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The region's office market ended 2008 on the downbeat and conditions likely won't improve before the end of this year, according to the latest quarterly real estate reports.
But there were some bright notes, especially in the Baltimore area, where a drop in construction has helped ensure that new buildings will be more full than empty when they are completed. In contrast, a continuing glut of new construction continues in the Maryland suburbs of Washington, and landlords will have a tough time filling space with tenants.
Even so, the year-end analysis released by Delta Associates and Transwestern put an optimistic spin on the future for Montgomery, Prince George's and Frederick counties. "Overall, despite easing market conditions, Suburban Maryland is poised to recover nicely from the current recession and experience steady growth," the report said.
The Baltimore region already shows strong demand for office space under development, with a pre-lease rate of 53 percent when 2008 ended, up from 29 percent in 2007. There are 2.3 million square feet of space under construction or renovation, down from 4 million square feet a year ago.
New groundbreakings will be slow this year but will begin to pick up in the fourth quarter in anticipation of 25,000 new military and contractor jobs coming to the Baltimore region as part of the Pentagon's Base Realignment and Closure program, the report said.
The national meltdown in financial markets has taken its toll on the local office sector, as shown in the construction downturn in the Baltimore area, according to Cushman & Wakefield. Its report concluded that "because of a different financing market at the close of 2008, many projects that were in the pipeline for development have been put on hold for an undetermined period of time. This hiatus will likely help pare down the amount of available space in newly-delivered buildings as well as the more established buildings."
Cushman & Wakefield noted similar bear-like behavior in a sharp drop in Baltimore-area office deals last year, when investment sales totaled $483 million, down from almost $650 million in 2007.
The firm also documented a shift in demand for office space away from Baltimore's central business district that mirrors the migration decades ago from the old downtown to the Inner Harbor. The new attraction is the Inner Harbor East area between the water and Little Italy.
Supply of office space continues
to weigh on suburban market
There was a steep fall in office construction in the Maryland suburbs surrounding Washington last year but not enough to balance demand for space, according to Delta and Transwestern.
There was a drop in completion of office space last year, with 1.6 million square feet delivered, down from almost 1.8 million square feet in 2007. That should fall "notably over the next 12 months," after office groundbreakings fell sharply in 2008, the report said. Construction started on 926,000 square feet of space last year, down from 3.3 million square feet in 2007.
Despite the lack of new construction, the report said that "we expect new supply to outpace demand by 600,000 square feet, as Suburban Maryland adds 2.5 million square feet to the inventory over the next 24 months."
The imbalance between supply and demand is clear in the development pipeline pre-lease rate of 27 percent last year, down from an already dismal rate of 28 percent in 2007.
The report projected that the overall office vacancy rate in suburban Maryland will edge up to 11.9 by the end of 2010, up from 11.5 percent today. That follows a sharp and steady softening in demand since the end of 2005, when the vacancy rate stood at 8.7 percent. At the same time, rents should fall 1 percent to 2 percent this year before stabilizing in 2010.
BAE Systems' plans
open big hole in Aspen Hill
Lee Development Group is looking for tenants to fill 262,923 square feet north of downtown Silver Spring when BAE Systems vacates its undersea warfare business offices.
The defense contractor is looking to consolidate space and has alerted Lee that it plans to move from the building in Aspen Hill when its lease expires in 2011, said Bruce H. Lee, president of the Silver Spring developer.
"We've listed it on CoStar and we're in the process of interviewing brokers," he said.
The building, which dates to 1957, is immediately west of Connecticut Avenue at 4115 Aspen Hill Road. It sits about two miles north of the Glenmont Metro station opposite Lee's Northgate Plaza strip mall. The antiquated building is left over from when BAE absorbed the former Vitro Corp. operations in 1999.
Commercial real estate news items may be mailed to: Steve Monroe, The Business Gazette, 9030 Comprint Court, Gaithersburg, MD 20877; e-mailed to smonroe@gazette.net; or faxed to 301-670-7183.
