basis points) Absorption New Construction Under Construction Asking Rents Per Square Foot Per Year Summary Statistics 2018 Year-End Projection NET RENTAL -23-26 -21 148,344 115,081 33,263 16,194-16,194 386,724 196,724 180,00 Direct Asking Rates $27.15 $28.71 $25.11 Change from $0.00 -$0.01 -$0.08 SUBURBAN MARYLAND MUCH NEEDED TROPHY DEVELOPMENT POISED TO COMMENCE SUPPLY Past Four Quarters: 346K SF Removed 178K SF Delivered 4733 Bethesda Ave: 99K SF Demolished Replacing with 300K SF 7272 Wisconsin Ave: 163K SF Demolished Replacing with 357K SF 2 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Demand Demand for office space grew during the third quarter, with net absorption registering 148,344 square feet. This is the third quarter of the last four where demand for office space has grown. As in previous quarters, the majority of the positive absorption occurred in Class A space and totaled 115,081 square feet. In contrast, 37,583 square feet of Class B space was returned. Net absorption registered 70,849 square feet in Class C product. Net Absorption 800 Thousands SF 600 400 200 0-200 -400 Marriott Headquarters - 7750 Wisconsin Avenue, Bethesda, MD Suburban Maryland Office Market Leasing Activity TENANT ADDRESS LEASE TYPE LEASED SPACE Marriott International 7750 Wisconsin Avenue Preleased/Relocation/ Consolidation 720,000 United States Citizenship & Immigration Services (CIS) One Town Center Preleased/New 574,767 Automatic Data Processing, Inc (ADP) 401 N Washington Street Renewal 23,798 Greenhorne & O'Mara (G&O) 6110 Frost Place Relocation/Expansion 21,633 Whiting Turner Contracting Company 6305 Ivy Lane Renewal/Expansion 21,500 Exiger 8403 Colesville Road Relocation 19,502 Clifton Larson Allen (CLA) 6411 Ivy Lane Relocation 19,149 Liquidity Servies, Inc. (LSI) 6931 Arlington Road Relocation 18,412 Aledade 4550 Montgomery Avenue New 15,475 CACI International, Inc. 174 Waterfront Street Relocation 15,105 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL 3
Deliveries Supply Thousands SF 300 250 200 150 100 50 0 Just one building was completed in the third quarter. Located at 10076 Darnestown Road in the Outlying Montgomery County West submarket. The 16,194-square-foot building delivered completely vacant. While there are several buildings ready to start construction over the next few quarters, there was just 376,724 square feet under construction at the end of the third quarter. While speculative construction is rare in Suburban Maryland, two projects in Bethesda will to start soon. Additionally, the second phase of Pike and Rose along Rockville Pike, located at 909 Rose Avenue, is expected to break ground early next year. All of these projects are in mixed-used neighborhoods with ample amenities and access to mass transit. Under Construction Thousands SF 700 600 500 400 300 200 100 0 Vacancy With a strong quarter of demand, vacancy for Suburban Maryland dropped by 23 basis points to end the quarter at 15.6 percent. This is below the three-year average of 16.4 percent and the second lowest it has been since the fourth quarter of 2013. Vacancy in the market continues to be stable despite a lack of consistent tenant growth. When the US Citizenship & Immigration Services moves in the next few years, it will be net growth to the market causing vacancy to further decrease. In the meantime, vacancy will likely remain at the current level as new deliveries offset expected demand growth. Even if these high-quality projects are successful, which they likely will be, the tenants that lease space will most likely relocate out of aging product in the market. Without substantial, sustained employment growth, buildings from which tenants relocate will have difficulty backfilling the space. 