MacRo LTD Blog

Have Office Vacancy Rates Peaked?

The office vacancy rates in Frederick County are strongly influenced by employment, but things are starting to improve.

Have Office Vacancy Rates Peaked?The Washington, DC market (including Frederick County) was somewhat insulated at first from the real estate collapse that resulted from the pop heard around the world.  The local office market, which had already reached a vacancy rate of over 12% in 2004, dipped to under 9% a year before emergency legislation was working its way through Congress to save big banks and Wall Street.

With hope that the well-defined recession was just another two-year cyclical swing, business held on for a while.  Gradually, however, realization dawned that the cavalry was not going to save the day and more and more businesses either shut down or cut staff.

Eventually office vacancy rates in this extended DC submarket grew (despite some encouraging dips) to nearly 16% … and that is with very little new product being introduced to the market over the last 5 years.

Encouraging signs?

In many camps, there seems to be a bit more hope that the economy is showing faint, but reasonable signs of an upward turn.  For many sectors of the real estate market anything that offers a glimmer of promise is exciting.

According to data gathered by the CoStar Group, profits of many major corporations have risen from a low of about $650 per employee in early 2009 to a 15 year high of nearly $1,500 at the end of the 2nd quarter of 2011.

During this same period, however, job growth has only crept along at very sluggish levels.  Clearly, through the use of new technologies and outsourcing, businesses have learned to do more with less.

The global markets continue to struggle with finding ways to restructure government spending, revenues and most importantly high levels of debt; so business remains very cautious to the idea of any significant expansion.  CoStar real estate economist Adrian Ponsen recently projected “weaker near-term office demand growth. With our weaker near-term expectations of office-using employment growth, we are expecting about 13% less office demand growth than previously forecast through 2015 and higher vacancies in the near term.”

After major cutbacks, many businesses left the desks and offices of downsized employees empty rather than tackle relocating to a smaller space.  As a result, the ratio of office space per employee has risen, creating what is known as shadow office space – meaning while it is leased, it is under-utilized.  Such space will typically be the first corporate America will fill before relocating to larger quarters or expanding into the vacant space next door.

CoStar estimates that this Shadow Space may add as much as 5.4% to vacancy rates nationally, while only 2.2% in the Washington, DC real estate market.  On top of that, with minimal new construction in the pipeline and a rise in telecommuting, the modest gains in the local and national employment picture do not mean that vacancies will fall in any significant way.

But the good news is that despite the fact that office building owners are making deals throughout the market to fill vacancies, rents are still projected to increase at very modest rates of around 2.1% during that term.

How many jobs will it take to fill over 1.3m square feet of office space?

In the 2nd quarter of this year vacancy rates in the Frederick office market peaked at over 16% and dipped a bit in the 3rd.  This equates to nearly 1,350,000 square feet of empty space, not counting shadow space … and before we factor in the decision by Bechtel to transfer over 600 employees to Virginia.

If we use a factor of 190 square feet per employee, that comes out to over 7,000 jobs needed to fill those buildings … before we consider the 1,220,000 square feet of vacant flex industrial space.

That’s a lot of jobs!

The population and job growth in Frederick County typically outpaces that of Maryland, and the unemployment rate in Frederick tracks lower.  Strong employers like MedImmune and NCI/SAIC are growing and bringing new jobs, and Ft. Detrick continues to be an attractor and incubator of new biomedical technology and business for Frederick County.

Among many other positives that Frederick County has to offer are proximity to the Washington, DC and Baltimore markets and the fabulous community that has been created here.  Combined with aggressive landlords, we are sure to beat the national odds of staying ahead of the sluggish national projections.

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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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