Retail Sector Outpaces Office Market

The office vacancy rate in Montgomery County dropped only slightly during the second quarter from a year ago, to 11.8 percent from 12 percent.

But retail real estate was strong throughout the county, said Lawrence Hoffman, a principal at H&R Retail, a retail real estate brokerage in Chevy Chase.

Rockville, Bethesda, Gaithersburg and Silver Spring, with their limited retail space, are "on fire," he said.

"The office market has been soft, but we haven't seen a hiccup in the retail market."

The average rent for office space in the county fell to $25.82 per square foot in the second quarter, from $26.71 in the second quarter of 2003. The average retail rent in Silver Spring is as high as $40 a square foot, brokers said. Fifteen years ago, before Silver Spring started sprucing up its downtown, it was only $12. Retail and restaurant sales are strong, encouraging others to move in.

Many leases in the City Place area are expiring, said Blair Lee IV, a Silver Spring developer, and some low-end retailers are being pushed out to make way for more upscale shops and restaurants. The area, he said, has become a "suburban Adams-Morgan" -- a reference to the District neighborhood popular for its restaurants and night life. Lee said he got more than 100 calls recently concerning a Silver Spring restaurant he had trouble leasing just four years ago.

It's the same story in the more upscale neighborhoods of Chevy Chase and Bethesda, said James G. Cahill, senior vice president at CB Richard Ellis. Office rent has flattened out at $30 to $35 per square foot for top-of-the-line space. But brokers are asking as much as $100 a square foot for retail space, up from the usual $40 to $50, said Grant M. Ehat, a principal at developer JBG Rosenfeld Retail.

There are some signs of progress in the office market. For example, the 400,000 square feet of vacant space in several buildings in Bethesda that Discovery Communications Inc. left behind two years ago is nearly filled, brokers said. The owner of the Discovery Channel moved to a bigger space in Silver Spring.

So, Cahill said, he predicts the office vacancy rate in Montgomery will fall to less than 10 percent by this time next year.

-- Lauren Bayne Anderson