Future of the office market, Part 2: Which of Montgomery County’s office districts are best positioned to win the region’s post-COVID office space race?

A Third Place blog from the Planning Department offers three possible scenarios for the post-Covid world of office space. It appears the Pike District ought to be rooting for the hub and spoke office model.

Scenario 1: The regional center best withstands an overall drop in office demand while the decline of suburban office parks accelerates. Submarkets in Montgomery County that would benefit: None, but Bethesda is likely the least negatively affected.

Scenario 2: Firms adopt the ‘Hub & Spoke’ office model Submarkets in Montgomery County that would benefit: urban submarkets (Bethesda, Silver Spring and portions of North Bethesda) It is likely that firms pursuing this strategy will want some level of urban amenities for these satellite locations. Within Montgomery County, office submarkets that offer transit access and elements of the urban amenities enjoyed downtown but with closer proximity to suburban workers—such as Bethesda, Silver Spring and the Pike District—might see increased demand. More suburban submarkets like Germantown, Gaithersburg, or Rockville, which are dominated by office parks with fewer amenities, might continue to struggle.

Scenario 3: The revival of the suburban office park Submarkets in Montgomery County that would benefit: suburban markets (Germantown, Gaithersburg or northern Rockville).

Where is all the office space?

Executive Director Amy Ginsburg, here.  I’m often asked why there isn’t more office space being built in the White Flint area.  As one person said to me, “All that’s going up are apartments and restaurants. Don’t get me wrong; I love all those restaurants. But where’s the work in ‘live-work-play’?”

Yesterday, Montgomery County Planning Department released a detailed Office Market Assessment for Montgomery County yesterday that provides some answers. First, some quick office space stats:

  • A total of 71.5 million square feet of office space is currently vacant throughout the Washington, DC region.

  • Montgomery County has nearly 11 million square feet of vacant office space, accounting for 15 percent of regional vacancies. (Fairfax has the largest share at 28% of vacant office space.)

  • The county’s office vacancy rate is just about 15%, and rents have decreased 7.8 percent since 2008.

  •  The Great Recession hit Montgomery County harder than the rest of the DMV, causing our share of regional employment to fall from 15.7 in 2004 to 14.7% to 2013. Washington, DC, Fairfax County, and Arlington County increased their shares of employment in our region.

Looking forward, it seems that numerous trends will make it harder to fill office space in Montgomery County.

  • The Federal government, long a bastion of office-space-renting agencies, continues to cut spending.

  • More jobs are being created in places that don’t require offices — retailers, restaurants, health care facilities — than in professional and technical services.

  • Telecommuting and hoteling lessen the amount of office space that companies need, even if they grow their workforce.

  • The average office size is down to 180 square feet per employee, down from 250 square feet, and some believe it will sink down to 150 square feet per employee. Open office design is replacing the corner office.

But despair not. There’s some great news in this report for the Pike District.  

  • The report said, “The most successful office clusters in Montgomery County are part of mixed-use developments with a strong sense of place and a quality environment. Transit connectivity is increasingly important to office tenants. This trend is consistent with recommended land use strategies in recent County plans for White Flint, Bethesda, White Oak and other communities.”

  • The report also said, “Office style and location are becoming an important factor. Millennials are showing much great affinity for urban, walkable areas that allow them to live, work, play within close proximity without a car. They and others also place increasing value on a sustainable workplace that provides a healthy work setting and that reflects their environmental values.”

So what does all this mean? To sum it all up in one sentence, it’s going to be hard to fill office space, but the office space that is going to get built and leased will be in places just like the Pike District.

Corporate America wants transit-friendly offices

The CEO of Marriott International said this week, ““I think it’s essential we be accessible to Metro and that limits the options. I think as with many other things our younger folks are more inclined to be Metro-accessible and more urban.”

This supports the recent data showing that new urbanism communities like the Pike District, where office workers have just a short walk from their cubicles to transit, housing, restaurants, and entertainment, are the most desirable locations for offices.

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Office tenants prefer mixed-use centers

According to NAIOP Research Foundation report. office tenants prefer amenity-rich, mixed-use centers (also known as “live, work, play” locations) over single-use office parks by a margin of 83 percent to 17 percent. The report states that “overall, office tenants show no strong preference for either downtown or suburban locations. Yet the study reveals a clear preference for suburban vibrant centers over typical single-use suburban office environments, and demonstrates that office properties in suburban vibrant centers are outperforming those in typical single-use suburban office areas on almost all metrics.” Bodes well for the Pike District, don’t you think?

(Bettercities.net has a good summary of the report.)