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presentation to the

Montgomery County Planning Board
June 25, 2015

Research + Special Projects Division
M ONTGOMERY C OUNTY P LANNING D EPARTMENT
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

The New Office Landscape

OVERVIEW
Lisa Madigan Tate, Research + Special Projects Division staff

• Purpose of study
• Office market indicators
• Regional economic forces
ANALYSIS + RECOMMENDATIONS
Anita Morrison, Partners for Economic Solutions (PES)

• Office market restructuring
• Outlook for Montgomery County
• Recommendations

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

The New Office Landscape

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Purpose
of Study

Purpose of study

• Rezoning / Conversion Requests
• Pipeline of Approved
Development
• Master Planning
• Transportation Planning
• Revitalization

Source: U.S. Bureau of Labor Statistics, Quarterly Census of Earnings & Wages
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Land use implications

Purpose of study

Average Weekly Wage by Industry
in Montgomery County
$1,935

Federal Government

$1,823

Information

$1,743

Financial Activities

$1,667

ALL OFFICE JOBS
Professional and Business Services

$1,497

ALL JOBS

$1,245
$945

Education and Health Services
Other Services

$835

Trade/Transportation/Utilities

$833

Other

$812

41% of all jobs
+

55% of total wages
in

Montgomery County

$790

ALL NON-OFFICE JOBS
Leisure and hospitality

4 major industries
based in offices
=

$415
Source: U.S. Bureau of Labor Statistics, Quarterly Census of Earnings & Wages

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Office jobs are critical to our economy

Purpose of study

Class A

80,000,000

Class B

Class C

70,000,000

7,637,740

60,000,000
50,000,000

8,516,101

Class A share of total
7,375,941

29,684,578

29,530,206

40,000,000
30,000,000
20,000,000
10,000,000

90%
80%

8,175,431
29,229,130

7,202,817

100%

70%
60%

26,631,110
37%
20,481,365

27,425,850
46%

48%

50%

34,292,198

36,669,681

50%

39%
22,450,542

30,871,884

40%
30%

0

20%
1995

2000

2005
Source: CoStar

Maryland-National Capital Park and Planning Commission

2010

2015

MONTGOMERY COUNTY PLANNING DEPARTMENT

Office property values are an important
component of the County’s tax base.

Purpose of study

• Analyze trends in depth
• Not purely anecdotal: quantify
impacts, outlook
• Identify best practices
• Recommend tangible land use and
related strategies
Source: U.S. Bureau of Labor Statistics, Quarterly Census of Earnings & Wages
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Goals of study

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Office
Market
Indicators

Office market indicators

11%

Unemployment Rate
9.6%

10%
9%
8%

6.5%

7%

United States
6.2%

5.8%

6%
5%

4.2%

4.6%

4.0%

4%

2.9%

2.6%

3%

Region
5.0%
County
4.5%

5.8%

3.5%

2%

2.6%
1.9%

1%
0%
1995

1997

1999

2001

Source: U.S. Bureau of Labor Statistics
Local Area Unemployment Statistics

Maryland-National Capital Park and Planning Commission

2003

2005

County

2007

2009

Region

2011

2013

United States

MONTGOMERY COUNTY PLANNING DEPARTMENT

The job market is recovering

Office market indicators

2011
• San Francisco
• New York/Silicon
Valley
• Austin/Houston
• Washington, DC/
Boston
• Baltimore/Dallas/
Denver
Maryland-National Capital Park and Planning Commission

Peaking
market

Rising
market

DC

Falling
market
• Detroit
• Cincinnati/Cleveland/
• New Jersey/
Bottoming
Orlando/Phoenix
market
• Charlotte/Fairfield Co/
Los Angeles/Miami/
San Diego/St. Louis/Tampa
• Chicago/
Orange Co/Raleigh-Durham
• Atlanta/Minneapolis/ Richmond/
Seattle/Philadelphia/United States
Jones Lang LaSalle
2011 OFFICE PROPERTY CLOCK

MONTGOMERY COUNTY PLANNING DEPARTMENT

The region’s office market was starting
to recover

Office market indicators

6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%

Percent Change in Employment

Montgomery County
Washington Region
United States
1995

1997

1999

2001

Source: U.S. Bureau of Labor Statistics
Quarterly Census of Earnings & Wages

Maryland-National Capital Park and Planning Commission

2003

2005

2007

2009

2011

2013

MONTGOMERY COUNTY PLANNING DEPARTMENT

Four consecutive years of positive job
growth in the region and county

Office market indicators

Office Vacancy Rate vs. Job Growth

Regional Job Growth
County Job Growth
Regional Vacancy Rate
County Vacancy Rate

18%

OFFICE VACANCY RATE

6%

16%

5%
4%
3%

14%

2%

12%

1%
10%

0%

8%

-1%

6%

-2%

4%

-3%

2%

-4%

1995

1997

1999

2001

2003

2005

2007

Source: U.S. Bureau of Labor Statistics, Quarterly Census of Earnings & Wages; CoStar

