The big real estate story of 2020 in Bethesda, and everywhere really, is the negative impact COVID-19 has wrought on office building and leasing fundamentals. But the news is not all bad. During the pandemic, public infrastructure improvements have carried on, and local building owners, including several notable national landlords, are using this time to make improvements to their properties. These events point to a brighter future, albeit a couple of years out, after the pandemic.
During the mid-2010s, Bethesda was one of the Washington, D.C. Metro-area’s strongest office submarkets, growing to more than 13MM square feet and boasting a vacancy rate lower than the overall region. Dynamics started to reverse in the late-2010s as demand for office space waned. That trend has continued during the pandemic with Bethesda suffering almost -600,000 square feet of net absorption YTD.
As it stands today, fierce competition exists amongst landlords for quality tenants, and Bethesda’s overall vacancy rate is approximately 16%, about 2 percentage points higher than the D.C. region, according to CoStar. Rental rates too have reversed the long-term trend, and growth has flatlined – today’s average asking rate in the submarket is just above $40/SF for all office categories and at least 10% higher for class-A properties. At the same time, Bethesda is seeing a construction boom that will exacerbate vacancy rates in the short term. In late 2019, the first of several trophy-quality office buildings came online, and today approximately 1.2MM square feet of office space is under construction, including the massive new Marriott headquarters. All these factors are weighing on owners’ minds and foretell tough times ahead, while positive activities are happening that give hope to a future rebound. When our firm, The Donohoe Companies, relocated to Bethesda in 2018, we were attracted not only by a strong business environment, but also the submarket’s excellent location “inside the Beltway,” adjacent to abundant restaurants and shopping and unrivalled public infrastructure. We coupled our move with two office acquisitions totaling almost 400,000 square feet and development of 700 luxury high-rise apartment units.