Q1 2015 SUBURBAN MARYLAND OFFICE SUBURBAN MARKET REPORT MARYLAND Q1 2015 OFFICE SUBURBAN MARYLAND OFFICE MARKET REPORT FIRST QUARTER 2015 Positive Absorption and Weak Leasing the Story of the First Quarter MARKET OUTLOOK VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected MARKET INDICATORS 2015 2016* 2014 2015 MARKET SUMMARY Despite positive absorption in the first quarter of 2015, leasing activity in Suburban Maryland has been anemic. Just one lease over 50,000 square feet was signed in the first quarter when IHeartRadio renewed in Rockville for 68,121 square feet. Maryland continued to suffer from a lack of large tenants in the market. Historically, the federal health agencies like the National Institute of Health have been the largest occupiers of space in the market. However, the effects of their reductions are being felt most strongly in Maryland. This coupled with the Federal Government mandating that any new leases be within a half mile of the metro station is creating pockets of dead buildings that have little chance of redevelopment. Virtually all types of federal tenants are being tasked to do more with less despite increasing jobs. The recent election of Larry Hogan as Governor, a staunch anti-tax republican, should not have an impact on federal tenants located in the Maryland. However, his smaller government focus will cause ripples across local and county municipalities in the future. With just one quarter under Hogan s governance, there has yet to be neither any downsizing in local government, nor has there been growth from private sector tenants as intended by his upcoming tax decreases. A former successful real estate developer himself, there is some optimism that his pro-business, anti-tax agenda will allow Maryland to compete more successfully for regional tenants. VACANCY RATE 16.6% 16.6% ABSORPTION -573,047 40,625 DELIVERIES 1,022,281 - UNDER CONSTRUCTION 670,185 723,617 ASKING RENTS/SF $25.54 $25.62 ECONOMIC OVERVIEW Office-using total employment in Suburban Maryland in the first quarter was down by.34 percent from the fourth quarter of 2014. However, total employment from the first quarter of 2014 is up 1.8 percent. The government continues to be both the largest employer and the sector adding the most jobs in Suburban Maryland, growing by a thousand since * Trailing four quarter total
the first quarter of 2014. Both the information and financial sectors of the Suburban Maryland market registered decreases in jobs from the first quarter of 2014, down 400 and 600 jobs, respectively. This does not bode well for the market, as both of these sectors contain the types of businesses we would expect to be growing. ABSORPTION During the past quarter, there was 40,625 square feet of positive absorption, a difference from first quarter 2014, when 905,441 square feet was returned to the market. Much like the rest of the region, Class A absorption remained positive for the last four quarters accounting for 43,651 square feet in the first quarter of 2015. With lower demand for Class B product, just over 15,000 square feet was returned to the market. An additional 12,127 square feet of Class C space was relinquished during the first quarter. Year over year, Class C space has remained negative. DEVELOPMENT ACTIVITY In an attempt to keep pace with increased Trophy and Class A space being developed in Northern Virginia and the District of Columbia, the construction of a number of speculative office buildings commenced in 2014. However, none of these projects have acquired a lead tenant as of the first quarter of 2015. Of the 723,617 square feet under construction, roughly 32 percent is currently pre-leased. The existing product in Suburban Maryland has not been very successful in competing with the District or Northern Virginia for regional tenants. As a result, there has been an influx of new projects breaking ground. The growing concern, however, is that only the live, work and play developments have been successful, and they are only a small part of what is under construction. It is expected that future developments will be more restrained and focused on creating an office/residential setting. One of the most successful recent projects in Suburban Maryland was the Pike and Rose development in Rockville. It is expected that this type of construction will be the aim of future endeavors for many developers in Suburban Maryland.
