With new office construction in Montgomery and Prince George's counties scarce and few projects planned, brokers and developers say suburban Maryland's commercial real estate market should continue to experience steadily rising rents and declining vacancies for the foreseeable future.
In Northern Virginia, 55 buildings are under construction with more than 5.4 million square feet. In suburban Maryland, there are 26 with a total of 1.7 million square feet. In the biggest Maryland office market, Montgomery County, only four office buildings are under construction.
"The suburban Maryland market is seeing, and will continue to see, a gradual increase in tenant activity," said Lawrence E. Thau, managing director of the Bethesda office of brokerage CB Richard Ellis. "And you're definitely seeing rental rates beginning to rise."
The rise will be slow, however, in keeping with the Maryland market's usual moderation, especially compared with the pace across the Potomac River. "We'll never be Northern Virginia," Thau said.
The office-vacancy rate in suburban Maryland as of June 30 was 10.4 percent, only slightly less than the 10.6 percent in the previous quarter and down from 11.5 percent a year earlier, according to CoStar Group, a Bethesda-based real estate research firm.
Even during the post-recession doldrums of 2002, the suburban Maryland vacancy rate never climbed as high as 13 percent.
In Northern Virginia, where office development surged in 2004, the vacancy rate was 11.1 percent on June 30, compared with 11.7 percent in the previous quarter and 13.9 percent a year earlier. That's down from a peak of 16.7 percent in the fourth quarter of 2002.
Northern Virginia, with far more high-tech and telecommunications companies and the flood of defense contractors in recent years, has long experienced much wider swings in the office market than suburban Maryland, which has generally relied on more stable corporate, financial services, biotechnology, health care and long-term government tenants.
"The commercial market here is okay," said Douglas Firstenberg of Stonebridge Associates, a brokerage and development firm in Bethesda. "You haven't had a tremendous amount of building. I would say the Class A properties are tightening up and doing considerably better than they have in the recent past, and the result is that we are seeing a spillover effect into other properties."
Thau said the biggest surge in demand for new space in suburban Maryland is coming from nonprofit groups, specialty research firms and think tanks. "It's intellectual knowledge that is spurring growth here," he said.
The District maintained the tightest office market in the region, with an 8 percent vacancy rate. Although 19 office buildings are under construction in the District with more than 6 million square feet, Firstenberg said land acquisition costs in the city are too high, and he expects supply to remain tight.
For the entire metro area, the vacancy rate was 10 percent on June 30, down from 11.5 percent a year earlier and a peak of 13.1 percent at the end of 2002. Vacancy rates in submarkets around the region, from Alexandria to Howard and Prince George's counties, are down as steady job growth continues through the region. The area's average asking rent was $29.76 a square foot, compared with $28.47 a year ago, according to CoStar.
New office development in Montgomery and Prince George's counties remained at their lowest levels in more than a decade. In Montgomery County, it's more a function of supply than of demand. "There are so few sites left," Firstenberg said.
One of the main new office developments in Montgomery County is already spoken for. Mills Corp., a mall developer, plans to move its headquarters from Rosslyn to Chevy Chase Land Co.'s 200,000-square-foot-building that will be part of a $160 million mixed-use development at Wisconsin and Western avenues in Chevy Chase.
Another new project is Tower II. Bethesda-based developers the Lerner Enterprises and Tower Cos. plan to begin construction soon on a 200,000-square-foot companion to the Tower Building at Interstate 270 and Wootton Boulevard in North Rockville.
But in suburban Maryland, Howard County remains the workhorse for new development. According to CoStar, 17 office buildings delivering more than 900,000 square feet of space will come online in the next three years.
Demand appears to be ready to soak it up: The net absorption, the amount of space leased minus the amount of new space on the market, was 214,921 square feet in the second quarter in Howard County.
Of all Washington area jurisdictions, only Fairfax County and the District, which have far bigger office markets than Howard, had greater net absorption than Howard in the quarter.
And Howard has had the most dramatic comeback in vacancy rate since the low point in the fourth quarter of 2002, going from 18 percent, only Loudoun County had a higher vacancy rate at that point, to 8.3 percent on June 30.
"Vacancy rates are about ideal in Howard right now," said Cole Schnorf, senior vice president of Manekin LLC, one of the most active office developers and brokers in Columbia. "Anything under 10 percent is good, but anything under 8 percent means that tenants might have problems finding the space they need."