Maryland-National Capital Park and Planning Commission

2009

2011

2013

ANNUAL JOB GROWTH

20%

MONTGOMERY COUNTY PLANNING DEPARTMENT

Post-recession job growth
did not revive office demand

Office market indicators

Vacancy Rate - Montgomery County

Vacancy Rate - Washington Metro

16%
14%
12%
10%
8%
6%
4%
2%
0%
1995

1997

1999

2001

2003
Source: CoStar

Maryland-National Capital Park and Planning Commission

2005

2007

2009

2011

2013

2015

MONTGOMERY COUNTY PLANNING DEPARTMENT

This is a region-wide phenomenon

Office market indicators

15.5
13.5
11.5

In millions of square feet

13.2
11.0

10.4
9.1

9.5

Net Absorption

7.6

7.5

4.9

5.5
3.5

2.8

2.8
1.1

1.5

0.7

0.7

0.4

-0.5
-0.7

-2.5

-1.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: CoStar
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

The regional office market is stagnating.

Office market indicators

17.5
15.4

15.5

13.2

13.5 12.6
11.5

11.0

Net Additions

11.6

10.6

10.4

10.4
7.6 7.3
6.2

In millions of square feet

9.2

9.1

9.5
7.5

7.1

6.7

4.9
4.5

5.5
3.5

2.8

3.4

2.8

2.3

1.6
0.7
0.7

1.1

1.5
-0.5
-2.5

Net Absorption

0.4

-0.7
-1.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: CoStar
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

New space was added despite slowdown.

Office market indicators

17.5
15.4

15.5
13.5 12.6
11.5

11.0

12%
10.6

6%

10.4

10.4

9%

9.2

9.1

7.1

6.7

Net Additions
Net Absorption
Vacancy Rate

10%
8%

4.9
4.5

3.5

2.8

3.4

2.8

2.3

1.6
0.7
0.7

1.1

1.5

6%
4%

0.4

2%

-0.5
-2.5

12%

11.6

7.6 7.3
6.2

7.5

14%

13.2

9.5

5.5

14%

13%

16%

-0.7

0%

-1.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: CoStar
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Result = rising vacancies

Office market indicators

80,000,000

VACANT OFFICE SPACE (SF)

Montgomery County
Remainder of Washington Region

70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0

1995

2000

2005

2010

2015
Source: CoStar

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

The region has +72 million square feet of
vacant office space

Office market indicators

80

Vacant

Occupied

Millions of square feet

70

10.9
62.5

60
50
40
30
20

TOTAL OFFICE SPACE:
VACANT SPACE:
OCCUPIED SPACE

10

73.2 million sf
10.9 million sf
62.5 million sf

0
1995

1997

1999

2001

2003

Source: CoStar
Maryland-National Capital Park and Planning Commission

2005

2007

2009

2011

2013

2015

MONTGOMERY COUNTY PLANNING DEPARTMENT

The County has nearly 11 million square
feet of vacant office space

Office market indicators
MONTGOMERY COUNTY PLANNING DEPARTMENT

Rents are flattening
Average Asking Office Rent, 1995 to 2015
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00

Average Office Rent - County

$5.00

Average Office Rent - Region

$0.00
1995

1997

1999

2001

2003

2005

2007

2009

2011

2013
Source: CoStar

Maryland-National Capital Park and Planning Commission

2015

Office market indicators

•San Francisco Peninsula
•Houston/San Francisco/
Silicon Valley
•Dallas
•Minneapolis
•Seattle
•Austin/Pittsburgh
•Portland/New York
•Boston/Denver/U.S.
•Austin/Houston/Los
Angeles
•Charlotte/Fairfield Co
•Miami/Tampa/San Diego/
St. Louis/Tampa
•Chicago/Orange
County/Raleigh-Durham
•Charlotte/Milwaukee/
Philadelphia
•Cincinnati/Detroit/Hampto
n Roads/Long Island/San
Antonio/St. Louis
•Sacramento/West Palm
Beach
Maryland-National Capital Park and Planning Commission

2014
Peaking
market

Falling
market

Rising
market

Bottoming
market

• New Jersey

• Washington, DC

DC
Jones Lang LaSalle

2014 OFFICE PROPERTY CLOCK

MONTGOMERY COUNTY PLANNING DEPARTMENT

The Washington region now trails most
office markets in the U.S.

