In a Downturn, Ingenuity Required

Office vacancies in Loudoun County are at a historical high. And the big-name technology companies that once promised to fill large office buildings have shrunk or disappeared. So what does that mean for developers of commercial real estate in the county?

It's time to get creative.

Late last year, the first building at Dulles Trade Center I, an office park on Route 606, came to market. Realizing the difficulty of leasing office or industrial space, the developer, Buchanan Properties LLC of Gaithersburg, turned the one-story, 105,400-square-foot building into a condominium office space. The idea was that people would actually buy the space, rather than lease it, much like in the residential condo market.

"We thought our location was very good," said Bob Buchanan, a principal at the firm. "We wanted to take advantage of low interest rates and low cost to the eventual user. We're very happy with the results. But we don't know yet how deep that market is."

The idea to sell the spaces rather than wait for people to lease was a good one, said Robyn Bailey, marketing manager of the Loudoun County Economic Development Commission.

"That was a huge savior that Bob did that," she said. "We're seeing very small businesses that are looking to grow, not big-name industries, but they're plugging along and have money. We had no product like this."

Buchanan realized it had to tap into a market that had been ignored in recent years. The small businesses in Loudoun need office space but cannot afford or fill some of the immense stretches of space in the Loudoun area that sit empty.

The idea apparently is catching on. Atlantic Realty Cos. of Tysons Corner announced last week that it has purchased 41 acres in Ashburn for construction of 300,000 square feet of retail, office condominium and hotel space beginning in late 2003. More than 65 percent of the professional office condos have pre-sold, according to the company.

Although Loudoun has a stunning 21.1 percent commercial vacancy rate, according to CoStar Group Inc., a commercial real estate information service, it also has a much smaller total base of space than neighboring counties. Loudoun has 8.7 million square feet of commercial office and flex/industrial space, while Fairfax has 93.8 million and a vacancy rate of 19.5 percent, according to CoStar. Some say that because there is less space to fill, Loudoun could bounce back once the economy picks up.

There are just two buildings under construction in the county, a stark difference from the growth during the gangbuster years. Merritt Properties LLC has an office space in Ashburn that will come to market in April; it is 31 percent leased. And a three-story building is under construction in Leesburg on Route 7, due to come to market in May; 42 percent of it is leased, according to CoStar.

-- Amy Joyce


Bethesda an Epitome of the Times

The sign that Montgomery County's commercial real estate market has slowed is perhaps most obvious in Bethesda.

Two years ago, the office vacancy rate hovered around 5 percent -- very low for any market in the metropolitan area. Most tenants wanted to be in Bethesda, where there are plenty of restaurants and Metro access. It was a landlord's dream: tenants competing to pay top-dollar rents and making personal guarantees to get space.

Now in Bethesda the vacancy rate is 15.5 percent. That's compared with a vacancy rate of 12.5 percent for the entire county. Still, the vacancy rates in Montgomery are low compared with areas in Northern Virginia, where overbuilding for the tech boom has left buildings empty.

Few buildings are going up in Montgomery, and the offices built in the past year have not filled up as quickly as hoped. There also is a glut of sublet space, as companies are downsizing, not expanding, and therefore are returning to the market the space they no longer need.

Because of the lack of demand, landlords are dropping prices by as much as 10 to 15 percent, putting average rents in the mid-$20-per-square-foot range.

"There's nothing of any girth going up in Montgomery," said Jack Alexander, a commercial real estate broker at AMR Commercial LLC in Bethesda. "That tells us that we haven't filled up the last buildings that come online."

In Bethesda, the lower vacancy rate is due in part to Discovery Communications Inc.'s planned move this spring to its new headquarters in Silver Spring. Its move is expected to return at least 400,000 square feet to the sublet market.

New buildings in Silver Spring are drawing rents of $30 per square foot -- cheaper than the average $50 per square foot for space in the District, convincing cost-conscious tenants to move to the suburbs. A nurses association, for example, is leaving its Southwest D.C. office to become one of the major tenants in a building being built by Foulger-Pratt Cos. in downtown Silver Spring.

-- Dana Hedgpeth


Building, but Is Anyone Biting?

A glut of new buildings and a hobbled economy have helped push Howard County's office vacancy rate to one of Maryland's highest levels.

Howard's office vacancy rate has climbed to 18.2 percent, including sublease space, with 1.9 million square feet available in the central Columbia/Ellicott City market, according to CoStar Group.

In Columbia, real estate firm Liberty Property Trust recently resorted to offering discounted rent to lease the last 4,000 square feet of its three-building office complex, Liberty Place at Columbia Crossing, which has had vacant space since it opened in 2001, said James K. Flannery, a Liberty vice president. Tenants of the 93,000-square-foot complex include financial services firm AXA Advisors LLC and government security technology firm Windermere Group. A fourth building is scheduled to open in July and is 40 percent pre-leased, Flannery said.

"We're building the fourth building as we speak, kind of unusual in this market," Flannery said. "There aren't too many buildings being built now."

Howard companies such as bankrupt telecommunications firm E.spire Communications Inc. and downscaled fiber-optics company Corvis Corp. recently put space up for sublease while construction continued on buildings started before the economic slowdown. The result is vacancies that have reached a height not seen in the county since the recession of the early 1990s.

The county has about an 18-month supply of vacant office space, but there is hope that local vacancies will shrink this year, said Randall M. Griffin, president and chief operating officer of Corporate Office Properties Trust, a Columbia-based developer. He predicted that Howard's vacancy rate could fall to as low as 14 percent by the end of 2003.

Howard's vacancy rate for Class A office space, or the newest available space in the county, rose to 24 percent in 2002, compared with 18 percent in 2001, according to a study by NAI KLNB Inc., a Columbia real estate firm. Local developers have said they expect a turnaround later this year as government agencies and health care firms seek space in the county.

-- Sabrina Jones


A Rude Awakening

In the late 1990s there was vast office construction in Fairfax County to accommodate the burgeoning growth of technology firms, so much so that the county wound up with more office space than such places as Boston, Philadelphia, Houston, Dallas, Seattle, Atlanta and Denver.

That was then, however. Now, there's almost no new construction, and 18.1 percent of the space in the mid-county area is vacant, with an even higher vacancy rate of 23.4 percent in the Route 28-Dulles Airport Road corridor, where many tech companies are located, according to CoStar Group.

For a county where economic growth is gospel, that has been a jarring comeuppance.

"While that is awful compared to what it used to be," Stephen S. Fuller, a regional economist at George Mason University, said of the vacancy rates, "it's not so bad compared to [parts of] the rest of the country," where the office vacancy rates are approaching 30 percent. The national average is 17 percent.

In the heyday of construction, when corporate growth was a given and no one thought of bankruptcies and layoffs, Fairfax's office vacancy rate hovered in the 8 to 10 percent range. Now, 17.7 million square feet of space is vacant, according to CoStar, and Fuller said it will take most of 2003 and 2004 for enough job growth to occur in Northern Virginia for the vacancy rate to fall back into the 10 percent range. But that is exactly what he's predicting.

"The good news in Fairfax County and Northern Virginia is that the [available] sublet space [where companies have folded or curtailed their operations] has not gone up," Fuller said, and actually has declined from 5.9 million square feet of space in 2001 to 5.1 million square feet at the end of 2002. That drop indicates that the number of shrinking or dying firms has lessened.

-- Kenneth Bredemeier