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
Much Needed Trophy Development on the Horizon Two new office developments are poised to break ground in the next eight months. The first being the follow up to the first phase at Pike and Rose, 909 Rose, scheduled to break ground in early 2018. The Pike and Rose development has been extremely successful in bringing a new livework-play environment to the North Bethesda market. The second, 7272 Wisconsin Avenue, which will sit on the site of the former Apex Building, is being developed by the JBG companies with an expected ground breaking next quarter. Both high-end office buildings are bringing much needed quality to an overall market where it has been lacking. Economics Market Indicators VACANCY Year-End Projection NET During the second quarter of 2017, the Suburban Maryland economy grew by 0.60 percent or by a 2.43 percent on an annual adjusted rate. This is the most growth since 2010. Despite this economic expansion, the pace of job growth slowed during the second quarter. In total, 820 office-using jobs were created, bringing the year-todate total to 2,340 new jobs. This compares to 1,410 jobs created during the second quarter of 2016 and a total of 1,160 jobs added in the first half of last year. CONSTRUCTION Summary Statistics RENTAL This quarter s office-using job growth was led by the government sector. The public sector added 1,620 new jobs during the quarter, bringing the total growth for the year to 2,500 new positions. Most of this job growth occurred at the state and local level as the Federal Government actually lost 40 jobs during this quarter and has only added 230 new jobs so far this year. In contrast, private industries contracted in the Suburban Maryland market. During the second quarter, jobs were lost in professional and business services, media and telecom, and other services sectors of the economy, with 400, 250 and 60 jobs lost, respectively. Employment in the financial services sector was flat for both the quarter and thus far in 2017. Year-to-date, the professional and business services sectors added 180 jobs, the Other Services sectors lost 80 jobs, and the media and telecom sectors lost 180 jobs. Direct Asking Rental Rates By Class Office Market All Classes Class A Class B & C Vacancy Rate 15.8% 16.3% 15.4% Change from (Basis Points) Absorption New Construction Under Construction (Millions Square Feet) Asking Rates Per Square Foot Per Year 44 55 35-377,350-240,783-136,567 41,584-41,584 0.49 0.29 0.20 Direct Asking Rate $27.15 $28.72 $25.19 Change from $0.57 $0.29 $0.59 $30 $29 $28 $27 $26 $25 $24 $23 $22 $21 $20 $28.72 $25.47 $22.23 Class A Class B Class C 2 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Demand Net Absorption 800 A two quarter streak of positive net absorption broke with net absorption registering negative 377,350 square feet during the quarter. Despite this significant drop in demand, year-to-date absorption remains positive at just over 328,000 square feet. The negative absorption was systemic and was negative across all three classes of buildings. The most significant decrease came from Class A space where negative 240,783 square feet was given back. Two large federal agencies, the National Institute of Health and the Agency for Healthcare Research Quality accounted for the significant negative absorption this quarter. Leases this quarter were a mixed bag in terms of predicting future demand. The top deal signed this quarter came from Kaiser Permanente, who signed at 4000 Garden City Drive for 172,863 square feet in the Lanhan submarket near New Carrollton. The New Carrollton area has now been the recipient of two significant leases this year with 2U signing in the first quarter. Both these leases will add significant positive net absorption to both Prince George s County and the Market as a whole. In contrastm, Hughes Network Systems renewed and contracted in Gaithersburg, shedding almost 90,000 square feet. (Thousands SF) 600 400 200 0-200 -400 Suburban Maryland Office Market TENANT ADDRESS SUBMARKET - CLASS LEASE TYPE LEASED SPACE Kaiser Permanente 4000 Garden City Drive Landover/Largo/Capital Heights - A Relocation 172,863 Hughes Network Systems 100 Lakeforest Boulevard Gaithersburg - A Renewal 111,167 FTI Consulting 16701 Melford Boulevard Bowie - A New 30,835 George Washington University 6110 Executive Boulevard North Bethesda/Potomac - C Renewal 29,263 Clarivate Analytics 1445-1455 Research Boulevard North Rockville - A Relocation 26,892 Lurn 2098 Gaither Road North Rockville - A Relocation 24,627 Montgomery County Mental Health Agencies 11002 Veirs Mill Road Kensington - B New 20,023 Guggenheim Securities LLC 702 King Farm Boulevard North Rockville - A Relocation/ Consolidation Family Health Centers 19851 Observation Drive Germantown - A Relocation 13,989 15,250 Pacific Trade International 5515 Security Lane North Bethesda/Potomac - B Renewal 13,004 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL 3
