Montgomery County’s stagnant office market is about to take another hit, thanks to 3.6 million square feet of expiring leases from federal government tenants, according to a report prepared for the county’s Planning Department.
Of that space, renewals have been taken on almost 2 million square feet, according to Partners for Economic Solutions in Washington, D.C.
All told, the report says the federal government’s new aim to reduce its office footprint could mean the loss of 1.1 million square feet of leased private office space in the next five years.
“The county's extensive Federal presence, long a source of economic strength and stability, is now disrupting the local office market as entire office buildings are vacated,” reads the report.
For Montgomery, already showing signs of the poor office market afflicting the entire Washington, D.C., region, the looming shift could mean significant changes for suburban office parks—where nearly all of the county’s 12 completely empty major office buildings are located.
"The thing we all need to come to terms with is this isn't a short-term blip," said county Planning Department Director Gwen Wright. "It's really a fundamental change in the way offices operate."
That realization could come into play soon in master plan work in the Rock Spring area of Bethesda and White Flint II, which includes office buildings on Executive Boulevard in Rockville that have suffered from the federal government's shrinking footprint.
“Plans for approved but unbuilt suburban office parks may need to be revisited,” says the report, which the Planning Board will review Thursday. “Some projects already have converted planned office space to residential or other uses, but redirecting development capacity to more competitive locations should be considered. Zoning impediments to redevelopment and diversification should be removed.”
In Rock Spring, made up mostly of a suburban-style office park home to Marriott International, Lockheed Martin and others, the vacancy rate in the second quarter of 2014 was almost 19 percent, according to the report.
Bethesda-based developer EYA has broken ground on 168 luxury town houses in the center of Rock Spring Park, on a site that until recently was zoned for another office building.
The average vacancy rate for nine clusters mostly along the I-270 corridor that the report categorized as “Office Parks” was 18.9 percent. The average vacancy rate for nine areas the report categorized as “Mixed-Use Business Districts” was 9.2 percent.
A consultant's report shows vacancy rates, average rents and square feet absorbed in 12 sub-office markets in Montgomery County. Credit: Montgomery County Planning Department
"They are definitely losing tenants, and so we are trying to be understanding of the trends and the issues raised by this study and trying to use that information to help really inform some of our upcounty master plans and some of the work we're going to do in places like Rock Spring and White Flint II," Wright said.
The mixed-use areas performing better in terms of office vacancies included downtown Bethesda, downtown Silver Spring, White Flint, other areas with Metro stations and some areas without Metro stations—such as the Kentlands and Washingtonian areas in Gaithersburg.
The report also urged the county to address its vacant office space problem—11 million square feet was vacant as of the second quarter of 2015—by reducing its amount of office space.
“Reduce the supply of non-competitive office space by converting vacant office buildings to housing, hotels or other uses,” it suggested. “Policies that facilitate site assembly could help owners of older, small office buildings to redevelop.”
It also recommended increasing financial incentives for potential office tenants and retrofitting existing office environments by adding “amenities, mixed-uses and improved transit or highway connections.”
Wright suggested those conversions might one day include schools, pointing to Fairfax County's purchase of an office building for conversion into an elementary school.
The report also made clear just how much the federal government’s shifting from privately leased office space to government-owned property will impact the area.
The Food and Drug Administration is leaving 231,500 square feet of leased office space spread over three buildings in Rockville and one in Bethesda to take up excess space at the Nuclear Regulatory Commission’s headquarters in White Flint. And the National Institutes of Health is moving more of its workers from privately leased space on Executive Boulevard to its Bethesda campus.
The seven federal agencies that call the county home represent 11 percent of the total countywide office space inventory and 3.6 million rentable square feet of leases expired last year or will expire this year or in 2016.