10076 Darnestown Road (16,194 SF) - Renovation delivered in Photo courtesy of CoStar Second phase of Pike and Rose along Rockville Pike and located at 909 Rose Avenue is is expected to break ground early next year. 4 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Rental Rates During the quarter, there was no movement in rental rates. At $27.15 per square feet, the asking rate ended the quarter where it began. All three classes of buildings were stable with the largest change in rents occurning in Class C space where there was just a five cent increase from $22.23 per square foot in the second quarter to $22.28 in the third quarter. Averaging $29.48 per square foot, Montgomery County, with its higher-end office buildings, continued to have the highest rents in Suburban Maryland. Prince George s County has been and will continue to be the lower cost alternative for tenants. It is expected, however, that there will be some high-rent pockets of office product emerging in the county, especially around the new casino in National Harbor. Vacancy Rate % 17.5% 17.0% 16.5% 16.0% 15.5% 15.0% Outlook Direct Asking Rental Rate $28 Maryland s market fundamentals are perhaps the most stable in the region with both the District and Northern Virginia expected to experience volatile vacancy swings in the next few quarters. Positive net absorption coming to Maryland from Federal agencies is a likely outcome over the next few years. One agency has already committed to move out of the District, and it would not be surprising if others followed suit. $/SF $27 $26 $25 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL 5
Suburban Maryland Office Market Class A MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING MONTGOMERY COUNTY Bethesda 5,508,542 - - - 36,314-170,652 8.4% $41.62 Gaithersburg 2,382,240 - - - 953 10,905 8.6% $23.65 Germantown 1,314,468 - - - 38,905 63,708 15.2% $25.79 I-270 North - - - - - - n/a n/a Kensington 165,000 - - - 1,828 3,901 15.2% $35.82 North Bethesda 7,194,884 - - - -25,140 152,165 20.4% $30.04 North Rockville 8,017,067 - - - -14,365-64,013 19.3% $28.95 North Silver Spring 1,399,928 - - - - 6,315 0.7% $21.50 Outlying Montgomery County East - - - - - - n/a n/a Outlying Montgomery County West 719,082 - - - - - 5.1% n/a Rockville 4,542,614 - - - 34,246 96,411 17.7% $32.44 Silver Spring 4,193,011 - - 121,724 29,432 26,058 11.3% $30.87 Montgomery County Total 35,436,836 - - 121,724 102,173 124,798 14.7% $30.66 PRINCE GEORGE S COUNTY Beltsville 767,760 - - - -16,715-93,757 59.7% $22.01 Bowie 688,392 - - - - 3,863 18.6% $28.00 Branch Avenue Corridor - - - - - - n/a n/a College Park 1,847,977 - - 75,000 6,295-24,462 7.3% $24.92 Greenbelt 2,166,286 - - - 11,912 122,816 29.8% $22.32 Landover/Largo 957,735 - - - - 14,687 22.2% $23.75 Lanham 557,000 - - - 1,922 348,388 10.8% $22.00 Laurel 840,547 - - - - 16,376 14.3% $19.35 National Harbor 460,752 - - - 9,494 9,209 0.0% n/a Outlying PG County South - - - - - - n/a n/a Pennsylvania Avenue Corridor 232,189 - - - - - 0.0% n/a Upper Marlboro 54,000 - - - - - 0.0% n/a Prince George's County Total 8,572,638 - - 75,000 12,908 397,120 21.4% $22.54 Suburban Maryland Total 44,009,474 - - 196,724 115,081 521,918 16.0% $28.71 THIRD QUARTER 2017 OVERALL QUICK STATS 15.6% Vacancy Rate 148,344 Absorption 16,194 New Deliveries $27.15 Direct Asking Rate 6 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Suburban Maryland Office Market Class B & C MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING MONTGOMERY COUNTY Bethesda 5,905,645 - - - -161,534-189,230 12.2% $36.82 Gaithersburg 4,240,026 - - - 60,798 95,224 9.8% $21.35 Germantown 1,818,629 - - - -9,299-16,512 14.1% $21.52 I-270 North 631,849 - - - - -42 85.5% n/a Kensington 1,457,017 - - - -5,450-15,993 27.3% $22.90 North Bethesda 3,904,046 - - - 42,791-87,624 15.9% $27.84 North Rockville 5,229,106 - - - -55,123-96,087 18.4% $23.18 North Silver Spring 1,862,228-16,806 180,000-6,265 8,877 15.6% $24.42 Outlying Montgomery County East 480,689 - - - -1,047-1,598 9.3% $24.91 Outlying Montgomery County West 89,450 16,194 16,194-20,985 18,189 4.3% $12.00 Rockville 5,507,938 - - - 35,396 28,401 8.9% $29.59 Silver Spring 2,717,002 - - - 17,784-30,184 10.2% $25.08 Montgomery County Total 33,886,625 16,194 33,000 180,000-60,964-285,579 14.8% $27.61 PRINCE GEORGE S COUNTY Beltsville 917,417 - - - 11,600 16,706 14.8% $17.77 Bowie 1,192,631 - - - -3,843 4,291 8.4% $18.48 Branch Avenue Corridor 1,930,340 - - - 3,887 27,710 14.4% $13.50 College Park 2,647,368 - - - 4,985 34,899 22.8% $21.86 Greenbelt 1,470,198 - - - 33,836 93,475 21.1% $18.64 Landover/Largo 2,260,543 - - - -17,174-90,580 18.8% $22.22 Lanham 1,512,494 - - - 2,710 34,779 18.3% $20.50 Laurel 1,825,416 - - - 27,945 34,942 8.7% $20.07 National Harbor 722,626 - - - 23,284-3,930 11.5% $28.54 Outlying PG County South 108,909-41,584 - - 69,939 18.4% n/a Pennsylvania Avenue Corridor 352,495 - - - 6,997 16,614 13.1% $21.91 Upper Marlboro 142,690 - - - - 2,614 0.0% n/a Prince George's County Total 15,040,127-41,584-94,227 240,459 16.2% $20.90 Suburban Maryland Total 48,926,752 16,194 74,584 180,000 33,263-45,120 15.2% $25.11 Class A 47.4% Class B 43.1% 1,410 Office Jobs Lost 0.38 Under Construction (Million Square Feet) Class C 9.5% Inventory by Class SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL 7
Suburban Maryland Office Market All Classes MARKET EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING MONTGOMERY COUNTY Bethesda 11,414,187 - - - -125,220-359,882 10.4% $38.37 Gaithersburg 6,622,266 - - - 61,751 106,129 9.4% $22.47 Germantown 3,133,097 - - - 29,606 47,196 14.6% $24.03 I-270 North 631,849 - - - - -42 85.5% n/a Kensington 1,622,017 - - - -3,622-12,092 26.1% $25.30 North Bethesda 11,098,930 - - - 17,651 64,541 18.8% $29.26 North Rockville 13,246,173 - - - -69,488-160,100 18.9% $27.23 North Silver Spring 3,262,156-16,806 180,000-6,265 15,192 9.2% $24.27 Outlying Montgomery County East 480,689 - - - -1,047-1,598 9.3% $24.91 Outlying Montgomery County West 808,532 16,194 16,194-20,985 18,189 5.0% $12.00 Rockville 10,050,552 - - - 69,642 124,812 12.9% $31.84 Silver Spring 6,910,013 - - 121,724 47,216-4,126 10.8% $29.66 Montgomery County Total 69,323,461 16,194 33,000 301,724 41,209-160,781 14.8% $29.48 PRINCE GEORGE S COUNTY Beltsville 1,685,177 - - - -5,115-77,051 35.3% $21.89 Bowie 1,881,023 - - - -3,843 8,154 12.1% $18.99 Branch Avenue Corridor 1,930,340 - - - 3,887 27,710 14.4% $13.50 College Park 4,495,345 - - 75,000 11,280 10,437 16.4% $22.55 Greenbelt 3,636,484 - - - 45,748 216,291 26.3% $21.20 Landover/Largo 3,218,278 - - - -17,174-75,893 19.8% $22.30 Lanham 2,069,494 - - - 4,632 383,167 16.3% $20.92 Laurel 2,665,963 - - - 27,945 51,318 10.5% $19.86 National Harbor 1,183,378 - - - 32,778 5,279 7.0% $28.54 Outlying PG County South 108,909-41,584 - - 69,939 18.4% n/a Pennsylvania Avenue Corridor 584,684 - - - 6,997 16,614 7.9% $21.91 Upper Marlboro 196,690 - - - - 2,614 0.0% n/a Prince George's County Total 23,612,765-41,584 75,000 107,135 637,579 18.1% $21.65 Suburban Maryland Total 92,936,226 16,194 74,584 376,724 148,344 476,798 15.6% $27.15 FOR MORE INFORMATION David Parker Regional Managing Director +1 202 728 3541 david.w.parker@colliers.com Robert Hartley Director of Research +1 703 394 4852 robert.hartley@colliers.com Andrew Wellman Research Analyst Suburban Maryland +1 202 534 3632 andrew.wellman@colliers.com Copyright 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International 1625 Eye Street, NW Suite 700 Washington, DC 20006 +1 202 534 3000 colliers.com/washingtondc 8 North American Research & Forecast Report Office Market Outlook Colliers International 8