Office market indicators

• Regional Economic Shocks
• Federal budget cuts
• Sequestration
• Federal consolidation

• Structural Changes in the
Office Industry
• Shrinking office spaces
• Changing location preferences

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

What happened to the office market
recovery?

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Regional
Economic
Forces

Regional economic forces

FEDERAL CONTRACT AND GRANT SPENDING
MONTGOMERY COUNTY

Billions of Dollars

$12
$11
$10
$9

$0.74

$1.00

$1.53

$8
$7
$6
$5
$4

$0.92

$0.82
$0.75

grants
$9.83

$9.12

$8.55

$8.24

$7.75

2010

2011

2012

2013

$8.58

$3
$2
$1
$0
2009

Source: Federal Procurement Data System
Maryland-National Capital Park and Planning Commission

2014

contracts

MONTGOMERY COUNTY PLANNING DEPARTMENT

Federal spending cuts, sequestration
strained area businesses and non-profits

Regional economic forces

2010 - 2014
Health Care/Social Services
Education
Accommodation/Food Services
Retail
Management
Information
Construction
Utilities
Real estate
(151)
Arts, Entertainment, and Recreation
(216)
Agriculture and Mining
(512)
Transportation/Warehousing
(681)
Finance/Insurance
(691)
Wholesale trade
(931)
Manufacturing
(1,234)
Professional and Technical Services (1,818)
Business Services (1,986)

4,495
3,798
2,234
908
512
183
176
96

Office-based jobs
Non office-based jobs

Source: Bureau of Labor Statistics, Quarterly Census of Earnings & Wages
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Office jobs in the County were hard hit
by federal budget turmoil

Regional economic forces
MONTGOMERY COUNTY PLANNING DEPARTMENT

Bipartisan agreement: cut leasing costs

Nuclear Regulatory Commission
Maryland-National Capital Park and Planning Commission

Regional economic forces

• Reduce leased space
• Use space more efficiently
• Consolidate into governmentowned buildings

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

GSA: Freeze the footprint

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Office Market
Restructuring

Office market restructuring

MONTGOMERY COUNTY PLANNING DEPARTMENT

Changing Use of Space
• Technology cuts the cords
that bound workers to their
offices
• New economy businesses
seek flexible spaces that
encourage collaboration
• Innovative office designs
increase employee density
• Less file storage and library
space
Courtesy of Smith Group/JJR
Maryland-National Capital Park and Planning Commission

Office market restructuring

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

GSA adopted downsizing trends to
cut space utilization

Office market restructuring

Consolidation into GSA-owned space: National
Institute of Allergy and Infectious Diseases

Consolidation of federal leased space:
National Institutes of Health in Rock Spring
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Federal downsizing will continue

Office market restructuring

10,000,000

Square feet of leased federal space by year of expiration

9,000,000

Remainder of Region

8,000,000

Montgomery County

7,000,000
6,000,000

6,686,526

5,000,000
4,000,000

4,628,185

3,000,000

6,433,296

4,279,987
3,592,213

2,000,000
1,000,000
-

2,321,978

632,400

231,132

642,150

151,640

2015

2016

2017

2018

2019

Source: U.S. General Services Administration, Inventory of Federal Leased Space
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

2.3 million square feet of Federal office
leases expire in 2015

Office market restructuring

 Transit access,
primarily Metro
 Mixed-use
environments
 Sustainable
buildings
 Pedestrianoriented areas
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Companies dependent on knowledge
workers are voting with their feet

Office market restructuring

RESTON TOWN CENTER

PIKE AND ROSE

NAVY YARD

MOSAIC DISTRICT

TYSONS CORNER CENTER

NOMA

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Office tenants are seeking out more
accessible mixed use environments

Office market restructuring

2014

1995

VACANCY RATE BY AREA

VACANCY RATE BY AREA

Montrose Pky

32.7%

I-270 Montrose…

31.6%

Shady Grove LSC

20.1%

Rock Spring

18.7%

E I-270 at Gude

17.5%

Germantown

16.4%

Silver Spring CBD

11.5%

Bethesda CBD

10.4%

WesTech

10.4%

Rockville CBD

6.6%

Silver Spring CBD
E I-270 at Gude

17.0%

Germantown

14.8%

Montrose Pky

12.3%

Bethesda CBD

12.2%

Rockville CBD

10.9%

Rock Spring

10.8%

Shady Grove LSC
I-270 Montrose to…
WesTech
Source: Partners for Economic Solutions

