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Suburban Maryland Office Report Q2 2020

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Market News

  • A combination of the impact of COVID-19 and an unrelated slowdown in Suburban Maryland leasing resulted in decreased deal velocity during the second quarter. There were no deals over 100,000 square feet signed in the second quarter and only two that were above 50,000 square feet. The top lease came from a 15-year renewal of the Food and Drug Administration at 12420 Parklawn Drive for 93,014 square feet in the Rockville submarket.
  • Interestingly just 30 percent of the top 10 deals for the quarter were renewals. The majority of the top deals came from new leases that were in the final stages of negotiation before the pandemic occurred. Leasing activity has slowly begun to pick up as companies are starting phased returns to the office. Ultimately, the decrease in leasing volume should be temporary. However, as companies have been required to remote work over the past several months the layout of the office will look different. Remote work may still be implemented in some fashion, and tenants’ space needs may reflect this potential new work plan.

Demand & Supply

  • Demand was down in the second quarter of 2020 bringing the year-to-date net absorption to negative 33,038 square feet. This compares to the same time last year when it totaled 8,880 square feet.
  • Most of the negative absorption came from the Class B space where 84,918 square feet was given back to the market. Class C space also was negative with 11,064 square feet returned; however Class A space had positive demand with 30,472 square feet. While not as dramatic as DC or Northern Virginia, the flight to quality space in Maryland has started to increase. With several high-end projects delivering by the end of the year, the migration to Class A space is expected to become more prevalent.

Vacancy & Rental Rates

  • Vacancy in the second quarter remained static at 14.4 percent. With no deliveries and minimal net absorption, the overall vacancy has remained the same for several quarters. As upcoming deliveries enter the market we expect to see an increase to vacancy specifically in lower quality space as most developments have had significant pre-leasing from tenants moving out of Class B and C space.
  • Average rental rates ticked up $0.07 from the previous quarter to end at $28.58 per square foot on a full-service basis. Class A space also increased by $.07 to climb above the $30.00 mark for the first time since the fourth quarter of 2011. While we have not seen a direct impact of the pandemic to asking market rents, we do expect to see sublet space enter the market. This increase in supply may cause downward pressure on asking rents in the near future.

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Suburban Maryland Office Report Q2 2020

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