Small businesses are back, and Frederick is poised with a healthy inventory of small office space!

Costar Group, the nation’s leading provider of commercial real estate trends and intelligence, recently reported 1st quarter 2012 statistics for the nation’s office market.  For the most part, the news was good:

• The U.S. saw significant conversions of temporary employees to permanent ones
• Corporate profits are still at record high levels
• Job growth was primarily in office jobs, versus manufacturing jobs
• Overall office vacancies are declining nationwide, currently standing at 12.7%
• Short supply of new commercial office space in the development pipeline indicates that vacancies will continue to decline
• The office market is nearing a tipping point for rent growth

CoStar also noted some interesting trends in commercial office space rental during the first quarter of 2012:

Small businesses are back!  Leasing of small spaces (less than 2,000 square feet) dominated activity during the first quarter.  In fact, there is currently a SEVERE shortage of office spaces less than 10,000 square feet in size in the Washington D.C./Northern Virginia/Montgomery County market. Rents on those spaces are starting to rise.

Best liquidity is in the mid-range of office space size.  Nearly half of the U.S. commercial tenant base is working in spaces 2,000-20,000 square feet in size.  So developers and investors take note:  buildings offering space in this size range are currently experiencing the highest overall demand.

Overall, tenant square footage is shrinking.  For Class B and C office spaces, tenants decreased the amount of square footage they leased.  Class A spaces, however, saw an increase in overall square footage leased during the past quarter.

After hearing all of that good news, we at MacRo eagerly dug into CoStar’s 1Q 2012 Office Market report for Frederick, and ran some reports using the CoStar database to analyze Frederick vacancies:

• Office vacancy rates in Frederick have declined to 15.4%, from a peak of 16.2% in 2011.  This compares to 13.5% in Washington, D.C. and 15.5% in Rockville/Germantown.  Bethesda’s office market is red hot, with a vacancy rate of just 9.4%!
• Nearly 80% of Frederick’s office vacancies are less than 10,000 square feet in size.  The D.C. metro area may be experiencing a shortage of office space under 10,000 sq. ft., but Frederick still has a healthy (ahem) inventory.
• Over 55% of the lease transactions in Frederick during the first quarter of 2012 and all of 2011 were for office spaces under 2,000 sq. ft.  When you take into account that 92% of all transactions for 2011 were for space less than 10,000 sq. ft., it does appear that most of Frederick’s office lease transactions for the past year have been for small to moderately-sized spaces.
• The top two office lease transactions year to date:
  • 15 Worman’s Mill Court   Pathology Associates renewed a lease for 35,000 sq. ft.
  • 7211 Bank Court Drive  Frederick Memorial Hospital signed a lease for 30,000 sq. ft. with a move-in date set for June of 2012

So what is the near-term outlook for the improvement of Frederick’s office market?

Well, if your business has outgrown its current space, or you need to trade that basement office for something more professional, now is the time.  On Thursday we’ll share our conversations with local Frederick commercial real estate brokers and investors, who report that the pressure of high office inventories and the prolonged recession has created a buyer’s (and leaser’s) market for Frederick office space.

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Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com.