MacRo LTD Blog

Frederick’s Commercial Office Market at the Half-Year Mark

Office vacancy and lease rates in Frederick continue to improve, but for how long?

Frederick’s Commercial Office Market at the Half-Year MarkThe fiscal cliff is looming ever closer, and just for fun, the economists at CoStar Group shared a graph predicting what will happen to the economy if the U.S. does fall off of that cliff. Misery loves company, so we are in turn sharing it with you.

I have to confess that when listening to CoStar’s quarterly commercial real estate updates I have become more interested in their macro-economic “big picture” analysis than the local real estate statistics. This so-called recovery is still moving at a drunken snail’s pace, so there isn’t much change in the market, up or down, to get too excited about.

For what it’s worth, let me start with a snapshot of Frederick’s office market at the end of the 2012 second quarter:

  • Office vacancies ticked down again to 14%, from 15.4% last quarter. Price per square foot inched up to $22.14 from $22.01 last quarter.
  • The number of lease transactions in Frederick during the second quarter was half the number during Q1 of 2012.  This is interesting, as CoStar reported a surge in office leasing activity nationwide during the second quarter.
  • Small and mid-sized transactions (10,000 sq. ft. and under) accounted for 100% of the new leases reported by CoStar this quarter for the Frederick area.
  • The top office lease transactions during the second quarter:
    • 5100 Buckeystown Pike  Regus signed a lease for 10,000 sq. ft.  More on that deal later in this post.
    • 5301 Buckeystown Pike  An unknown tenant signed a lease for 8,500 sq. ft.

CoStar’s economists shared the following news about the national commercial office market, and the economy, during their 2Q 2012 office market update:

  • Interest rates continue to plunge due to investors fleeing risky European markets in favor of more stable (relatively speaking) American investments. An abundance of cheap debt tends to drive up equity values, so look for commercial real estate prices to climb. Washington, D.C. was second only to New York City in terms of sales volume generated by global investors during the second quarter. But keep in mind that any significant cuts in government spending will have a profound negative impact on the D.C. office market.  See Fiscal Cliff above.
  • Office-using employment growth has been higher than total employment growth, but CoStar predicts that trend is about to plateau. They believe that most—if not all—of the employable office work force is already employed.
  • Optimistically, economists are now predicting that total employment will not nudge above pre-recession levels until 2014. CoStar is adding the qualifier “maybe it will take as long as 2016.”
  • Net absorption for commercial office space has been roughly ½ of job growth in this recovery. CoStar expects absorption to pick up once shadow space burns off.

I don’t agree with that last point. Shadow space is only partly suppressing the absorption of vacant office space.

The office market as a whole is undergoing an evolution, as companies are finding ways to configure office spaces more efficiently—as well as more communally (for lack of a better word). In larger cities across the U.S., the traditional bullpen of cubicles surrounded by executive offices is disappearing in favor of more casual open work spaces, which in many cases appear to have the look and feel of a Starbucks.

The Regus deal I mentioned earlier is a reflection of both office design evolution and the hesitancy of corporate America to make any long-term investments right now.  Regus bills itself as “the world’s largest provider of flexible workspaces.”  The publicly-traded company just entered the Frederick County office market with their lease of 10,000 square feet on Buckeystown Pike.

Stay tuned—MacRo will explore how these game changers may impact Frederick County’s office market in a future post.

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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

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