Bethesda/Chevy Chase

• RBA: 12,312,159 SF
• Vacancy Rate: 12.1%
• 12 Month Net Absorption: 16,500 SF
• Average Asking Rent: $39.39
• 12 Month Rent Growth: (1.2%)

Pre-leasing and new construction are the main themes of the Bethesda/Chevy Chase submarket. JGB Smith delivered 4747 Bethesda Ave in August 2019. This 5-Star office building was 80% leased prior to this and, in addition to serving as JBG’s new headquarters, will host Booz Allen Hamilton (65,000 SF), Host Hotels & Resorts (55,000 SF), and Orano (22,000 SF). Carr Properties will deliver another 361,000 SF, 5-Star Building at 7272 Wilson Ave in August 2020, which was already 60% leased in Q1 2019 with tenants such as ProShares (55,000 SF), Fox 5 (60,000 SF), and Enviva Partners (80,000 SF). Another 1,300,000 SF is under construction of which nearly 1,000,000 SF will be occupied by Marriott International, Inc. that is moving its corporate headquarters to 7750 Wisconsin Ave, set to deliver in January 2022.

Interestingly rent growth was negative this quarter, but this mostly the result of negative net absorption in the submarket’s 3-Star and 1 & 2-Star properties. Rent growth was actually positive for 4 & 5-Star properties (1.3%) and should continue to rise as new, trophy office space comes on the market. The strong demand evidenced by strong pre-leasing and new construction should continue but it will likely be marked by a flight to quality and an increasing disparity between average rents for 4 & 5-Star properties and 1, 2, and 3-Star properties.

North Bethesda/Potomac

• RBA: 11,240,588 SF
• Vacancy Rate: 15.1%
• 12 Month Net Absorption: 74,000 SF
• Average Asking Rent: $30.33
• 12 Month Rent Growth: 1.3%

The woes of the North Bethesda/Potomac submarket can be attributed to large scale, government agency relocations and consolidations. The submarket has struggled to fill blocks of space vacated by the FDA, National Institute of Allergy and Infectious Diseases, and the National Cancer Institute. Vacancy levels hit 20.5 in Q2 2015 but have been gradually declining since and are at their lowest in over 5 years. Just as things were starting to look up, Marriott, the submarket’s largest tenant, will be vacating approximately 800,000 SF when it moves into its new headquarters at 7750 Wisconsin Ave (Bethesda/Chevy Chase submarket) in January 2022. This move will have a devastating impact to the submarket’s fundamentals; causing the vacancy rate to skyrocket and pushing rents down. The one bright spot and a bit of sweet revenge was ABT Associates relocation from the Bethesda/Chevy Chase submarket to 6130 Executive Blvd in Q1 of this year. The 130,000 SF lease deal had a notable impact on the submarket’s vacancy rate, but with new construction in neighboring, Bethesda/Chevy Chase, the North Bethesda/Potomac will be hard pressed to compete with demand with its aging inventory and lack of access to public transportation.

Rockville

• RBA: 10,835,109 SF
• Vacancy Rate: 10.8%
• 12 Month Net Absorption: 62,000 SF
• Average Asking Rent: $30.18/SF
• 12 Month Rent Growth: 2.8%

At first glance, Rockville’s fundamentals look strong. The vacancy rate is below the metro average, and the past 12 months saw approximately 62,000 SF of net absorption with a corresponding 2.8% growth in rents. Despite these positive metrics the submarket has still not recovered from the Great Recession and is particularly vulnerable to large-scale, move-outs from government tenants. The submarket’s demand is driven by government agencies and the federal contractors that want to be close to them. Combined they account for over 40% of the office space in Rockville. Relocations by government tenants, such as the National Institutes of Health vacating 115,000 SF last year, have an oversized impact on a submarket such as Rockville because government-related businesses that support such agencies will seek to relocate as well to be in close proximity. Still Rockville is a Biotech hub with the U.S. Department of Health and Human Services occupying nearly 1,200,000 SF. If it can maintain this reputation is should be able to continue to attract companies in this rapidly growing field.