Maryland-National Capital Park and Planning Commission

24.0%

6.4%
4.2%
1.7%

MONTGOMERY COUNTY PLANNING DEPARTMENT

Single-use, auto-oriented office parks
are losing their appeal

Office market restructuring

Source: Partners for Economic Solutions

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Single-use, auto-oriented office parks
are losing their appeal

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Outlook for
Montgomery
County

Outlook for Montgomery County

Even with no new construction, acceptable
vacancy levels are unlikely until 2022
2019
 Vacancy rate: 10.4% to 15.2%
 Vacant space: 7.6 to 11.1 million sq. ft.

2022
 Vacancy rate: 7.1% to 14.8%
 Vacant space: 5.2 to 10.8 million sq. ft.
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Future Montgomery County Office Vacancies

Outlook for Montgomery County

• Office construction slowdown
• Uptick in conversions, demolitions,
re-zoning, plan revisions
• Shopping for office space/ flight to
quality
• Location, location, location
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Analysis projects a soft regional office
market for the next 5 to 10 years

Outlook for Montgomery County

• Quality properties
Best
prospects

• Walkable, mixed-use
environments
• Easy transit/highway access
• Obsolete buildings

Worst
prospects

• Auto-centric, single-use
environments
• Poor accessibility
• Isolated from worker housing,
amenities and business centers

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Some locations will recover; some will
be unable to compete

Outlook for Montgomery County

• New construction focused in prime locations,
mixed-use with transit and quality public
spaces
• Transit connectivity is increasingly important
• Limited demand for single-use office parks
and campuses
• Pipeline of 22.7 million office square feet
 Mostly in less competitive locations and
configurations
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Implications for the Future

Outlook for Montgomery County

• Declining
property values
and taxes
• Conversions to
other uses
• Demolitions

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Implications for the Future

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Strategies &
Best Practices

Strategies & Best Practices

Rockville Town Center

Reston Town Center
Maryland-National Capital Park and Planning Commission

Signature Theater in Shirlington

Capitol Riverfront

MONTGOMERY COUNTY PLANNING DEPARTMENT

Best Practices

Strategies & Best Practices

Rezone for mixed uses

Subdivide laboratory
building

Repurpose for hospitals

Add retail, hotels and
apartments by moving
parking into garages

Create pedestrian
infrastructure

Maryland-National Capital Park and Planning Commission

3rd Avenue in Northwest Park,
Burlington, MA

MONTGOMERY COUNTY PLANNING DEPARTMENT

Transforming Office Parks

Strategies & Best Practices

• Continue to invest in transit
• Enhance walkability and connectivity
• Events and programming to enliven districts
• Partner with developers to diversify existing
office parks
 Remove any zoning impediments to redevelopment
 Provide incentives for building improvements

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Enhance Office Environments

Strategies & Best Practices

• Encourage conversion to
other uses: housing,
hotels, public schools
• Encourage demolition
and redevelopment by
facilitating assembly of
small office sites
• Discourage new
development that can’t
compete
Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Reduce Non-Competitive Space

Strategies & Best Practices

COMPACT DEVELOPMENT

MIXED USE ZONING

CREATING NEW URBAN CENTERS

TRANSIT ORIENTED DEVELOPMENT

URBAN DESIGN / PLACEMAKING
RETROFITTING SUBURBAN OFFICE PARKS

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Montgomery County has planned
ahead of major market trends

• Support economic development
• Fund economic incentives for large tenants
• Provide landlord incentives for small tenants
• Invest in the local workforce
• Protect and enhance the local quality of life

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Increase Office Demand

Strategies & Best Practices

• Support existing mixed-use districts rather than
creating new districts
• Not every Metro or light rail station can attract
significant office development
• Target office park redevelopment incentives




Opportunity for dense, walkable environment
Good accessibility and visibility
Available sites or vacant buildings
Residents + businesses to support retail + restaurants
Willing owners

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Prioritize

Lisa Madigan Tate, Regional Economist
Research & Special Projects Division
Lisa.Tate@montgomeryplanning.org
301.377.4936

Access the full report at
http://www.montgomeryplanning.org/research

Maryland-National Capital Park and Planning Commission

MONTGOMERY COUNTY PLANNING DEPARTMENT

Staff contact: