Office space vacancy rate high in Germantown

Empty parking lots and "for lease" banners hint at the statistics.

Weeds grow in the cracks of neglected sidewalks at the Century Corporate Campus near Crystal Rock Drive. Two signs declare "Space For Lease" in bold letters outside an empty six-story building on Milestone Center Drive.

But Germantown's 28 percent office space vacancy rate -- more than double the county average -- is not cause for alarm, commercial developers and market researchers say.

As of Monday, the overall vacancy rate for office and flex space in Germantown was 28.7 percent, according to Marshall Benedict, a financial analyst and head of research for McShea and Company, a commercial real estate services firm. In contrast, the Montgomery County average vacancy for office space hovers between 12 and 13 percent.

Germantown's vacancy rates are twice as high as other communities along Interstate 270, according to McShea. In the first quarter of 2004, 12.3 percent of office space in Rockville was vacant. Gaithersburg had an 8 percent vacancy rate during the same period. Benedict said Germantown's high vacancy rates are part of a normal economic life cycle.

"We're at the tail end of a downturn," he said. "Germantown will get its share."

Using data from CoStar, a commercial real estate information source, Benedict explained that vacancy rates rose as new buildings were completed in Germantown before companies were prepared to occupy them.

"In the late 1990s, a lot of space was delivered, and then business fell off," he said. "So it's going to take time for that space to fill up. But it will."

He searched CoStar's database for Germantown's direct and sublet vacancies in both traditional office space and flex space, which can serve as office, laboratory, manufacturing or warehouse space. At the end of 2001, 22.5 percent was vacant. In 2002, the number had climbed to 29.8 percent. That same year, 281,000 square feet of office space and 153,000 square feet of flex space was delivered.

"That's 10 percent more space," Benedict noted. "It takes time to absorb that."

The vacancy rate rose to 31.7 percent at the end of 2003, but in the first quarter of 2004, it dropped to 30.3 percent. If the current data are any indication, the rate will show a decrease when data for the second quarter are tabulated.

"It should keep going down, as long as people don't start putting too much supply up there," Benedict said, referring to commercial projects in the development pipeline. No new space was completed in the first quarter of 2004.

Candace Curie, president of the Gaithersburg-Germantown Chamber of Commerce, said increased rates and development north of Germantown could be partly to blame for the high vacancy rate.

"We have to be very careful that Germantown doesn't become the hole in the doughnut," she warned.