Office Market Assessment Montgomery County, Maryland Prepared for the Montgomery County Planning Department June 18, 2015 Contents Executive Summary..................................................................................................................... iv Regional Office Vacancies (Second Quarter, 2015) ............................................................... iv Findings .................................................................................................................................... v Recommendations .................................................................................................................... v Introduction .................................................................................................................................... 1 Montgomery County’s Challenge ............................................................................................ 1 I. Forces Changing the Office Market ....................................................................................... 3 Types of Office Tenants ........................................................................................................... 3 Regional and County Employment ......................................................................................... 4 Regional Employment Trends ............................................................................................. 4 Montgomery County Employment Trends .......................................................................... 6 Regional and National Trends in Office Demand ................................................................ 12 Employment-Driven Demand ............................................................................................ 12 Life Sciences Companies .................................................................................................... 12 Changing Office Space Utilization Patterns ..................................................................... 13 Shifting Locational Demand .............................................................................................. 14 Timing of Change ............................................................................................................... 14 Federal Space Cutbacks ..................................................................................................... 15 Supply Forces ......................................................................................................................... 18 Responding to Changing Tenant Preferences ................................................................... 18 Construction in Excess of Demand .................................................................................... 19 Major Vacancies ................................................................................................................. 19 Limited New Construction ................................................................................................. 20 Heavy Competition ............................................................................................................. 20 Office Building Conversions .............................................................................................. 21 Constraints on Conversion ................................................................................................ 21 Conclusions ............................................................................................................................ 23 II. Market Trends and Conditions ........................................................................................... 24 Regional Market .................................................................................................................... 24 i Montgomery County and Competitive Jurisdictions ........................................................... 26 Absorption Trends by Jurisdiction .................................................................................... 28 Class of Space ..................................................................................................................... 31 County Submarket Conditions .............................................................................................. 32 Geographic Distribution .................................................................................................... 33 Submarket Office Market Trends ..................................................................................... 36 Office Clusters by Type.......................................................................................................... 38 Office Typology ................................................................................................................... 38 Metro Station Areas ........................................................................................................... 39 Clusters by Type of Environment ...................................................................................... 41 Historical Trends ................................................................................................................ 44 Regional Comparison ......................................................................................................... 48 Historical Data ................................................................................................................... 49 III. Future Outlook ...................................................................................................................... 51 Vacant Space Projections ...................................................................................................... 51 Tougher Competition ............................................................................................................. 53 New Construction .................................................................................................................. 53 Office Space in the Development Pipeline ............................................................................ 54 Prospects for Large Vacant Campus Developments ........................................................ 55 Conversions to Residential Use ......................................................................................... 55 Fiscal Implications ................................................................................................................. 56 IV. Best Practices ......................................................................................................................... 57 Successful Office Markets ..................................................................................................... 58 Mixed-Use with Great Public Space and Programming – Reston Town Center ............ 58 New Public Infrastructure – NoMa ................................................................................... 59 Urban Mixed-Use in the Suburbs – Mosaic District ........................................................ 60 Great Public Spaces and Mixed-Use – Capitol Riverfront ............................................... 61 Urban Mixed-Use and Cultural Anchors – Shirlington ................................................... 62 Mixed-Use and Civic Anchors – Rockville Town Center .................................................. 63 Reusing Suburban Office Campuses ..................................................................................... 64 Subdivision of Space and Rezoning – Bridgewater, New Jersey ..................................... 65 Conversion to Medical and Mixed-Use – Holmdel, New Jersey ...................................... 65 ii Conversion to Medical Use – Middleton, New Jersey ...................................................... 65 Addition of Retail, Hotels and Apartments – Marlborough, Massachusetts .................. 65 Repositioning Office Parks .................................................................................................... 66 Retail and Hotel Addition with Walkable Infrastructure, Burlington, Massachusetts . 66 Addition of Retail, Hotel and Housing, Structured Parking – Henrico County, Virginia ............................................................................................................................................. 67 V. Conclusions and Recommendations ................................................................................. 68 Recommendations .................................................................................................................. 70 Enhance Office Environments to Improve Competitiveness ........................................... 70 Reduce the Supply of Non-Competitive Space .................................................................. 72 Increase Demand ................................................................................................................ 73 Setting Priorities .................................................................................................................... 76 Appendix iii Executive Summary Prepared by Washington, DC-based Partners for Economic Solutions (PES) for the Montgomery County Planning Department, this in-depth market study examines the many forces changing the regional office market, current conditions in the county and best practices for office development. The goal of the research is to better understand the unprecedented challenges confronting the market, including changing tenant