VACANCY With positive absorption and no significant deliveries added to the office market, vacancy in Suburban Maryland closed with little change from last quarter. The overall vacancy rate for first quarter 2015 was 16.6 percent. Class A and B space remained stable at 17.4 and 17.8 percent respectively. Overall direct vacancy finished the quarter at 15.9 percent virtually identical to last quarter. RENTAL RATES With vacancy similar to last quarter, rental also remained relatively stable. The direct asking rent for the first quarter 2015 was $25.62. Class A rates did increased from $27.64 to $27.71. However, they are down year over year, dropping from $28.76 to $27.71. An increase,also, occurred in the Class B direct asking rent rate, which finished the quarter at $23.94 during up from $23.81 in the fourth quarter of 2014. Landlords are continuing to compete for tenants by offering concessions. Generally Class A tenant concession packages range between $60 to $70 on leases with terms of five years or more with one month of rental abatement for every year of term within the lease. Significant Deliveries Project Submarket RBA Lead Tenant NONE
Significant Q1 2015 Construction Projects Project Submarket RBA Delivery Lead Tenant 7800 Harkins Road Lanham 110,000 Q2 2015 Department of Housing and Community Development 726 Rockville Pike Rockville 10,989 Q2 2015 Patent First 8645 Colesville Road Silver Spring 210,600 Q4 2015 None 2000 Dennis Avenue Kensington/Wheaton 53,432 Q4 2015 Montgomery County 12435 Park Potomac Avenue Building-D Rockville 135,000 Q1 2016 None
Recent Lease Transactions Tenant Address Submarket Size (SF) Type IHeart Radio 1801 Rockville Pike Rockville 68,121 Relocation GSA-National Institute of Health (NIH) 10401 Fernwood Road North Bethesda/ Potomac 24,167 Expansion Edgewood Management Corporation 9711 Washingtonian Boulevard North Rockville 24,105 Renewal Computer Packages 414 Hungerford Drive Rockville 21,523 Renewal Motionsoft 1451 Rockville Pike Rockville 20,127 Relocation OUTLOOK The outlook for 2015 is more of what occurred in 2014. Of the three markets, Washington DC, Northern Virginia and Suburban Maryland, Maryland has had the least amount of leasing activity. From a rental rate standpoint, space in Maryland is a lower cost alternative than Northern Virginia and, to a much larger degree, the District. Suburban Maryland loses out on tenants to Northern Virginia and the District for two distinct reasons. The majority of deals going to Northern Virginia over Suburban Maryland is a result of the significantly discounted cost of doing business in Virginia. Despite the delta in rent between the two markets, Virginia is still much more hospitable when it comes to a tenant s overall expenses. Suburban Maryland loses tenants to the District because some tenants require a capitol presence. Tenants are willing to pay a much higher rental rate and much higher corporate tax rates for a DC address. Law firms, associations and government affairs offices all need to have a significant