In Northern Virginia, office space is newer, but in Montgomery County, it costs less

November 24, 2013

The highly competitive markets inside the Capital Beltway contain more than 100 million square feet of office space. But in those close-in suburbs, vacancies, rents and demand for space can vary depending on where you are.

Take Montgomery County and Northern Virginia. One important difference between the two areas is the amount of recently built space in each. Less than 500,000 square feet of new office space has been added to Montgomery County’s inner Beltway neighborhoods over the past five years. One of the few major new buildings under construction is Carr Properties’ 4500 East West Highway, which is adding 226,000 square feet of office space in Bethesda.

Meanwhile, more than 4 million square feet of office space has been added in the inner Beltway market in Northern Virginia over the same period. That additional space increased Northern Virginia’s inner Beltway office inventory by 5.2 percent compared to a 2.4 percent increase to Montgomery County’s inner Beltway during the same time period.

Although still adjusting to huge vacancies caused by the Pentagon’s base relocation and closure process, developers in Northern Virginia are moving ahead with new projects. More than 1 million square feet of new office space is currently under construction in the area, led by the 35-story 1812 N. Moore St., scheduled to be finished next month in Rosslyn.

Many of these buildings have yet to be leased, causing the office vacancy rate to shoot up in Northern Virginia’s inner Beltway office market from 10 percent in 2010 to 17.5 percent in the current quarter. In Montgomery County, the inner Beltway office market boasts a modest 9.5 percent vacancy rate.

Yet, the average office rental rate in Montgomery County’s inner Beltway area has dropped more than 4 percent to $33.68 per square foot over the past five years, compared to a rent increase of 10 percent in Northern Virginia to $40.87 per square foot.

Some of the increase in rent reflects the larger amount of new space added to the market, as office space in newer buildings typically commands a premium in the market.

Backed by a business-friendly environment, developers appear to have confidence that office space in Northern Virginia’s close-in suburbs will continue to be backfilled through slow but steady demand, leading to increasing asking rents and continued speculative development.

At some point, the difference in rents will likely tilt the demand for office space back in favor of Montgomery County’s inner Beltway market, where developers are poised with plans to build more than 2 million square feet of new office space — all proposed in Silver Spring or Bethesda.

D.J. O’Brien is a research manager with CoStar in Washington. For more information please see www.costar.com.

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