Office leasing statistics in the first quarter of 2014 provided proof yet again that the federal government and its contractors are the engine that makes the Suburban Maryland office sector go – or not go, as was the case. Nearly 36% of Suburban Maryland’s office inventory, some 26 million square feet (msf), is leased by the federal government or by government contractors; making it the most exposed of all Washington Metropolitan area markets to the federal sequester cuts that went into effect early in 2013, and the decline in federal government employment that has plagued the region for the more than two years.
An anticipated surge in large vacant blocks of space hit the Suburban Maryland office market hard in the first quarter of 2014. As a result, a new record-high vacancy rate of 17.4% was reached, coupled with a new record-low quarterly net absorption total of negative 968,000 square feet (sf). Federal government and government contractor tenants shed more than 1 msf of space during the first three months of 2014. In Montgomery County, Lockheed Martin gave back 290,000 sf in North Rockville, while in North Bethesda the National Cancer Institute consolidated its footprint leaving 154,000 sf vacant, and the National Institutes of Health shed 150,000 sf. Other tenants vacating space included DRS Technologies (60,000 sf) and ASRC Aerospace Corporation (84,000 sf). Meanwhile in Prince George’s County, Computer Sciences Corporation (CSC) returned 325,000 sf.
What does all of this mean?
For supply-demand dynamics, it is worrisome. The overall vacancy rate was 4.5 percentage points off of its historical average at the end of the first quarter of 2014. An additional half msf in existing space is expected to come online, together with 420,000 sf in vacant new product delivering by the end of 2014, along with at least another 500,000 sf in 2015. All of this softening in demand has and will continue to lead to a general decay in rental rates for the foreseeable future. Concession packages were about 5% more generous than in the previous quarter. Equilibrium will likely not be reached until the market’s demand drivers – the federal government and its contractors – return. Until then, we’ll need to brace for additional (large vacant block) impact.
For additional Q12014 stats for markets around the country, visit our website: http://www.cassidyturley.com/research/market-reports
By: Nathan Edwards
Director of Research, Cassidy Turley - Washington, D.C.
Contributor: Urmi Joshi, Suburban Maryland Senior Research Analyst, Cassidy Turley
Email Nathan: Nathan.Edwards@cassidyturley.com
Follow Cassidy Turley on Twitter: @CassidyTurleyRE