North Rockville — or Shady Grove, if you like — is the heart of the Interstate-270 technology corridor and home to the National Cancer Institute. Residential developers have targeted the area, adding more than 600 new apartments in 2012, with more to follow. But overall, demand for those units failed to keep pace, and the office market appeared sluggish.
The North Rockville office market has 12.4 million square feet of inventory. Last year, tenants vacated 59,000 square feet more than they leased, meaning the area had negative absorption for the year after 177,000 square feet of positive absorption in 2011. This compares to the 10-year annual average absorption of 194,000 square feet.
The direct office vacancy rate rose to 12.7 percent during 2012, from 12.2 percent a year earlier, and when sublet space is included the rate was 15.1 percent at the end of 2012, up from 13.3 percent a year earlier.
JBG Cos. built a 575,000-square-foot building for the National Cancer Institute, delivered in January 2013. Average effective office rents in this submarket fell to $20.35 per square foot at year-end 2012, from $21.15 per square foot at year-end 2011. This represents a 3.8 percent decline in 2012, compared to a decline of 1.6 percent in 2011.
Effective rents in North Rockville are likely to be restrained during 2013, as demand is lackluster compared to past recovery cycles. This, coupled with an elevated vacancy rate, likely will encourage landlords to offer generous concession packages to attract tenants. Some superior properties may see rent growth in 2013.
With the arrival of more than 625 new units in 2012, the overall vacancy rate soared from 6.4 percent to 19.2 percent during the year. Average rents rose 3.1 percent for high-end (Class A) low-rise apartments in the Gaithersburg-North Rockville area, while the vacancy rate climbed to 6.9 percent from 6.4 percent.
By the end of 2012, the 36-month pipeline of new apartment supply in the area totaled 1,065 available units that were under construction or being marketed and 521 units that were still in the planning stage. Accounting for discounts and concessions, rents for Class A low-rise units averaged $1,641 per month at the end of 2012, which represents a 3.1 percent increase during the year. Concessions represented about 4.9 percent of face rent in this segment of the market at year-end 2012.
The mid-level (Class B) apartment market in Gaithersburg-North Rockville experienced a 2.1 percent decline in average effective rent among garden apartments during 2012, which was driven by an increase in the Class B vacancy rate from 3.7 percent to 5.8 percent during the same period. It is likely that Class B vacancy rose and rents fell due to pressure from all the high-end apartments that were being completed.
With more than 1,600 new units in the pipeline, it is likely that the Gaithersburg-North Rockville apartment market will become increasingly competitive in 2013. This will be true for both the Class A and Class B markets, because a growing Class A apartment inventory will likely result in further rent compression, which could attract tenants from Class B properties who could not afford Class A rents previously.
There have been 465 new condominium units built in the North Rockville area since 2003, but there are no new units for sale at the moment. The development pipeline is very limited, with no new units under construction or planned for delivery within the next 36 months and only 150 units planned for delivery in the long-term (beyond three years).
David Parham is senior vice president at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.delta