Report Says Converting Empty Local Office Buildings Not Viable

Planning Department asked consultants to gauge reuse potential for struggling Rock Spring, Executive Boulevard properties

June 24, 2016 12:44 p.m.

Converting empty Bethesda and North Bethesda office buildings into housing, schools or other uses likely wouldn’t be financially feasible, according to a report commissioned by the Montgomery County Planning Department as it considers new zoning for the struggling Rock Spring and Executive Boulevard office parks.

The report, from Washington, D.C.-based real estate consulting firm Bolan Smart Associates, points to the high costs of renovating or demolishing aging office buildings to make way for the type of mixed-use residential and retail development in vogue around the region.

It also suggests the office parks are in position to recover despite vacancy rates that are close to 30 percent. The consultants pointed to the fact the majority of the vacant space in the two office parks was the result of the recent relocations of two agencies that are part of the National Institutes of Health (NIH)—the National Cancer Institute from Executive Boulevard and the National Institute of Allergy and Infectious Disease from Rock Spring.

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“To varying degrees, and for different reasons, Executive Boulevard and Rock Spring both remain very viable office markets,” the report said. “They both have distinct histories and relative competitive positions in the hierarchy of office concentrations in the Washington metropolitan area.”

County planners are working on new master plans for both areas that could include new zoning and recommendations for more residential and retail use. Planners will brief the Planning Board on the report during its June 30 meeting.

Real estate experts have held up the stretch of mostly vacant office buildings on Executive Boulevard as an example of how older, more suburban-style office parks are dying and how companies are instead seeking space closer to major transit hubs such as in downtown Bethesda.

Hotel giant Marriott International’s decision to relocate from its headquarters in Rock Spring to a more transit-accessible location by 2022 also has fueled that shift in thinking.

But Bolan Smart’s report said there is still a need for the office parks, though attracting new tenants there might require some building renovations and lower rents.

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Last year, big box alcohol retailer Total Wine & More moved its headquarters to a 100,000-square-foot space at 6600 Rock Spring Drive.

In May, downtown Bethesda-based research firm Abt Associates confirmed that in 2018 it will move to 6130 Executive Blvd., a 151,000-square-foot office building that has been vacant since the National Cancer Institute moved out in 2013 and 2014.

Bolan Smart’s report said the nearby mixed-use Pike & Rose project was creating leasing momentum for Executive Boulevard properties.

It said average rents in the Rock Spring office park, which comprises 7 percent of the county’s office inventory with 25 buildings and more than 5.3 million square feet of space, were 5 percent higher than average office rents countywide but still more than 25 percent lower than average rents in downtown Bethesda.

The report details the potential costs of converting the older office buildings, including replacing utilities and installing new stairways to meet current building and fire codes and finds property owners likely would lose money on the projects.

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“Simply put, the value equation (potential income vs. cost) in these submarkets for continued office use, though perhaps reduced from prior achieved rent levels, still exceeds that of the substantial cost of converting to alternative uses,” the report says.

The report does say that building residential projects on yet-to-be-developed parcels in the office parks, such as the 168-townhome project under construction in Rock Spring, can add value and improve them. It says residential development could also be possible on existing surface parking lots and points to unused density in existing zoning.

“Existing financing liabilities may restrict near-term reuse options; not every owner of a possibly obsolete building will actually be interested in a change of use,” planners wrote in an introduction of the Bolan Smart report. 

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