Office market stomped as federal footprint shrinks -- Gazette.Net


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The suburban Maryland office market lies crushed in the wake of the shrinking federal footprint, as both government agencies and their private contractors give up space, according to brokers’ first quarter reports.

Net absorption for the year turned negative 763,705 square feet in Montgomery, Frederick and Prince George’s counties, thanks largely to space consolidation by large federal contractors, according to the office outlook from JLL (formerly Jones Lang LaSalle).

“It was anticipated that certain government contractors would be vacating their space and three major move-outs occurred in the first quarter,” the report said.

Two buildings in Rockville, totaling 254,093 square feet, are now vacant after military giant Lockheed Martin reduced space this year. The two buildings, 2277 Research Boulevard, owned by Brandywine Realty Trust, and 9211 Corporate Blvd., owned by Piedmont Office Realty Trust, had been fully occupied for at least the past 17 years, JLL reported.

In Largo, Computer Sciences Corp., took 45,636 square feet, in a move that left vacant their former headquarters in Lanham, as it reduced space it needed to service an Internal Revenue Service contract. Now the empty 325,000-square-foot property is the largest block of vacant office space in Prince George’s County, according to broker Transwestern.

Taken by themselves, Montgomery and Prince George’s counties showed “a new record-low quarterly net absorption total of negative 968,000 square feet,” according to Cassidy & Turley.

JLL noted that the ongoing consolidation of federal space will continue to have an impact on the local office market. The National Institutes of Health, for example, is looking for 539,000 square feet of space in either Montgomery or Prince George’s counties, an efficiency move to replace leases in seven buildings scattered about Bethesda and Rockville totaling 693,908 square feet. The biggest vacancies could result at 6701 and 6705 Rockledge Drive in Rock Spring Park.

At the same time, The Food and Drug Administration is making two moves that will ripple through the private office market. Starting next month, 2,600 employees will relocate from leased and federal locations along the Rockville Pike corridor to the agency’s new 1.2-million-square-foot Life Sciences-Biodefense Complex at its White Oak headquarters campus.

The FDA also will take 186,313 square feet of empty space at 3 White Flint, the build-to-suit property delivered last year by developer LCOR as part of the Nuclear Regulatory Commission headquarters. About 1,000 workers will relocate, leaving vacant current leased space of 231,453 square feet in Rockville and Bethesda.

Overall, the market continues to be “dominated by contractions, renewals, and sublets,” according to CBRE. The broker noted that preliminary reports suggested that the suburban Maryland vacancy rate jumped by half-a-percentage point over the quarter to end at 17 percent.

Colliers International predicted that the continuing shrinkage of the federal government’s footprint “may result in a give back of nearly 20 [percent] of its occupied spaces as leases roll over.”

That could have its greatest impact in suburban Maryland, where federal government and government contractor tenants occupy 36 percent of the office inventory, which Cassidy & Turley said is “the largest share in the entire Washington region.” Combined federal agency and contractors already gave back more than one million square feet of space during the first three months of 2014, the broker said.

Cassidy reported that 917,094 square feet of office space was under construction in suburban Maryland at the end of the first quarter. Deliveries scheduled this year include:

• The 490,998-square-foot building for the National Institute of Allergy and Infectious Diseases next to the Twinbrook Metro that JBG expects to complete in the second quarter,

• The 226,566-square-foot 4500 East West Highway building near the Bethesda Metro, which Carr Properties expects to complete in June, and

• An 80,000 square feet office space building Federal Realty Investment Trust expects to complete in the third quarter at its Pike and Rose development near the White Flint Metro.

Delivery is also planned in the first quarter of 2015 for the 119,530-square-foot Social Security Administration building in Frederick.

A total of 797,564 square feet of space will be delivered this year, JLL reported, with 61.6 percent of that space preleased. But the broker added that none of the 306,566 square feet of speculative space has been preleased.

“The stagnant market activity has nearly eliminated speculative construction and the challenging economic factors have played a role in postponing new developments,” JLL said.

But its report concluded that “The limited amount under construction in Suburban Maryland should bode well for the market that now has to absorb a few major blocks of space.”

Health and social services firm ASI/PSI leaving Montgomery for Prince George’s

PSI Services III, Inc. and its administrative services organization, Administrative Services, Inc., is consolidating space in Landover and closing its offices in Bethesda and Chevy Chase, according to broker West, Lane & Schlager Realty Advisors.

ASI/PSI has signed a 12-year lease for 21,696 square feet at 8301 Professional Place, within walking distance of the New Carrollton Metro. The move will relocate all of the firm’s Maryland health-care and social services and staff to one central location in Prince George’s County.

WLS principal Richard Lane and senior associate Andrew Genova were originally retained to sublease ASI/PSI’s offices in Bethesda and Chevy Chase. But because those leases had less than three years left, finding tenants for subleases was difficult.

So WLS contacted several owners in Prince George’s County and presented the prospect of assuming all, or a portion, of the Bethesda lease in exchange for securing ASI/PSI as a tenant. They were able to line up a deal with Persimmon Capital Partners at 8301 Professional Place.

Persimmon assumed all of the ASI/PSI Bethesda lease liability, while the owner of the building at 7101 Wisconsin Ave., Brandywine Realty Trust, was able to relocate a long-term tenant, Evidera, for the entire ASI/PSI space. This has allowed ASI/PSI to terminate their lease with Brandywine two years early for 50 percent of the remaining value and ensured no out of pocket costs for ASI/PSI.

“It was a rare example of how creativity and cooperation by several brokers and owners can result in a true win-win-win negotiation,” Lane said in a press release. “ASI/PSI was able to relocate and consolidate into one building in Landover. Persimmon was able to get a well-established and solid tenant in ASI/PSI to commit for a long term. And Brandywine was able to accommodate the significant growth of an existing tenant in its building.”