Bethesda rent patterns shift as quality of supply evolves

Bethesda’s office market is experiencing sweeping changes

June 26, 2019
  • With a new master plan, enacted in 2017, development of office and multifamily buildings has taken off in the latter part of this market cycle. Within the next five years, new office and residential developments will continue delivering on a rolling basis. These developments will all boast the high-quality design and construction that is mandated by zoning guidelines for projects seeking to exceed zoned height limits. Four new office towers, two reaching almost 300-feet tall and several multifamily developments, are set to deliver over the next five years, transforming Bethesda’s skyline.
  • With new construction driving change, office asking rents across asset classes have seen dramatic stratification. The introduction of new Trophy construction availabilities has created a new ceiling for rents in the high-$60’s p.s.f. to low-$70 p.s.f. FS. At the bottom of the market, in Class C and B- assets, asking rents hover in the low-$30’s p.s.f. FS. The wide range that has been created has almost doubled the delta between the top and bottom of the market with a 47% increase from 2010 to 2019.
  • Along with that wide rent range, former best-in-class assets, now defined as B+ and A+ properties due to the introduction of true Trophy product, have pushed their rents to new heights in response to continued demand within this market segment. Since 2016, over 72% of leases larger than 10,000 s.f. have been signed for top of the market assets with 22% signing for Class A+ and B+ assets and 50% signing for Trophy assets – a sum of 1.6 m.s.f. in tenant demand. Many of the mainstays in the Class A+ asset class, broadly composed of prominent Class A assets that have been built or significantly upgraded since 2000, are now asking and achieving rents above $50.00 p.s.f. FS. That is a significant increase since 2016 when rents averaged $48.33 p.s.f. FS and 2010, when rents averaged in the mid-$40’s p.s.f. FS. Class B+ properties, differentiated by recent renovations that delivered enhanced tenant amenities and refinished lobbies and shared spaces, command an average asking rent in the mid-$40’s p.s.f., growing from the mid-$30s p.s.f. in 2010.
  • As changes continue to transform the downtown Bethesda office market, several questions remain. First and foremost, to what extent will new higher rents persist across asset classes? Several Class B+ buildings have lingering large-block availabilities, which could potentially prevent owners from pushing rents higher in that market segment, should demand not keep up. Additionally, will congestion and pricing cause Bethesda tenants to explore and relocate to other submarkets? Abt Associates relocated to North Bethesda in 2018 and the American Occupational Therapy Association recently signed a lease to join them in North Bethesda. With high quality, more affordable office space in North Bethesda and along Rockville Pike across all asset classes, time will tell whether these examples turn into a broader trend.

Source: JLL Research

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