Q4 2013 MARYLAND OFFICE MARYLAND OFFICE MARKET REPORT FOURTH QUARTER 2013 LEASING ACTIVITY CONTINUES TO BE BETTER THAN EXPECTED MARKET SUMMARY Updated April 2013 MARKET INDICATORS Q4 2013 Q1 2014* VACANCY ABSORPTION NET ABSORPTION CONSTRUCTION RENTAL RATE * projected SUMMARY STATISTICS Q4 2012 Q4 2013 15.0% 15.4% ABSORPTION YTD (151,132) (158,683) DELIVERIES YTD 1,251,941 401,161 1,288,369 1,107,419 $25.65 $25.15 VACANCY RATE UNDER CONSTRUCTION ASKING RENTS/SF Suburban Maryland continued building on better than expected third quarter leasing activity with an equally strong fourth quarter. Unlike the previous quarter, Federal Government deals accounted for several of the largest leases signed this quarter. The Nuclear Regulatory Commission renewed for five years for just under 350,000 square feet at 11545 Rockville Pike. It is a short-term renewal with an upcoming 15 year deal expected to take place in 2014. The Indian Health Services (IHS) and National Institutes of Health (NIH) also signed deals this quarter for 77,521 and 75,000 square feet, respectively. The fourth quarter of 2013 finished with 201,238 square feet of absorption, bringing the year-end total to 375,009 square feet of positive absorption. Class A space continued to be the largest recipient of positive absorption, accounting for nearly 270,000 square feet. For the year, Class A was the only product that had positive absorption, and was offset by nearly 200,000 square feet of negative Class B absorption and just over 70,000 square feet of negative Class C absorption. This clearly demonstrates the flight-toquality trend that we have been reporting in leasing activity over the past several quarters.
VACANCY Minor demand gains were not enough to lower the vacancy in Suburban Maryland, which stayed at 15.4 percent in the fourth quarter. This is up 40 basis points from the fourth quarter in 2012. Montgomery County vacancy rose by 10 basis points from the third quarter and 40 basis points from a year ago to finish the year at 14 percent. The North Bethesda and North Silver Spring submarkets saw significant spikes in vacancy from 2012, which rose by 180 and 450 basis points this year, respectively. Overall, the Suburban Maryland market continues to see the flight to quality which is evident in the vacancy rate both this quarter and throughout 2013. Class A vacancy for the market decreased in the fourth quarter by 20 basis points to end at 15.2 percent. In contrast, the Class B vacancy increased 20 basis points this quarter and nearly 100 basis points to 17.2 percent since the beginning of the year. RENTAL RATES For the second quarter in a row, the average rental rate dropped slightly falling from $25.27 to $25.15 per square foot during the fourth quarter. Rental rates should remain in the mid $20s range as upcoming new construction is delivering largely pre-leased and demand drivers continue to be few. Montgomery County continues to hold the premium on pricing over Prince Georges County where the delta is over eight dollars. However, Montgomery County saw a decrease in rents of seven cents from the third quarter to end the year at $27.75, and nearly a dollar per square foot decrease from the fourth quarter of 2012. DELIVERIES/CONSTRUCTION Once again there were no significant deliveries in the Suburban Maryland market. Unlike both the District and Northern Virginia, construction has been tempered since the recession. There are several sites that are currently under construction but the majority of the projects are significantly preleased. The one exception is the trophy office building at 4500 East West Highway which is scheduled to deliver in July of 2014. This speculative development is located in the heart of downtown Bethesda, but despite its excellent location, it has yet to sign its first lease.
