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Montgomery County Moving Toward 'Fiscal Peril,' Needs To Spur New Development: Report

A depressed commercial tax base and moratorium on new development in parts of Montgomery County have hurt the county's fiscal health, according to a new report, which recommends several ways to spur new development and business growth in the suburban Maryland county. 

Aerial shot of Bethesda and North Bethesda

Empower Montgomery, an advocacy group established by business executives, commissioned the report from Sage Policy Group and its lead economist, Anirban Basu. The report, released Tuesday, followed Sage's April report that detailed the slow pace of business formation and job growth in the county. 

The new report concludes that Montgomery County is "marching toward fiscal peril," and recommends several steps it should take to improve its financial well-being. 

Its first recommendation addresses a moratorium on new development put in place in some parts of the county last year because of crowding schools. The county last year halted development in areas around two high schools in Silver Spring and one elementary school in Bethesda. It could expand that moratorium July 1 to include areas around four more high schools in Kensington, North Bethesda, Rockville and Gaithersburg, plus two elementary schools in Bethesda and Silver Spring. 

The moratorium stalls new development in those school districts until new school space is constructed, enrollment declines or boundary lines are redrawn. Charlie Nulsen, president of development firm Washington Property Co. and founder of Empower Montgomery, said the county needs to find ways to allow development in these areas. 

"Every one of these areas are development-light, or in need of development, and to have a school moratorium integrated on top of that is troublesome," Nulsen said. 

The report recommends taking money from the county's reserve fund, reducing the reserves from 10% of total revenue to 9%, which would free up $56M that could fund new school construction and allow for more development in those areas. The report notes that new development could widen the county's commercial tax base, but it also highlights the depressed tax revenues from existing commercial properties.

Rockville's Gateway Tower, which sold in 2018 after going through a foreclosure

The values of Montgomery County's commercial properties have lagged behind those in other jurisdictions in the region, contributing to lower commercial tax revenue, the report finds. Commercial property sales average $232/SF across Montgomery County, according to Transwestern data cited by the report, but that average drops to $170/SF when excluding the Bethesda-Chevy Chase submarket. Northern Virginia, by comparison, averages $272/SF for all commercial property sales. 

The assessed value of office buildings in Montgomery County increased by 13% from 2006 to 2016, but outside of the Bethesda-Chevy Chase submarket, it grew 4.8% over the decade.

"Montgomery County has a shining star in Bethesda, but when you go outside the Bethesda-Chevy Chase submarket, things have been fairly depressed or inactive for a long time," Nulsen said. 

The office market also faces a problem in the coming years from federal government lease expirations. Roughly 1.73M SF of General Services Administration leases are set to expire in Montgomery County by 2023, with another 1.68M SF expiring by 2028, according to the report.

If the GSA leaves some of those buildings, it could raise the county's office vacancy rate and further depress property values. The county could retain those federal agencies with lease renewals, but Nulsen pointed out that the GSA has shown a pattern of shrinking and consolidating the footprints of government agencies in recent years.

"The GSA is mostly downsizing requirements, so we think it's something on the horizon that needs attention, and we need to be prepared for the worst case," Nulsen said. 

An aerial rendering of Pike & Rose at full build-out

Two primary areas where the report recommends the county work to spur new commercial activity are White Flint and White Oak. The county has approved sector plans envisioning higher-density development in both areas, but much of that has not yet come to fruition. 

In the White Flint area of North Bethesda, Federal Realty Investment Trust has developed portions of its Pike & Rose mixed-use complex. Federal Realty CEO Don Wood last year wrote a letter threatening to pull part of its workforce out of the county because he was disappointed in the level of public investment on the White Flint area, complaining about slow progress on road upgrades and park space projects. The Sage Policy report echoes his concerns, noting that the County Council last year voted to delay an extension of Montrose Parkway. 

"Policymakers have collectively failed to supply the infrastructure investment required to realize White Flint's potential," the report said. 

White Oak, an area in the eastern part of the county, could support 25M SF of commercial development and 15,000 residential units under a plan approved in 2014, the report said. Billion-dollar projects have been planned in the area but have been slow to move forward.

The report recommends infrastructure investments, tax incentives, public-private partnerships and expedited permitting processes to help get development in those areas off the ground. It also notes that the areas are opportunity zones, allowing investors to take advantage of the new federal program when launching new projects. 

"The recommendation is to take areas where approvals are in place and commit to creating a good environment for new commercial construction," Nulsen said. "That includes tax incentives and expedited permitting; things that would make a difference."