Demand Picked Up in 2017 with New Trophy Options on the WayFor the second quarter in a row, demand for office space in Suburban Maryland grew, bringing net absorption for the year to 650,278 square feet. While the market did not see the amount or size of leases signed this quarter that it did last quarter, it was not as weak as it had been in the past. The top two deals signed in the market this quarter were both Federal renewals. The National Institutes of Health renewed for just under 80,000 square feet in the North Bethesda submarket, and FEMA executed a 54,000-square-foot, short-term renewal in College Park. The College Park location, however, is not going to be a long-term option for the agency as they are looking to vacate the building completely. The need for this location is waning with most of the employees doing work offsite, spending minimal time in the office.
EconomyDuring the fourth quarter of 2017, the Suburban Maryland economy grew by 0.80 percent or by a 3.24 percent annually adjusted rate. This is the most growth since 2008 and a notable increase over the third quarter level. Despite this economic expansion, office-using employment continued to decline. In total, 160 jobs were shed following a loss of 20 jobs in the third quarter. Both the financial and other services sectors were the only ones who added new jobs, increasing by 80 and 170 positions, respectively. The professional, business, media/telecom and government sectors lost enough jobs to offset these gains.
DemandFor the third time in 2017, demand for office space expanded, growing by 189,674 square feet in the fourth quarter. Suburban Maryland demand has been one of the bright spots for the region, outperforming the District throughout the year. This trend is expected to continue in 2018 as the United States Citizenship & Immigration Services moves to Prince George’s from the District.
The majority of the absorption continued to be focused on Class A space which accounted for 84.0 percent of the net absorption during the quarter. The demand growth was spread across all three classes of space. This was the first time this has happened since the fourth quarter of 2016 and only fourth time since the beginning of 2011.
SupplyDuring 2017, development activity picked up in Suburban Maryland. At the beginning of the year, only 360,114 square feet was under construction. By the end of year, that number blossomed to 945,824 square feet. During the fourth quarter, the amount of space under construction increased significantly due to several projects breaking ground. The most notable commencement was JBG Smith’s trophy office building located at 4747 Bethesda Avenue. The developer will be taking floors t wo through five in the building. Together with Booz Allen Hamilton and Host Hotels, roughly 50 percent of the 300,000-square-foot, downtown Bethesda office building has already been committed. Additionally, two medical office buildings totaling 269,000 square feet broke ground in Prince George’s County. The first of these is Kaiser Permanente’s 176,000-square-foot headquarters at 4000 Garden City Drive in New Carrolton. The other is the 93,100-square-foot Medical Pavilion at National Harbor, which was being developed by the Peterson Companies. Both of the medical office buildings are scheduled to deliver in the second half of 2018.
VacancyContinued positive demand with no deliveries pushed overall vacancy rates to a five-year low of 14.9 percent in the fourth quarter. Due to the fact that the fraction of space has been built in Suburban Maryland compared to the other regional markets, even minimal positive demand has an impact on vacancy. A decrease in vacancy occurred across all classes of space, dropping by 30 basis points in both A and C and ten basis points in the Class B product.
Rental RatesIncreased demand, shrinking vacancy and new development were not the only indicators strengthening in the Maryland market. During the quarter, rent expectations across the region rose by $0.15 to end at $27.30 per square foot, the highest since 2009. Rental rates have been steadily increasing since the beginning of the year when they averaged $26.58 per square foot.
Montgomery County asking rents continued to be the highest in Suburban Maryland and increased $0.12 during the quarter to end the year at $29.56 per square foot on a full-service basis. At $28.81 per square foot, the average was still below the historical high, but was the highest it has been in the last five years. Rent growth in Prince George’s County, on the other hand, slid $0.05 during the quarter to end the year at $21.60 per square foot.