presence in the District. With market conditions and tenant activity not expected to improve substantially before 2018, vacancy in Suburban Maryland is expected to rise throughout 2015. Construction is not as robust as in neighboring markets, but the amount speculative space uncommitted is high. With the amount of new space coming to the market, average asking rents will increase through Maryland. The concession packages, however, will also rise, keeping the net effective rents stagnant if not decreasing.
SUBURBAN MARYALND Q1 MARKET STATS SUBURBAN MARYLAND MONTGOMERY COUNTY Existing Properties Vacancy Activity Absorption Rents Class Bldgs RBA Direct Vacancy Sublet Vacancy Total Vacancy Total Vacancy Prior Qtr Leasing Activity SF* Net Absorption Current Qtr SF Net Absorption YTD Weight Avg Asking Lease A 265 43,918,617 16.5% 1.0% 17.4% 17.4% 222,658 43,651 43,651 $ 27.71 B 789 40,723,310 17.2% 0.6% 17.8% 17.7% 35,699-15,153-15,153 $ 23.94 C 308 8,964,485 7.4% 0.0% 7.4% 7.6% 37,574 12,127 12,127 $ 19.25 All Classes 1,362 93,606,412 15.9% 0.7% 16.6% 16.6% 295,931 40,625 40,625 $ 25.62 Existing Properties Vacancy Activity Absorption Rents Submarket/ Direct Vacancy Total Vacancy Total Vacancy Leasing Activity Net Absorption Net Absorption Weight Avg Asking Bldgs RBA Sublet Vacancy Class Prior Qtr SF* Current YTD Lease Bethesda A 26 5,672,661 10.4% 0.9% 11.3% 11.2% 11,109-4,950-4,950 $ 40.08 B 70 5,450,941 10.7% 0.9% 11.7% 10.8% 11,532-49,398-49,398 $ 37.21 C 28 653,973 3.6% 0.1% 3.7% 3.4% 16,051-2,502-2,502 $ 29.01 All Classes 124 11,777,575 10.2% 0.9% 11.1% 10.6% 38,692-56,850-56,850 $ 37.76 Gaithersburg A 11 2,382,240 12.4% 1.6% 14.0% 14.0% 16,472 523 523 $ 23.94 B 72 3,850,912 9.1% 0.0% 9.1% 9.5% 0 17,697 17,697 $ 22.69 C 28 790,412 7.1% 0.3% 7.4% 7.6% 0 1,844 1,844 $ 17.82 All Classes 111 7,023,564 10.0% 0.6% 10.6% 10.8% 16,472 20,064 20,064 $ 23.01 Germantown A 12 1,314,468 19.1% 1.3% 20.4% 21.1% 15,335 8,168 8,168 $ 26.62 B 40 1,725,121 14.1% 0.1% 14.2% 14.3% 0 731 731 $ 22.04 C 1 13,508 0.0% 0.0% 0.0% 0.0% 0 0 0 n/a All Classes 53 3,053,097 16.2% 0.6% 16.8% 17.1% 15,335 8,899 8,899 $ 24.98 Kensington A 2 165,000 17.6% 0.0% 17.6% 10.8% 0-11,264-11,264 $ 29.29 B 31 1,246,167 31.1% 0.0% 31.1% 31.7% 0 6,591 6,591 $ 22.22 C 15 283,850 11.6% 0.0% 11.6% 10.9% 0-1,920-1,920 $ 24.87 All Classes 48 1,695,017 26.5% 0.0% 26.5% 26.2% 0-6,593-6,593 $ 23.63 North Bethesda A 35 7,184,077 21.5% 0.5% 22.0% 24.0% 14,068 149,667 149,667 $ 31.53 B 45 3,098,996 17.5% 0.1% 17.6% 17.5% 24,167-3,037-3,037 $ 25.18 C 18 827,050 8.0% 0.0% 8.0% 8.0% 0 0 0 $ 30.23 All Classes 98 11,110,123 19.4% 0.3% 19.7% 21.0% 38,235 146,630 146,630 $ 29.87 North Rockville A 60 8,017,067 16.4% 2.1% 18.5% 17.4% 24,105-88,465-88,465 $ 28.91 B 73 4,698,405 16.5% 2.6% 19.1% 18.9% 0-11,106-11,106 $ 23.60 C 15 681,543 14.8% 0.0% 14.8% 16.5% 0 11,112 11,112 $ 24.28 All Classes 148 13,397,015 16.3% 2.2% 18.5% 17.9% 24,105-88,459-88,459 $ 27.06 North Silver Spring A 7 1,399,928 1.1% 0.0% 1.1% 1.1% 0 0 0 $ 25.65 B 40 1,881,390 21.2% 