SIGNIFICANT Q4 2013 CONSTRUCTION PROJECTS Project Submarket RBA Delivery Lead Tenant 5601 Fishers Lane Rockville 490,998 Q2 2014 NIAID (BTS) 275 N Washington Street Rockville 23,391 Q2 2014 Bank of America 4500 East West Highway CBD Bethesda/Chevy Chase 226,566 Q2 2014 None Pike and Rose Rockville 169,644 Q3 2014 None RECENT LEASE TRANSACTIONS Tenant Address Submarket Size (SF) Type Nuclear Regulatory Commission 11545 Rockville Pike North Bethesda 347,922 Renewal Indian Health Services 12300 Twinbrook Parkway Rockville 77,521 Renewal National Institute of Health 9800 Medical Center Drive North Rockville 75,000 Relocation Xerox 12410 Milestone Center Drive Germantown 68,000 Renewal
OUTLOOK While Suburban Maryland is often considered third place in the region in terms of market expectations, it has quietly maintained stable market fundamentals in 2013. The largest reason for this stability is the lack of speculative construction in the market. Suburban Maryland ownership has been far more disciplined with construction of new product. The District and Northern Virginia continue to build new inventory at near pre-recession levels. While Maryland in the short term should see some improving market fundamentals, the lack of quality development will hold them at a distinct disadvantage when trying to attract future high end tenants. A number of buildings with limited access to the Metro are likely to see their vacancy spike upwards as their tenant s leases expire in the upcoming quarters. In some cases instead of increasing capital expenditures in an effort to attract tenants, some building owners in Rockville may end up taking their buildings offline and shutting them down because of the shrinking size and number of Suburban Maryland focused tenants. For this reason Suburban Maryland owners have been bearish on new construction and we will likely continue to see that trend continue. SUBURBAN MARYLAND Q4 MARKET STATS SUBURBAN MARYLAND Class Bldgs RBA Direct Sublease Total Total Vacnacy Prior Qtr Leasing SF* Net Absoprtion Current Qtr SF Net YTD Weight Avg Asking Lease A 261 43,198,424 14.3% 0.9% 15.2% 15.4% 778,551 78,506 337,835 $ 28.76 B 786 40,154,209 15.5% 0.6% 16.1% 16.0% 550,645 (60,431) (578,940) $ 23.25 C 308 9,036,583 7.9% 0.1% 8.0% 8.3% 42,304 21,435 77,622 $ 18.87 All Classes 1,355 92,389,216 14.2% 0.7% 14.9% 15.0% 1,371,500 39,510 (163,483) $ 25.15 Submarket/ Class Bldgs RBA Direct Sublease Total Total Vacnacy Prior Qtr Leasing SF* Net Absoprtion Current Qtr SF Net YTD Weight Avg Asking Lease BETHESDA A 25 5,446,095 9.1% 0.5% 9.6% 10.2% 209,021 33,057 206,968 $ 43.46 B 70 5,450,941 8.4% 1.1% 9.5% 9.3% 200,658 (13,151) (111,463) $ 35.09 C 28 653,973 4.0% 0.0% 4.0% 5.9% 11,578 12,261 (3,103) $ 26.92 Subtotal 123 11,551,009 8.5% 0.8% 9.3% 9.5% 421,257 32,167 92,402 $ 37.78 MONTGOMERY COUNTY GAITHERSBURG A 11 2,382,240 11.3% 0.3% 11.6% 12.2% 3,389 12,259 55,190 $ 24.16 B 72 3,850,912 11.3% 0.2% 11.5% 10.7% 60,175 (29,186) (5,091) $ 20.17 C 28 790,412 6.8% 0.1% 6.9% 6.8% 3,105 (694) 30,147 $ 16.69 Subtotal 111 7,023,564 10.8% 0.2% 11.0% 10.8% 66,669 (17,621) 80,246 $ 21.40 GERMANTOWN A 12 1,314,468 23.1% 1.2% 24.3% 24.3% 70,245-29,537 $ 25.65 B 40 1,725,121 13.4% 0.0% 13.4% 13.1% 8,982 (5,393) (16,862) $ 20.06 C 1 13,508 0.0% 0.0% 0.0% 0.0% - - 400 n/a Subtotal 53 3,053,097 17.5% 0.5% 18.0% 17.9% 79,227 (5,393) 13,075 $ 22.33 KENSINGTON A 2 165,000 7.7% 1.8% 9.5% 10.8% 2,056 2,056 1,863 $ 33.00 B 31 1,246,167 28.3% 0.0% 28.3% 28.6% 9,823 (16,756) (1,622) $ 22.07 C 15 283,850 3.1% 3.6% 6.7% 7.1% 2,830 1,226 326 $ 22.40 Subtotal 48 1,695,017 22.0% 0.8% 22.8% 23.3% 14,709 (13,474) 567 $ 23.89 NORTH BETHESDA A 32 7,014,434 17.3% 0.8% 18.2% 15.1% 12,170 (217,489) (75,040) $ 31.19 B 46 3,124,996 13.9% 0.6% 14.6% 15.9% 119,211 41,262 (127,539) $ 27.38 C 19 872,050 8.6% 0.0% 8.6% 8.7% 2,015 739 10,220 $ 18.87 Subtotal 97 11,011,480 15.7% 0.7% 16.4% 14.8% 133,396 (175,488) (192,359) $ 29.19 NORTH ROCKVILLE A 59 7,905,591 13.1% 1.9% 15.0% 15.4% 23,379 28,860 (2,790) $ 29.69 B 73 4,698,370 15.9% 1.8% 17.7% 16.3% 22,272 (67,634) (144,537) $ 23.74 C 15 681,543 14.1% 0.0% 14.1% 14.1% - - (578) $ 15.35 Subtotal 147 13,285,504 14.1% 1.8% 15.9% 15.6% 45,651 (38,774) (147,905) $ 25.84 NORTH SILVER SPRING A 7 1,399,928 1.3% 0.0% 1.3% 1.3% 3,953-10,153 $ 25.05 B 40 1,881,390 20.9% 0.6% 21.5% 21.5% 9,137 (902) (161,876) $ 23.35 C 6 150,875 6.7% 0.0% 6.7% 5.1% - (2,429) (4,079) $ 15.00 Subtotal 53 3,432,193 12.3% 0.3% 12.6% 12.5% 13,090 (3,331) (155,802) $ 23.29
Subtotal 53 3,432,193 12.3% 0.3% 12.6% 12.5% 13,090 (3,331) (155,802) $ 23.29 Submarket/ Direct Sublease Total Total Vacnacy Leasing Net Absoprtion Net Weight Avg Asking Bldgs RBA OUTLYING MC E A - - n/a n/a n/a n/a - - - n/a B 14 344,328 8.9% 0.0% 8.9% 8.9% - - (5,241) $ 23.93 C 7 150,461 5.0% 0.0% 5.0% 5.0% - - 1,176 $ 22.60 Subtotal 21 494,789 7.7% 0.0% 7.7% 7.7% - - (4,065) $ 23.35 MONTGOMERY COUNTY OUTLYING MC W A 4 719,082 0.2% 0.0% 0.2% 0.2% - - (1,160) $ 29.97 B 4 78,356 17.3% 0.0% 17.3% 15.6% - (1,386) 3,141 $ 21.57 C 1 13,000 100.0% 0.0% 100.0% 100.0% - - - n/a Subtotal 9 810,438 3.4% 0.0% 3.4% 3.3% - (1,386) 1,981 $ 22.94 ROCKVILLE A 26 3,917,447 18.2% 0.7% 18.9% 20.2% 77,521 53,457 136,525 $ 32.45 B 59 3,878,291 8.8% 0.4% 9.2% 10.2% 22,113 38,968 68,828 $ 25.93 C 37 1,487,181 5.8% 0.0% 5.8% 5.9% 1,991 1,614 11,506 $ 20.49 Subtotal 122 9,282,919 12.3% 0.4% 12.7% 13.7% 101,625 94,039 216,859 $ 28.87 SILVER SPRING A 19 4,193,011 9.8% 1.0% 10.8% 11.4% 117,861 22,059 (28,110) $ 29.57 B 40 1,991,121 8.5% 0.4% 8.9% 10.0% 22,081 22,378 31,536 $ 24.32 C 33 847,337 14.0% 0.0% 14.0% 14.5% 7,780 4,103 24,726 $ 21.41 Subtotal 92 7,031,469 10.0% 0.7% 10.7% 11.4% 147,722 48,540 28,152 $ 27.27 MONTGOMERY COUNTY A 197 34,457,296 13.0% 1.0% 14.0% 13.8% 519,595 (65,741) 333,136 $ 31.19 B 489 28,269,993 12.8% 0.7% 13.5% 13.5% 474,452 (31,800) (470,726) $ 25.61 C 190 5,944,190 8.3% 0.2% 8.5% 8.8% 29,299 16,820 70,741 $ 19.22 Subtotal 876 68,671,479 12.5% 0.8% 13.3% 13.2% 1,023,346 (80,721) (66,849) $ 27.77 PRINCE GEORGE'S COUNTY Submarket/ Class Bldgs RBA Direct Sublease Total Total