Gaithersburg, Germantown seeking momentum

September 30, 2012

Economic activity is beginning to stir in the Gaithersburg and Germantown areas, led by the construction of new apartments.

The two communities, which make up the northern end of the Interstate 270 technology corridor, saw a spurt of growth in the 1970s after the National Institute of Standards and Technology and the Energy Department established headquarters there, and many contractors sought space to be nearby.

Development slowed in recent years, following the recession. But Gaithersburg’s downtown is currently undergoing revitalization supported by the city. Plans call for developing more office space in “Olde Towne” Gaithersburg and bringing more activity downtown.

Office market stabilizing

Gaithersburg and Germantown feature a combined 7.7 million square feet of office space, approximately 70 percent of it in Gaithersburg. About 1 million square feet is available to lease and 50,000 additional square feet is available for sublet, producing a vacancy rate of 13.1 percent in Gaithersburg and 12.4 percent in Germantown as of mid-year 2012. This is slightly above Montgomery County’s rate of 11.3 percent but vacancy rates in the area have been fairly stable since 2010, in part because of limited office development. Currently, only one 194,400-square-foot building is under construction in the area.

Annual net absorption (the change in the amount of leased space) during the past 15 years has been approximately 35,000 square feet in Gaithersburg and 52,000 square feet in Germantown. We expect leasing activity to be restrained in the near-term, since the federal government, a major driver of leasing for this area, is undergoing budget austerity measures. Office rents in the area been declining since 2006 and averaged $18.35 a square foot at mid-2012.

Apartment market ramping up

Residential activity in Gaithersburg and Germantown is ramping up, as the lower cost of suburban living in locations like Gaithersburg and Germantown is attractive to many commuters. The neighborhoods boast close to 5,000 Class A rental apartments, 60 percent of which are in Gaithersburg. Two new buildings opened in Gaithersburg this year, and more than 850 more are under construction. Germantown has been much quieter, but that could be changing. An additional 2,000 units are likely to deliver in the combined market over the next 36 months and 20 percent of these units will be in Germantown.

Apartment rents are competitive in Gaithersburg, averaging $1,665 a month, or $1.63 a square foot. These rank second only to rents along the Rockville-Bethesda corridor when compared to other areas of Montgomery County. On the other hand, rents in Germantown are lower, at an average of $1,470 a month or $1.44 a square foot.

Overall vacancy is 4.6 percent in Gaithersburg, and 5.9 percent in Germantown — a notch higher than the surrounding neighborhoods. Concessions (or rent discounts) make up only 1.2 percent of face rents in Germantown, but 3.6 percent in Gaithersburg at 3.6 percent of face rent.

Development of condominiums in the area has historically been moderate. Since 2003, almost 1,900 condominiums have been built and fewer than 150 units are now available for sale. Most of the new condominiums have come in the form of townhouses in which units are stacked over one another.

Lingering effects from the recession and housing meltdown may explain the limited pipeline of condominium units. Only 24 units will begin marketing in the next 36 months and no additional units are planned long-term. There are 540 multifamily units in the pipeline, however, which could be built as rental apartments or condominiums.

Ade Opoola is senior associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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