When the National Institutes of Health moved from the District to Bethesda in the 1930s, its budgets helped fuel a slow transformation of rural Montgomery County. That change accelerated in 1998, when Congress doubled federal funding for medical research over five years, creating jobs for thousands of scientists, supporting scores of biotech firms and increasing demand for new offices and services for the NIH.
Now those days of a double-digit increases are over.
This year the NIH budget grew by 3 percent to $27.8 billion, and congressional staff members and NIH officials say budget increases in coming years will be modest -- no more than 6 percent, compared with 16 percent in the mid-to-late 1990s.
"With a burgeoning budget deficit and competing pressures for money for homeland security, it leaves everyone else fighting for the scraps," said John Scofield, a spokesman for the House Appropriations Committee.
The impact on the county, so far, has been uneven. Biotech executives say they are worried but not bleeding. EMMES Corp. of Rockville, a biotech statistics company that gets 80 percent of its business from the NIH, moved into a bigger building three years ago when NIH budgets were still growing fast. But now the company is taking a "very conservative, very careful" approach to its future, said Michael J. Grady, EMMES's vice president of finance. "Our growth depends on [the NIH's] ability to support research trials."
"NIH has a huge impact on the Maryland economy," said Phillip A. Singerman, executive director of Maryland Technology Development Corporation. "NIH's budget doubled over the last eight years. Now, it's leveled off and may be declining a bit. . . . There is a general concern that demand in the federal budget will keep [NIH funding] flat or lead it to be cut." So far, companies have not been forced to cut back on research, he said.
Commercial real estate brokers, however, said that as a result of the budget slowdown, there are an unexpectedly large number of empty buildings in Montgomery County, including a 125,000-square-foot building in Rockville that has been empty since Manugistics Group Inc., a software company, moved out almost two years ago.
"Many thought it was a foregone conclusion that NIH would go there," said David I. Machlin, a first vice president at brokerage CB Richard Ellis Group Inc. "It's still empty."
During the 1990s, it seemed like the NIH was ready to take any major office space that came onto the market, brokers said. Even during a downturn in the early 1990s, when companies put several million square feet of office space back on the market, it was absorbed by the NIH and local companies, said Phillip McCarthy, a senior vice president at Transwestern Commercial Services.
"Any piece of space that became available, you could assume you'd lease it to NIH," McCarthy said.
The amount of space the NIH leased went from 1.4 million square feet in 1997 to 3.3 million this year, making it one of the largest tenants in Montgomery County. Much of the office space the NIH has leased is in the Rock Spring Park area and Rockville.
Roberta Levy Liss, a senior vice president at Trammell Crow Co., said she leased about 300,000 square feet in 1999 and 2000 to the agency. "They had a voracious appetite," she said.
But after the Sept. 11, 2001, terrorist attacks and the shift of federal spending to defense and intelligence, brokers noticed a change as NIH spending growth slowed.
"We're dying out here," said Brendan F. Cassidy, a senior vice president at Cassidy & Pinkard, a brokerage company. "Up until 9/11, what NIH was taking was a good boost to the market. But they haven't been seen."
The NIH agrees it has reduced its demand for office space. "Yes, the rate of growth of our budget is slowing and so is the rate of growth of our staff," said Leonard Taylor Jr., acting director of the NIH's Office of Research Facilities Development and Operations, which oversees the agency's real estate. "Since staff and money drive our need for space, that means it's slowing down too. But it's not grinding to a halt."
The agency's demand for space off-campus has increased consistently each year. But in the next fiscal year it will spend only $92 million on leases, up only $3 million from this fiscal year. The year before, spending increased by $10 million.
These days the NIH needs more laboratory space than office space. Taylor has been looking for months for a 40,000-square-foot lab in Montgomery County, Taylor said. But few developers want to build fancy lab space to house such facilities because there are only a small number of customers who would want it and it would be expensive to build.
Of the new space the NIH will need, most will be for research, Taylor said. So developers and brokers are looking for other tenants to fill the space they once hoped NIH would take.
An area economist said that as the economy improves other sectors will fill some of the void. "What makes Montgomery County Maryland's largest jurisdiction in terms of jobs and the county with the lowest unemployment rate is not just NIH or FDA, it's the technology and intellect generated in and around them," said Anirban Basu, chief executive of Sage Policy Group, a Baltimore economics and research firm.
And Montgomery County is trying to broaden its economic base, said David W. Edgerly, directory of the county Department of Economic Development.
One of the county's two business incubators -- subsidized spaces for start-up companies where some biotech firms got their start -- is only 40 percent filled by biotech companies. The rest of the space in the Rockville incubator is taken by information technology, software development and telecommunications companies, Edgerly said. The other incubator, in Silver Spring, is 70 percent leased with no biotech companies.
"We're not focusing on just NIH or just biotech," Edgerly said. "Many jurisdictions have made the mistake of an overdependence on one major sector. But a diversified economic base provides for stability in economic cycles."
Staff writer Michael Barbaro contributed to this report.