Vacnacy Prior Qtr Leasing SF* Net Absoprtion Current Qtr SF Net YTD Weight Avg Asking Lease BELTSVILLE A 6 767,760 20.5% 1.0% 21.5% 40.5% 7,948 145,225 43,594 $ 22.69 B 16 710,905 27.2% 0.0% 27.2% 25.4% - (13,070) (9,916) $ 19.29 C 8 205,989 3.1% 0.0% 3.1% 1.0% - (4,313) (3,633) $ 17.64 Subtotal 30 1,684,654 21.2% 0.5% 21.7% 29.3% 7,948 127,842 30,045 $ 21.25 BOWIE A 6 688,392 19.0% 1.1% 20.1% 21.5% 6,242 9,429 46,500 $ 26.58 B 31 1,015,982 6.5% 0.4% 6.9% 9.1% 5,156 23,033 5,901 $ 22.11 C 6 161,649 4.1% 0.0% 4.1% 4.1% - - 600 $ 14.97 Subtotal 43 1,866,023 10.9% 0.6% 11.5% 13.2% 11,398 32,462 53,001 $ 24.41 BRANCH AVENUE A - - n/a n/a n/a n/a - - - n/a B 38 1,310,622 9.9% 0.0% 9.9% 10.5% 6,789 8,010 (35,055) $ 17.68 C 18 629,718 3.2% 0.0% 3.2% 3.7% - 2,730 2,043 $ 19.64 Subtotal 56 1,940,340 7.7% 0.0% 7.7% 8.3% 6,789 10,740 (33,012) $ 18.68 COLLEGE PARK A 10 1,847,977 5.5% 0.0% 5.5% 5.5% - - (89,062) $ 28.50 B 32 1,852,346 35.1% 0.2% 35.3% 32.6% 1,200 (49,330) (69,165) $ 21.03 C 27 846,255 14.3% 0.0% 14.3% 14.3% 850 (157) (27,131) $ 18.06 Subtotal 69 4,546,578 19.2% 0.1% 19.3% 18.2% 2,050 (49,487) (185,358) $ 20.49 UPPER MARLBORO A 1 54,000 0.0% 0.0% 0.0% 0.0% - - - n/a B 4 65,761 6.3% 0.0% 6.3% 3.0% - (2,132) (2,932) $ 16.01 C 6 76,929 5.9% 0.0% 5.9% 2.6% - (2,557) (1,564) $ 17.92 Subtotal 11 196,690 4.4% 0.0% 4.4% 2.0% - (4,689) (4,496) $ 17.01 GREENBELT A 18 2,166,286 30.1% 1.2% 31.3% 31.5% 17,717 4,144 7,194 $ 22.69 B 40 1,389,317 22.1% 0.6% 22.7% 23.0% 5,224 3,662 25,621 $ 18.85 C 3 79,234 0.0% 0.0% 0.0% 0.0% - - - $ 19.20 Subtotal 61 3,634,837 26.4% 1.0% 27.4% 27.6% 22,941 7,806 32,815 $ 21.07 LANDOVER www.colliers.com/marketname
Submarket/ Direct Sublease Total Total Vacnacy Leasing Net Absoprtion Net Weight Avg Asking GREENBELT A 18 2,166,286 30.1% 1.2% 31.3% 31.5% 17,717 4,144 7,194 $ 22.69 B 40 1,389,317 22.1% 0.6% 22.7% 23.0% 5,224 3,662 25,621 $ 18.85 C 3 79,234 0.0% 0.0% 0.0% 0.0% - - - $ 19.20 Subtotal 61 3,634,837 26.4% 1.0% 27.4% 27.6% 22,941 7,806 32,815 $ 21.07 PRINCE GEORGE'S COUNTY LANDOVER A 8 1,139,735 23.6% 0.0% 23.6% 24.0% 49,516 4,444 (5,877) $ 17.62 B 36 1,896,589 24.4% 0.0% 24.4% 24.0% 24,952 (6,581) (23,188) $ 20.34 C 16 363,954 2.9% 0.0% 2.9% 2.4% - - (365) $ 17.84 Subtotal 60 3,400,278 21.8% 0.0% 21.8% 21.3% 74,468 (2,137) (29,430) $ 19.30 LANHAM A 2 447,000 1.7% 2.2% 3.9% 3.9% - - 2,087 n/a B 33 1,361,020 25.8% 0.2% 25.9% 26.2% 4,681 3,771 11,499 $ 18.42 C 8 144,802 5.9% 0.0% 5.9% 5.9% - (88) 6,683 $ 20.18 Subtotal 43 1,952,822 18.8% 0.6% 19.4% 19.6% 4,681 3,683 20,269 $ 18.46 LAUREL A 6 840,547 8.3% 0.0% 8.3% 7.6% 120,904 (6,277) 16,336 $ 18.53 B 42 1,514,487 21.7% 0.4% 22.1% 21.6% 23,419 (7,844) (19,745) $ 17.67 C 11 275,929 2.6% 0.0% 2.6% 9.8% 3,800 2,900 3,268 $ 8.42 Subtotal 59 2,630,963 15.4% 0.2% 15.7% 15.8% 148,123 (11,221) (141) $ 17.76 NATIONAL HARBOR A 4 460,752 19.3% 3.3% 22.6% 19.8% - (12,718) (16,073) $ 24.70 B 17 555,262 17.9% 0.0% 17.9% 20.0% 4,772 11,850 12,966 $ 22.88 C 6 167,364 14.4% 0.0% 14.4% 17.5% 7,355 5,100 22,254 $ 16.62 Subtotal 27 1,183,378 17.9% 1.3% 