The effects of COVID-19 stretched into the third quarter of 2020 and the impact became even more pronounced. For the second quarter in a row, there were no leases executed over 100,000 square feet. The largest lease signed this quarter came from the National Institute of Health’s blend and extend for 43,629 square feet at 6100 Executive Boulevard in the Rockville submarket. In addition, deal velocity was down considerably with just 12 leases that were signed over 10,000 square feet for the quarter, which is roughly one-third of the typical volume.
While there were just 12 deals above the 10,000 square foot threshold in Suburban Maryland, most continue to be non-renewals, which differs from the surrounding markets. The top deal was a blend and extend and two other deals were short-term extensions, both of which have been popular COVID-19 leasing strategies. The non-renewal leases that were signed this quarter were in the medical and pharmaceutical sectors including NIH, United States Pharmacopeial Convention, and American Gene Technologies.
Demand & Supply
As tenants scramble to cut costs and rethink their long term strategy, the Suburban Maryland market saw 441,994 square feet of space returned to the market in the third quarter. This is the second quarter in a row where demand was negative and the largest drop in demand since the second quarter of 2019.
With the considerable amount of negative demand in the third quarter, year-to-date absorption sank further, ending at negative 490,991 square feet. If this trend continues into the fourth quarter, it will be the first time since 2014 yearly demand was negative.
During the quarter 333,663 square feet of space was added to the inventory. The newest addition to the Pike and Rose development, 909 Rose Ave delivered. Additionally, 700 Quince Orchard Road delivered in the Gaithersburg submarket. The market had 2.8 million square feet under construction. Two preleased buildings account for a large portion of that space; the new Marriot headquarters and the US Citizenship and Immigration Services’ future building.
Vacancy & Rental Rates
The overall vacancy rate increased 80 basis points during the quarter, ending at 15.2 percent. Vacancy rates for all classes of space increased, with Class A ending at 16.5 percent and the combined Class B & C rate ending at 14.0 percent.
Direct average rental rates increased $0.06 from last quarter to end at $28.64 and is up $0.67 from the start of the year. Throughout the pandemic, we have seen many owners maintain their face rents and have chosen to attract and negotiate with tenants through greater concession packages.