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Do Increasing Vacancies Spell the End of Suburban Office Parks?

Legal Update 2016, Vol 3

Despite its historically strong performance, Montgomery County’s commercial office market has experienced several continuous years of decline. Concerned about persisting vacancies, the county is evaluating the potential for adaptive reuse.

According to a February 2016 report by the Office Market Working Group, a task force organized by County Executive Ike Leggett, the Washington metropolitan region experienced a 14.8 percent office vacancy rate in the third quarter of 2015. More tangibly, the group reported that approximately 10.3 million square feet of vacant office space was located in the county, including eleven “Class A” buildings that were near or totally vacant.

These adverse market conditions arise from a variety of factors, according to the group. While declines in federal government spending have directly affected leasing in the county, broader trends in the American workplace – including teleworking (facilitated by the ready availability
of technology) and more efficient workspace design – are reducing employers’ demands for office space.

These changes pose significant challenges to the county’s efforts to attract and retain employers and, consequently, to maintain its tax base and provide services. With respect to land use, these changes also raise concerns about the future of some suburban areas predominantly developed with office uses. Concluding that the suburban office park model is out of date, the group specifically recommended that the
county explore using zoning and growth management tools that will allow owners to convert “obsolete” office buildings to accommodate alternate uses like residences or even schools.

To further evaluate how this might be accomplished, the Montgomery County Planning Department recently commissioned Boland Smart Associates to prepare a study of local office market dynamics within two planning areas with a high concentration of office uses: the Rock Spring Master Plan area and the White Flint 2 Sector Plan area (which includes a number of office buildings on Executive Boulevard).

Boland Smart’s findings suggest that only a limited number of office buildings in these areas are “ripe” for adaptive reuse based on their age, location, and design (e.g., floor plate depths, floor-to-ceiling heights, and column support spacing). Boland Smart also concluded that adaptive reuse in these areas is determined fundamentally by economics favoring the retention of office uses. For the majority of property owners, the potential revenues associated with office leasing – even if currently diminished – simply exceed the costs associated with converting these buildings to different functions.

The Planning Department’s evaluation suggests that the wholesale conversion of the county’s office parks may not be imminent. Nonetheless, the report implies that to the extent that ongoing vacancies are of concern, the county may be able to stimulate the adaptive reuse of some buildings by actively seeking to balance the cost-benefit equation for owners. Potential strategies include providing tax incentives, fee reductions, expedited permitting, and flexible zoning for such buildings.

Because converting office buildings has proven effective for accomplishing revitalization in New York City, Philadelphia, Boston, and elsewhere, it is foreseeable that the county will continue to explore such strategies and that local adaptive reuse projects will become more widespread.

Chris Ruhlen is a land use attorney who focuses on land use, zoning, real estate, and related governmental issues. He has significant experience with real property tax issues and regularly assists clients with the assessment appeal process and associated real estate tax issues. For more information about adaptive reuse, contact Chris at (301) 841-3834 or cmruhlen@lerchearly.com

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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