Deliveries (Thousands SF) 300 250 200 150 100 50 0 Supply Just under 500,000 square feet is currently under construction in Suburban Maryland, with significantly more scheduled to start. In addition to the two projects mentioned earlier (909 Rose and 7272 Wisconsin Avenue), the build-to-suit for Marriot, located at 7750 Wisconsin Avenue, is just a little over a year away from commencing. It is not a coincidence that all three of these projects are located in Downtown Bethesda or in North Bethesda. These submarkets continue to be the most viable and attractive to developers due to the in-place amenities and proximity to the District. This will likely be the only areas in Suburban Maryland that see developers are willing to go speculative on their projects. Under Construction (Millions SF) 0.7 0.6 0.5 0.4 0.3 0.2 The 487,918 square feet currently under construction in Suburban Maryland is spread among five buildings. These buildings are significantly smaller than what is being constructed in the District and Northern Virginia. On average, the size of buildings under construction in Suburban Maryland is approximately 100,000 square feet. In comparison, the average size of buildings under construction in the District and Northern Virginia are just under 300,000 square feet per building. 0.1 0.0 Development Pipeline Deliveries, Under Construction Total Development RBA (Thousands SF) 200 180 160 140 120 100 80 60 40 20 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 2019+ 0 57 Randolf Rd 13950 Brandywine Rd 10076 Darnestown Rd 1000 Spring St 100 St. George Blvd 5801 University Research Ct 12040 Plum Orchard Dr Deliveries Under Construction Availability 4 SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL
Vacancy While the negative absorption did not completely erase the vacancy drop during the previous quarter, it did force it up by 44 basis points. The vacancy rose to 15.8 percent but remains under the five-year average of 16.3 percent. The increase in vacancy rose in all building classes in Suburban Maryland. It was, however, most apparent in Class A space, where it rose by 55 basis points to end the quarter at 16.3 percent. Both Class B and C space rose by 35 basis points ending the quarter at 15.7 and 14.2 percent, respectively. Rental Rates Vacancy Rate 18% 17% 16% 15% 14% Falling demand did not affect overall asking rents. The average market rate rose by $0.57 to end the quarter $27.15 per square foot on a full service basis the highest on record. Rental rates rose across the board in Suburban Maryland, with the most dramatic increase occurring in the Class C product, where rents rose by nearly a dollar to end the quarter at $22.24 per square foot. With a delta of just over six dollars, the spread between Class A and Class C product is not wide enough for lower quality buildings to adequately compete. In comparison, the difference between Class A and C space is just over $14 in Washington, DC and $13 in Northern Virginia. As new space comes to the market, especially in Bethesda, expect the rent spreads to widen. Direct Asking Rental Rate ($/SF Gross) $28 $27 $26 $25 Outlook Economic growth in Suburban Maryland is expected to continue to grow to levels over the next six quarters. An additional 1,730 new office-using jobs are projected through the end of 2017. Job growth is expected to be slower in 2018 with less than 2,000 new officeusing jobs being generated. However, due to efficiencies created by the implementation of workplace strategies, like hoteling, teleworking and open floor plans, utilization rates are expected to fall. As a result, expect demand for office space to shrink. SUBURBAN MARYLAND OFFICE MARKET REPORT COLLIERS INTERNATIONAL 5
