Sequestration taking toll on Montgomery office market -- Gazette.Net


Montgomery County’s office market emerged as something of a bright spot in the D.C. region during the third quarter, but the outlook is bleak for the next two years, as the full effects of federal spending sequestration take hold, according to preliminary data from broker CBRE.

The county’s vacancy rate actually fell to 16.6 percent, ticking down from 16.9 percent in the second quarter.

“Three-tenths-of-a-percent improvement is small for Montgomery County, but after several quarters in the negative, we’ll take it,” said Jeff Kottmeier, director of research for CBRE’s mid-Atlantic region.

But Montgomery’s year-to-date absorption rate stands at a negative 226,000 square feet, thanks largely to federal agencies giving back space in consolidation moves. That could improve as data comes in during the final days of September, but any change won’t fully erase all the space dumped back on the market earlier this year, Kottmeier said.

While the region’s federal jobs sector is stagnant or shrinking, Montgomery has shown some increase in private employment in financial services, real estate, health care and medical office back office employment, Kottmeier said.

The good news for Montgomery and the rest of the region is that there is very little construction in the pipeline, which should limit vacancy increases in the short term.

But a few large properties are rising, including a 220,400-square-foot speculative building Carr Properties is developing on the site of a former McDonald’s in downtown Bethesda. Federal Realty Investment Trust is adding 80,000 square feet of office space to its Pike & Rose complex in Rockville.

Sport & Health Club also announced plans for a 32,000-square-foot gym that should open at the mixed-use property in about a year.

Frederick County has good news and bad news. The top lease transaction was a renewal by Bechtel Power Corp. of 123,000 square feet of space. The bad news: That’s part of a space consolidation at the firm’s five-building campus, which lost 625 government operations workers who have moved to Reston.

The preliminary CBRE report shows that private tenants are taking a “wait-and-see attitude” through the end of the year. And any federal leasing by the General Services Administration could be stalled, as Congress continues its budget brinkmanship over approving an increase in the federal debt limit.

“Early indicators suggest the vacancy rate in Montgomery Country is likely to rise through 2014-15 due to GSA consolidations,” the report said.

GSA renews two leases in Rockville

The General Services Administration renewed a pair of whole-building leases totaling 117,630 square feet in Rockville for the FDA, according to broker Jones Lang LaSalle, which represented the federal real estate management agency.

The first is a 61,902-square-foot, 10-year lease at 11919 Rockville Pike, which was transferred to a substitute trustee, LNR Partners of Miami Beach, last month. The four-story property — called Montrose Two — was previously owned by the Dallas-based Lionstone Group.

The property is within walking distance of the White Flint Metrorail station and provides quick access to I-270 from Montrose Parkway. The new lease expires on Jan. 18, 2023.

The second building — at 5630 Fishers Lane — also was renewed for 10 years under a deal with the owner, Chevy Chase-based JBG Cos. The FDA will continue to occupy the entire 55,728-square-foot property. The building is also within walking distance of the Twinbrook Metro Station, and sits next to the 935,000-square-foot HHS Parklawn Building, which JBG is renovating.

JBG starts Twinbrook construction

The JBG Cos. will stage a groundbreaking ceremony Monday for a pair of apartment buildings and retail space on either side of the Twinbrook Metro subway station in Rockville.

The Galvan at Twinbrook and The Terano buildings will offer more than 500 rental units and more than 130,000 square feet of retail space. The project is a joint development with the subway’s operator, the Washington Metropolitan Area Transit Authority.

ProMark plan: Fewer offices, more apartments

The Montgomery County Planning Board will consider a plan next Thursday to drop an approved office building in favor of more apartments in White Flint.

Developer ProMark, based in Rockville, has asked for a sketch plan amendment to replace about 150,000 square feet of office space at its proposed North Bethesda Gateway complex. The new plan calls for a pair of six-story residential buildings with 35,000 square feet of ground-floor retail.

The original plan included a 19-story residential tower, a 16-story residential building, and a nine-story office building with connecting retail space.

ProMark floated the new plan in January and it also wants to reserve an additional 76,083 square feet of nonresidential for future use.

Silver Spring project abandons office space

This column last week mistakenly hailed plans to redevelop the Montgomery County parks and planning headquarters as a sign of new office development in Silver Spring.

In fact, the developers named by the county have not included any office space in their response to a request for proposals to redevelop 8787 Georgia Ave., which is owned by the Maryland-National Capital Park and Planning Commission.

Instead, the entire property would be replaced by a 400,000-square-foot mixed-use complex that would include 360 apartment units and 25,000 square feet of ground-level retail space.

The developers — a partnership between StonebridgeCarras of Bethesda and Greenbelt-based Bozzuto Development — consider the project a single property, although county planning code treats it as multiple buildings due to fire walls separating the three-level complex.

The building would include two-level apartments fronting Spring Street, as well as three levels of apartments behind that and five levels of apartments on top of the retail facing Georgia Avenue.

“There will be a townhouse-style façade along Spring Street, so it’s empathetic to its neighbors,” said Bozzuto development manager Hilary Allard Goldfarb.

That means the building will be a good fit with its residential neighbors across Spring Street, but it will represent the loss of yet another potential office space in downtown Silver Spring.

So the 35,600-square-foot parks and planning headquarters in the building completed in 1957 will join a list of recent development plans to add apartment buildings instead of office space.

In April, the planning board changed the zoning for a parking lot at 8621 Georgia Ave. to allow Potomac-based Willco Cos. to build 1,600 square feet of retail and 292 residential units. The property previously had been approved for a 191,281-square-foot office building, which would have filled the empty space left in 1976, when the Johns Hopkins University Applied Physics Laboratory moved to Howard County.

Guardian Realty Investors of Bethesda also dropped plans for a 13-story office building one block north of the Willco property on another surface parking lot at 8711 Georgia Ave. Construction has started on a 160-unit apartment building.

The loss of the parks and planning offices will further shrink the inventory of downtown Silver Spring office inventory. The amount of space fell to 4,472,139 square feet at the end of the second quarter, dropping by 72,538 square feet from the 4,544,677 square feet at the end of 2009, according to broker Jones Lang LaSalle.

But United Therapeutics plans to add 111,724 square feet of office space and 10,000 square feet of retail space to its headquarters and laboratory complex. The biotech firm already has expanded to more than 200,000 square feet from its original 8,000-square-foot building on Spring Street.