Real Estate

Jack McShea, III
President, McShea Commercial Real Estate Services

When a Russian professor predicting the end of the United States is profiled on the front page of The Wall Street Journal, you know it was a bad year. And, while Suburban Maryland did not escape from 2008 unscathed, it emerged in a better position than much of the country due to the presence of several federal agencies and its proximity to the District of Columbia. U.S. versus Suburban Maryland Suburban Maryland continues to maintain unemployment and office vacancy rates well below the national average. As of November, the national unemployment rate was 6.8 percent compared to 3.7 percent in Montgomery County, 4.3 percent in Frederick County and 5.3 percent in Prince George's County. The national office vacancy rate ended the year at 13.9 percent (up from 12.6 percent) and is expected to hit 16.4 percent by the third quarter of 2009, according to the National Association of Realtors. Vacancy in Suburban Maryland rose as well but, at 12 percent, it is still comfortably below "average."

Office Market Statistics

Office vacancy was higher throughout Suburban Maryland for the year. Montgomery County fared the best (its vacancy rate rose to 10.2 percent from 9 percent) while Prince George's County experienced the sharpest increase in vacancy (17.9 percent from 15.3 percent). Annual net absorption (the change in occupied space) was negative by approximately 380,000 square feet in 2008. By comparison during the 2001 recession, absorption was very low but never dipped into negative territory. With 80,000 square feet of positive net absorption, Frederick County was the only county to post positive absorption for the year. Montgomery and Prince George's Counties recorded approximately 215,000 and 245,000 square feet of negative net absorption.

Leasing volume contracted by 25 percent over the year as companies nervous about the economy ceased hiring and stayed out of the office market. The tenants that did sign leases had much more bargaining power than they did in 2007, particularly as the year drew to a close with no sign of light on the horizon. Tenants were more likely to sign renewals and short term leases than in 2007. Many even paid a premium to secure one- to three-year leases enabling them to "wait out" the recession.

Concessions

As tenants pulled back, landlords reacted by offering more concessions. By the end of the year, landlords who had been reluctant to drop asking rates were doing just that. Free rent, a rarity not that long ago, became an expected component of virtually any deal. "Turnkey" build-outs, in which the landlord assumes responsibility for improvements to a tenant's space, have become ubiquitous as most tenants are now unwilling to come out of pocket for their improvements.

2009?

Can we expect anything good from 2009? There's no doubt that the first half of 2009 will be a difficult time. However, there should be some interesting opportunities for investors and tenants in our region as government spending increases and the markets begin to stabilize. Landlords will become even more creative and aggressive in 2009 thereby creating some great opportunities for tenants willing to sign long term leases.