Suburban Maryland Office Market Class A MARKET MONTGOMERY COUNTY EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER CONSTRUCTION YTD OVERALL VACANCY DIRECT ASKING Bethesda 5,508,542 - - - -100,764-206,966 9.0% $40.99 Gaithersburg 2,382,240 - - - 18,218 9,952 8.7% $23.89 Germantown 1,314,468 - - - 9,476 24,803 18.2% $22.00 I-270 North - - - - - - n/a n/a Kensington 165,000 - - - 7,349 2,073 16.3% $35.82 North Bethesda 7,186,872 - - - 50,913 177,305 20.0% $30.03 North Rockville 8,017,067 - - - -130,093-49,648 19.1% $29.22 North Silver Spring 1,399,928 - - - 6,315 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 - - - 6,562 62,165 18.5% $32.35 Silver Spring 4,193,011 - - 121,724-23,840-3,374 12.0% $31.03 Montgomery County Total 35,428,824 - - 121,724-155,864 22,625 15.0% $30.74 PRINCE GEORGE S COUNTY Beltsville 767,760 - - - -69,666-77,042 57.5% $22.11 Bowie 688,392 - - - 4,788 3,863 18.6% $28.00 Branch Avenue Corridor - - - - - - n/a n/a College Park 1,847,977 - - 75,000-30,757-30,757 7.6% $26.00 Greenbelt 2,166,286 - - - 7,165 110,904 30.3% $22.29 Landover/Largo 957,735 - - - - 14,687 22.2% $23.75 Lanham 557,000 - - - - 346,466 11.1% $22.00 Laurel 840,547 - - - - 16,376 14.3% $19.55 National Harbor 460,752 - - 95,000 3,551-285 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 - - 170,000-84,919 384,212 21.5% $22.48 Suburban Maryland Total 44,001,462 - - 291,724-240,783 406,837 16.3% $28.72 SECOND QUARTER 2017 OVERALL QUICK STATS 15.8% Vacancy Rate -377,350 Absorption 41,584 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 6,003,107 - - - 9,601-27,696 11.0% $37.09 Gaithersburg 4,240,026 - - - -7,483 34,426 11.2% $22.61 Germantown 1,818,629 - - - -5,058-7,213 13.6% $21.67 I-270 North 631,849 - - - - -42 85.5% n/a Kensington 1,457,017 - - - -12,051-10,543 26.9% $24.64 North Bethesda 3,904,046 - - - -57,059-130,415 17.0% $28.09 North Rockville 5,209,067 - - - 30,083-40,964 17.4% $23.41 North Silver Spring 1,862,228-16,806 180,000-34,016 15,142 15.2% $24.50 Outlying Montgomery County East 480,689 - - - -314-551 9.1% $25.95 Outlying Montgomery County West 73,256 - - 16,194-2,600-2,796 11.8% $12.00 Rockville 5,507,938 - - - -74,544-6,995 9.5% $29.80 Silver Spring 2,716,002 - - - -30,606-47,968 10.8% $24.92 Montgomery County Total 33,946,854-16,806 196,194-184,047-224,615 14.8% $27.91 PRINCE GEORGE S COUNTY Beltsville 917,417 - - - 16,110 5,106 16.1% $17.77 Bowie 1,192,631 - - - 862 8,134 8.1% $18.73 Branch Avenue Corridor 1,930,340 - - - 14,050 23,823 14.6% $14.93 College Park 2,647,368 - - - 937 29,914 23.0% $21.68 Greenbelt 1,470,198 - - - -3,637 59,639 23.4% $18.32 Landover/Largo 2,260,543 - - - -55,174-73,406 18.0% $22.24 Lanham 1,510,534 - - - 26,368 32,069 18.4% $20.65 Laurel 1,825,416 - - - 16,353 6,997 10.2% $19.97 National Harbor 722,626 - - - -10,473-27,214 14.7% $25.63 Outlying PG County South 108,909 41,584 41,584-41,584 69,939 18.4% n/a Pennsylvania Avenue Corridor 352,495 - - - 500 9,617 15.1% $21.73 Upper Marlboro 142,690 - - - - 2,614 0.0% n/a Prince George's County Total 15,038,167 41,584 41,584-47,480 146,232 16.8% $20.73 Suburban Maryland Total 48,985,021 41,584 58,390 196,194-136,567-78,383 15.4% $25.19 Class A 47.3% Class B 43.2% 822 Office Jobs Created 487,918 Under Construction 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 11,511,649 - - - -91,163-234,662 10.1% $38.35 Gaithersburg 6,622,266 - - - 10,735 44,378 10.3% $23.26 Germantown 3,133,097 - - - 4,418 17,590 15.5% $21.78 I-270 North 631,849 - - - - -42 85.5% n/a Kensington 1,622,017 - - - -4,702-8,470 25.8% $26.63 North Bethesda 11,090,918 - - - -6,146 46,890 19.0% $29.32 North Rockville 13,226,134 - - - -100,010-90,612 18.4% $27.47 North Silver Spring 3,262,156-16,806 180,000-27,701 21,457 9.0% $24.30 Outlying Montgomery County East 480,689 - - - -314-551 9.1% $25.95 Outlying Montgomery County West 792,338 - - 16,194-2,600-2,796 5.7% $12.00 Rockville 10,050,552 - - - -67,982 55,170 13.5% $31.75 Silver Spring 6,909,013 - - 121,724-54,446-51,342 11.5% $29.78 Montgomery County Total 69,375,678-16,806 317,918-339,911-201,990 14.9% $29.61 PRINCE GEORGE S COUNTY Beltsville 1,685,177 - - - -53,556-71,936 35.0% $21.98 Bowie 1,881,023 - - - 5,650 11,997 11.9% $19.23 Branch Avenue Corridor 1,930,340 - - - 14,050 23,823 14.6% $14.93 College Park 4,495,345 - - 75,000-29,820-843 16.7% $22.00 Greenbelt 3,636,484 - - - 3,528 170,543 27.5% $21.04 Landover/Largo 3,218,278 - - - -55,174-58,719 19.3% $22.33 Lanham 2,067,534 - - - 26,368 378,535 16.4% $21.04 Laurel 2,665,963 - - - 16,353 23,373 11.5% $19.82 National Harbor 1,183,378 - - 95,000-6,922-27,499 9.0% $25.63 Outlying PG County South 108,909 41,584 41,584-41,584 69,939 18.4% n/a Pennsylvania Avenue Corridor 584,684 - - - 500 9,617 9.1% $21.73 Upper Marlboro 196,690 - - - - 2,614 0.0% n/a Prince George's County Total 23,610,805 41,584 41,584 170,000-37,439 530,444 18.5% $21.51 Suburban Maryland Total 92,986,483 41,584 58,390 487,918-377,350 328,454 15.8% $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 Washington, DC 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