This story, originally published at 4.54 p.m. Nov. 29, 2023, was updated at 11:53 a.m. Nov. 30, 2023, to correct that there was an increase in interest rates.
Business leaders and developers are sounding the alarms as Montgomery County’s commercial office market hovers at a 17.7% vacancy rate, declines in the value of existing office buildings, and an overall weak market outlook, according to a report from a Bethesda-based real estate consultant RCLCO. They warn that the decline in the office market could put the county’s social safety net in jeopardy.
In a letter sent to County Executive Marc Elrich (D) and Council President Evan Glass (D-At-large) on Tuesday, developers said that if the value of existing office buildings declines by as much as 30%, the county could lose up to $47 million in annual tax revenue.
The letter, which was signed by 33 county developers, attempted to appeal to county leaders to intervene on the issue and “restore a solid financial footing for the future.”
Doug Firstenberg, a principal at Stonebridge, a real estate development and investment firm based in Bethesda, signed the letter and said that the solution isn’t to continue raising taxes, but instead to raise the tax base.
“What we’re worried about is our businesses are completely aligned with the county having maximum revenue. When the county is doing well, we will tend to do well. … And now, what has really changed is the tax base has really had some significant impacts,” he said.
Firstenberg said he recognized that many in the county are working from home in a post-pandemic world, which has led to a reduced demand for office space and an increase in interest rates.
“It’s hugely important that we recognize the alignment of interest and work together to come up with ways to re-gear the county’s economy for what the future going to be,” Firstenberg said.
In response to the letter, Elrich said that he is willing to work with developers and find ways to address the issue.
“They’re not wrong to say that it’s a problem, which is why I’m happy to help them figure out how to convert buildings to uses that could quickly be put back on the market that could benefit them, and it would benefit the county,” he said.
Glass echoed the county executive’s sentiment and said that he looked forward to working with leaders in the commercial real estate sector about “innovative solutions” to address the situation.
“Communities across the country are trying to determine how to better utilize office buildings in a post-pandemic world where more people are telecommuting,” he said in a statement email to MoCo360. “These are difficult realities, which is why the council’s Economic Development Committee has been working on this issue.”
Alexander Rossello, the director of policy communication at the Apartment & Office Building Association of Metropolitan Washington (AOBA), said that over the past two years, the county has not been creating a favorable tax and regulatory environment to attract economic investment.
Rossello – who did not sign the letter – pointed to three measures the county has recently taken that he said have made the county less attractive: raising property taxes, passing the Building Energy Performance Standards in 2022 and the rent stabilization law in July.
“The bottom line is the county is sending all the wrong signals to the [business] community,” he said. “And if they want to turn around what is looking to be a rather scary tax revenue situation for them moving forward, they need to start sending more positive signals.”
Rossello added that the average county resident should know that if the commercial office market continues to decline without government intervention it will not just be developers and business leaders that will feel the impact.
“It may seem abstract to the average person, and they may not care at the first glance, but this has real significant implications for what Montgomery County can do for its residents,” Rosello said. “If you care about the fiscal health of the county and all of the things that government can do, that it does for its residents and should do for its residents, then you should care about this issue.”
In the letter, the developers pointed to an October report developed by RCLCO–a Bethesda-based real estate consultant–that examined the potential impacts of a decline in office values and determined how that could threaten the county’s near- and long-term fiscal health.
The report stated that there is “potential for a severe near-term contraction in county tax revenues.”
According to the report, since 2019 the Montgomery County office vacancy rate increased from 13.1% to 17.7% and attributes the increase in vacancy to the “new normal” of work post-pandemic.
The Washington, D.C. office vacancy rate increased to 19.7% in the third quarter of 2023, according to Newmark. Howard County office vacancy rate is 14.5%, Baltimore Banner reported in November.
RCLCO’s report also found that property tax revenue in the county has grown steadily over the past four years but stated that office starts – the start of new construction projects – are “essentially non-existent” and apartment starts are beginning to slow. This could cause assessments of existing apartment buildings to “taper off” from their recent peak, developers said.
According to the report, in 2023, the total assessed value by land use of office properties built in the county before 2019 is $12,052,292,462, compared to $12,027,906,658 in 2022 and $12,382,944,176 in 2021.
“On a net basis, 200,000 more square feet of office space has become vacant than occupied since 2019, amid an uptick in new deliveries and poor performance of older office product. In this environment, owners have struggled to push rents at risk of further endangering occupancy,” the report stated.
To help address the issue, developers are pushing for the county to create and fund programs and policies that support private-sector job growth and to look at how nearby jurisdictions such as Washington, D.C., and Arlington County have attempted to address the issue in their region.
According to a press release, D.C. enacted legislation last year that incentivizes the repurposing of downtown office buildings to residential developments. In Arlington, the county is expediting zoning amendments and policy changes that “support non-traditional uses in obsolete office spaces.” Other solutions that have been proposed across urban areas in the United States to address the decline in the commercial office market are through converting office properties to alternative uses such as residential buildings. This has been the subject of some of the latest residential developments in the county, but it is not an easy feat, developers say.
Conversions are dependent on “the layout of office buildings, how far office values fall relative to their replacement cost, and zoning and permitting hurdles,” the release states. Developers are urging the county to fully comprehend the risks and vulnerabilities of the declining office market and plan for economic recovery.
Elrich added that developers and property owners can file for reassessments of their buildings if they have higher vacancies. He also said that he has heard complaints from developers about how long it takes to get a project moving forward in the county and would like to change the practices and policies around permitting to have fewer steps in the process.
“I’ve been pushing for those changes but haven’t been successful at getting many council members interested in it,” Elrich said. “But it’s one of the things that makes us [the county] different, in a bad way. And I think that’s something we can fix.”
Ginny Bixby contributed to this report.