1.0% 22.2% 22.0% 0-4,733-4,733 $ 23.82 C 6 150,875 3.3% 0.0% 3.3% 4.0% 0 1,057 1,057 $ 21.75 All Classes 53 3,432,193 12.2% 0.5% 12.8% 12.6% 0-3,676-3,676 $ 23.91 Outlying Montgomery County West A 4 719,082 0.0% 0.0% 0.0% 0.0% 0 0 0 n/a B 4 78,356 12.0% 0.0% 12.0% 11.7% 0-238 -238 n/a C 1 13,000 100.0% 0.0% 100.0% 100.0% 0 0 0 n/a All Classes 9 810,438 2.8% 0.0% 2.8% 2.7% 0-238 -238 n/a Rockville A 27 4,408,445 18.8% 0.3% 19.1% 18.3% 106,942-34,306-34,306 $ 32.02 B 60 3,901,898 12.8% 0.0% 12.8% 12.5% 0-11,717-11,717 $ 28.30 C 37 1,487,181 1.7% 0.0% 1.7% 2.7% 21,523 14,726 14,726 $ 22.61 All Classes 124 9,797,524 13.8% 0.1% 13.9% 13.6% 128,465-31,297-31,297 $ 30.73 Silver Spring A 19 4,193,011 8.6% 0.8% 9.4% 9.6% 0 10,285 10,285 $ 29.44 B 39 1,975,277 8.8% 0.1% 8.8% 8.6% 0-5,412-5,412 $ 24.03 C 32 775,693 12.7% 0.0% 12.7% 12.1% 0-4,621-4,621 $ 21.51 All Classes 90 6,943,981 9.1% 0.5% 9.6% 9.6% 0 252 252 $ 26.96 Montgomery County A 203 35,455,979 14.7% 1.0% 15.7% 15.8% 188,031 29,658 29,658 $ 30.23 B 493 28,894,094 15.7% 0.7% 16.4% 16.2% 35,699-63,372-63,372 $ 26.83 C 189 5,860,092 7.3% 0.0% 7.4% 7.7% 37,574 19,696 19,696 $ 23.38 All Classes 885 70,210,165 14.5% 0.8% 15.3% 15.3% 261,304-14,018-14,018 $ 28.65
MARKET REPORT Q1 2015 SUBURBAN MARKET MARYLAND REPORT OFFICE Q1 2015 SUBURBAN MARYLAND OFFICE Submarket/ Class Beltsville Existing Properties Vacancy Activity Absorption Rents Bldgs RBA Direct Vacancy Sublet Vacancy Total Vacancy Total Vacancy Prior Qtr Leasing Activity SF* Net Absorption Current Net Absorption YTD Weight Avg Asking Lease A 6 767,760 47.9% 2.0% 49.9% 46.6% 0-25,576-25,576 $ 22.48 B 16 710,905 28.7% 0.0% 28.7% 28.7% 0 0 0 $ 19.20 C 8 205,989 6.4% 0.0% 6.4% 0.7% 0-11,600-11,600 n/a All Classes 30 1,684,654 34.7% 0.9% 35.6% 33.4% 0-37,176-37,176 $ 21.15 Bowie A 6 688,392 21.3% 2.2% 23.5% 22.4% 0-7,168-7,168 n/a B 31 1,015,982 7.2% 0.4% 7.6% 7.5% 0-360 -360 $ 21.03 C 6 161,649 4.1% 0.0% 4.1% 4.1% 0 0 0 $ 7.97 All Classes 43 1,866,023 12.1% 1.0% 13.1% 12.7% 0-7,528-7,528 $ 12.77 Branch Avenue A - - n/a n/a n/a n/a 0 0 0 n/a B 38 1,310,622 8.2% 0.0% 8.2% 8.8% 0 8,642 8,642 $ 18.41 C 18 629,718 3.6% 0.0% 3.6% 4.0% 0 1,980 1,980 $ 14.24 All Classes 56 1,940,340 6.7% 0.0% 6.7% 7.2% 0 10,622 10,622 $ 16.74 College Park A 10 1,847,977 5.1% 0.0% 5.1% 5.1% 0 0 0 n/a B 32 1,852,346 33.1% 0.0% 33.1% 32.5% 0-11,045-11,045 $ 21.34 C 27 846,255 15.4% 0.0% 15.4% 15.2% 0-1,655-1,655 $ 18.75 All Classes 69 4,546,578 18.4% 0.0% 18.4% 18.1% 0-12,700-12,700 $ 21.00 PRINCE GEORGE S COUNTY Upper Marlboro A 1 54,000 0.0% 0.0% 0.0% 0.0% 0 0 0 n/a B 4 65,761 3.0% 0.0% 3.0% 3.0% 0 0 0 n/a C 6 76,929 1.5% 0.0% 1.5% 1.5% 0 0 0 $ 13.98 All Classes 11 196,690 1.6% 0.0% 1.6% 1.6% 0 0 0 $ 13.98 Greenbelt A 18 2,166,286 31.1% 0.7% 31.8% 32.0% 19,470 4,841 4,841 $ 21.84 B 40 1,389,317 22.5% 0.6% 23.1% 23.4% 0 3,957 3,957 $ 19.05 C 3 79,234 0.0% 0.0% 0.0% 0.0% 0 0 0 n/a All Classes 61 3,634,837 27.1% 0.6% 27.8% 28.0% 19,470 8,798 8,798 $ 21.02 Landover/Largo A 7 957,735 24.1% 0.0% 24.1% 24.3% 0 45,817 45,817 $ 15.64 B 36 1,896,589 25.7% 0.8% 26.5% 26.9% 0 7,466 7,466 $ 19.98 C 16 363,954 3.6% 0.0% 3.6% 3.9% 0 1,212 1,212 $ 18.13 All Classes 59 3,218,278 22.7% 0.5% 23.2% 23.6% 0 54,495 54,495 $ 18.51 Lanham A 2 447,000 78.7% 0.0% 78.7% 75.8% 0-12,948-12,948 $ 22.00 B 33 1,361,020 24.5% 0.0% 24.5% 26.2% 0 23,530 23,530 $ 19.28 C 8 144,802 4.3% 0.0% 4.3% 4.3% 0 0 0 $ 19.56 All Classes 43 1,952,822 35.4% 0.0% 35.4% 35.9% 0 10,582 10,582 $ 19.86 Laurel A 6 840,547 8.0% 0.0% 8.0% 8.0% 0 0 0 $ 19.23 B 42 1,514,487 14.8% 0.4% 15.3% 15.7% 0 6,837 6,837 $ 18.94 C 11 275,929 4.8% 0.0% 4.8% 5.7% 0 2,366 2,366 $ 18.50 All Classes 59 2,630,963 11.6% 0.3% 11.9% 12.2% 0 9,203 9,203 $ 19.04 National Harbor A 4 460,752 16.7% 3.3% 20.0% 21.9% 0 9,027 9,027 $ 25.55 B 17 555,262 14.4% 0.0% 14.4% 15.5% 0 6,200 6,200 $ 25.32 C 6 167,364 9.0% 0.0% 9.0% 9.1% 0 128 128 $ 16.56 All Classes 27 1,183,378 14.5% 1.3% 15.8% 17.1% 0 15,355 15,355 $ 24.76 Pennsylvania Avenue Corridor A 2 232,189 0.0% 0.0% 0.0% 0.0% 0 0 0 n/a B 8 211,925 18.5% 0.0% 18.5% 19.9% 0 2,992 2,992 $ 22.88 C 9 140,570 7.0% 0.0% 7.0% 7.0% 0 0 0 $ 17.00 All Classes 19 584,684 8.4% 0.0% 8.4% 8.9% 0 2,992 2,992 $ 22.44 Prince George s County A 62 8,462,638 23.7% 0.7% 24.5% 24.1% 34,627 13,993 13,993 $ 20.91 B 296 11,829,216 20.8% 0.3% 21.1% 21.5% 0 48,219 48,219 $ 20.16 C 119 3,104,393 7.5% 0.0% 7.5% 7.2% 0-7,569-7,569 $ 15.87 All Classes 477 23,396,247 20.1% 0.4% 20.5% 20.6% 34,627 54,643 54,643 $ 20.19 * Leases over 10,000 square feet.
DEFINITIONS OF KEY TERMS FOUND IN THIS REPORT Deliveries: Buildings that complete construction during a specified period of time. In order for space o 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 a 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 building that are either planned, under construction or under renovation. Leasing Activity: 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 of more of space. Includes competitive space in Class A, B and C single - and multi-tenanted buildings. Excludes buildings that are owned and operated by the Federal Government 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 me be on the space. Inventory: Includes all existing multi or single tenant leased or owner-occupied office properties greater than or equal to 10,000 square feet (Net rentable area). Does not include government owned buildings. Net Absorption: The net change in occupied space over a given period of time. Unless other wise noted, net Absorption includes direct and sublease space. Weighted Average Asking Rental s: Average rental rates 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 services and utilities. Reports on an annual per square foot basis. 502 offices in 67 countries on 6 continents United States: 140 Canada: 31 Latin America: 24 Asia Pacific: 199 EMEA: 108 $2.3 billion in annual revenue 1.7 billion square feet under management Over 15,800 professional 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 Vienna, VA 22182 TEL +1 703 394 4800 FAX +1 703 394 4301 Accelerating success.