19.2% 19.6% 12,127 4,232 19,147 $ 22.95 PENN AVE CORRIDOR A 3 328,679 63.5% 0.0% 63.5% 63.5% 56,629 - - n/a B 8 211,925 15.5% 0.0% 15.5% 15.5% - - (4,200) $ 23.78 C 9 140,570 5.8% 0.0% 5.8% 6.5% 1,000 1,000 4,726 $ 15.61 Subtotal 20 681,174 36.7% 0.0% 36.7% 36.8% 57,629 1,000 526 $ 22.21 PRINCE GEORGE'S COUNTY A 64 8,741,128 19.3% 0.8% 20.1% 21.7% 258,956 144,247 4,699 $ 21.48 B 297 11,884,216 22.1% 0.2% 22.3% 22.0% 76,193 (28,631) (108,214) $ 19.78 C 118 3,092,393 7.0% 0.0% 7.0% 7.6% 13,005 4,615 6,881 $ 18.40 Subtotal 479 23,717,737 19.1% 0.4% 19.5% 20.0% 348,154 120,231 (96,634) $ 20.15 www.colliers.com/marketname
DEFINITIONS OF KEY TERMS FOUND IN THIS REPORT Deliveries: Buildings that complete construction during a specified period of time. In order for space to be considered delivered, a certificate of occupancy must have been issued for the property. Direct Space: Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of tenant) trying to sublet a space that has already been leased. Existing Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. It does not include space in buildings that are either planned, under construction or under renovation. Leasing : The volume of square footage that is committed to and signed under a lease obligation for a specific building or market in a given period of time. It includes direct leases, subleases and renewals of existing leases. It also includes any pre-leasing activity in planned, under construction, or under renovation buildings. Rentable Building Area (RBA): The total square footage of a building that can be occupied by, or assigned to a tenant for the purpose of determining a tenant s rental obligation. This report tracks buildings with 10,000 square feet or more of speculative space. Includes competitive space in Class A, B and C single and multitenant buildings. Excludes buildings that were built with the intent to house only medical users and government owner-occupied buildings. Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space. Vacant Space: Space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Inventory: Includes all existing multi- or singletenant leased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). Does not include government buildings. Net : The net change in occupied space over a given period of time. Unless otherwise noted, Net includes direct and sublease space. Weighted Average Asking Rental s: Weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial service and utilities. Reports on an annual per square foot basis. 482 offices in 62 countries on 6 continents United States: 140 Canada: 42 Latin America: 20 Asia Pacific: 195 EMEA: 85 $1.95 billion in annual revenue 1.12 billion square feet under management Over 13,500 professionals FOR MORE INFORMATION, CONTACT: Rob Hartley Director of Research robert.hartley@colliers.com TEL +1 703 394 4852 FAX +1 703 394 4801 Colliers International Tysons Corner 8045 Leesburg Pike Suite 401 Vienna, VA 22182 TEL +1 703 394 4800 FAX +1 703 394 4801 Accelerating success. www.colliers.com/marketname