Commentary: Market revival-Office market shows signs of heating up

The continued revival of the office market was the story in the Baltimore area's commercial real estate market during the first quarter of 2005, with leasing and condo sales proving to be significant chapters.

While the office market is gaining steam around the Baltimore area, the song has remained the same with much of the rest of the commercial real estate market throughout Maryland. That is to say the industrial and flex markets have been somewhat uneven, but retail is booming as usual.

Below are the biggest deals of the first quarter, renewals not included, courtesy of Bethesda-based CoStar Group Inc.

OFFICE

Address: 9910 Franklin Square Drive, White Marsh

Square footage: 52,000

Submarket: Baltimore County East

Tenant: The Johns Hopkins University

Tenant representative: Colliers Pinkard

Landlord: Nottingham Properties Inc.

Landlord representative: Nottingham Properties Inc.

Sign date: 1/27/2005

After remaining stubbornly high for some time, the vacancy rate in Baltimore City has dropped to 15 percent, said T. Courtenay Jenkins III, senior vice president with Trammell Crow Co. in Baltimore. This is down from 18 percent vacancy in the fourth quarter of last year.

There is a lot of activity in the central business district and in the city in general. [It is] emerging as the hottest office market in the region, he said.

Jenkins pointed to the redevelopment along the waterfront with 500 E. Pratt St. and Lockwood Place, the 110,000-square-foot retail project that is rising next door. Both are 50 percent leased and could be substantially leased by end of year.

Also, Verizon is downsizing at its 320,000-square-foot building at 100 E. Pratt that is under contract to the Amstar Group. The latter plans to renovate the building and put more than 150,000 square feet back on the market.

At Inner Harbor East, 170,000 square feet of office space is included at 600 Exeter St., which is under construction and due for delivery in late 2006. Further east is Canton Crossing, a 17-story, 500,000-square-foot building with free parking. It is the largest new office project being built in the metro region and is slated to deliver next April. It is already 60 percent leased and will include such tenants as 1st Mariner Bank.

Overall, activity has been brisk, and properties are selling for record prices, Jenkins said. 100 E. Pratt will break a record in excess of $300 per foot. The city has solved a lot of problems during the last five years, and I think more companies are staying in or moving back to downtown and Canton.

The increased activity in the city seems to be working its way north, said Senior Vice President John Hamilton of Corridor RF&S in Baltimore. He is representing two buildings along the Charles Street corridor, at 1030 and 2701. We're trying to figure out why we're seeing so much more activity in the past month. - We have come to the conclusion that the market is rebounding. I have four lease proposals out on 1030 alone.

The suburban markets are looking healthy, too. Scott Wimbrow, senior vice president and principle with MacKenzie Commercial Real Estate Services/Cushman & Wakefield's Columbia office, said the Anne Arundel and Howard county markets are still strong and dominated by federal government and the defense contractors, as are the other jurisdictions around the Beltway, with the economy remaining healthy in this region.

But it's not all about the defense industry. Wimbrow noted strength in the health care and financial services markets as well. But our market is so dominated by technology and intelligence contractors that, at the end of the day, it all seems to reach back to the federal government, he said.

Despite that robust sector, some smaller contractors are concerned that the mounting federal deficit could result in across- the-board cuts at some point.

As for trends, Michelle North, associate with NAI KLNB in Columbia, noted that companies are moving away from increasingly congested Columbia Town Center for the better highway access from locations on Route 100 or Route 95 because users can get similar amenities elsewhere.

And Darrell Nevin, president of The Lease Wright in Columbia, noted the popularity of office condos.

About 600,000 square feet of office condo space is coming on line in Howard County this year alone for as much as $250 per foot, Nevin said. They are also popping up in Baltimore County and Baltimore City, and prices are still rising. A second wave of buyers is trying to capitalize on the opportunity to buy before rates rise and the market levels off.

INDUSTRIAL

Address: 300 Clubhouse Lane, Hunt Valley

Square feet: 179,931

Submarket: Route 83 Corridor North

Landlord: 40 Clubhouse LLC

Landlord representative: Clubhouse Properties of Maryland Inc.

Sign date: 3/17/2005

Getting a handle on the industrial market can be tough. While there are deals being signed, activity does not appear to be swift.

We have seen an increase in substantial leasing activity, finally, said James Lighthizer, principle with Chesapeake Real Estate Group in Glen Burnie. He noted about 225,000 square feet of deals signed in Odenton in Anne Arundel County, with BAX leasing 80,000 square feet at Arundel Crossing 3, Scholastic Books leasing 70,000 square feet at Arundel Crossing 7 and Guest Services with a similarly sized lease at 3.

Lighthizer also said there were numerous 40,000- to 80,000- square-foot deals in the metro area during the first quarter and that the vacancy rate dropped 1.5 points, to 9.5 percent.

But there are a ton of contradictions, said Thomas Gentner, senior vice president at Transwestern Commercial Services in Columbia. Rental rates are going up, and vacancy is decreasing. But it's kind of a neutral market. There just is not much velocity, he said, pointing to a net absorption of just less than 300,000 square feet for the first quarter in the I-95 Corridor, a bit less than the normal average for this point in the year.

He anticipates better things, however. We expect to see an increase in job growth and demand for space from tenants in the marketplace and, ultimately, an above-average year of volume. But this soft market is concerning me because we expected to be very busy by mid-February, and we are not.

J. Allan Riorda offered similar observations. A principle at NAI KLNB in Columbia, he said the leasing market remains somewhat flat, but the sales market continues to be extremely active with substantial demand for limited product.

The Route 95 Corridor is doing well because of its location on a main artery. But vacancy continues to be at approximately 11 percent in metro Baltimore. It's been flat for about the past year. I can't say why, but I'm not worried about it because the market is cyclical. And with the severe land constraints, I am not concerned about overdevelopment, Riorda said.

He agreed with Gentner that there will still be positive absorption for 2005. But more product is coming on the market late this year and early next, and at that point, there could be negative absorption because it will take time to lease new product, he said.

Calling the traditional leasing market tepid at best, Colliers Pinkard Senior Vice President Richard Latini said that those with the entrepreneurial spirit, are keeping the market active. Those who own privately held firms are buying small buildings that range from 25,000 to 90,000 square feet or so.

They go for from $40 to $70 per square foot, depending on the location, with top dollar going for properties along the 95 Corridor in Howard County, he said. That is driven by the interest rates that still make buying more affordable than leasing.

So, Corporate America is not the most active player for existing distribution properties lately. What we are seeing is more activity for build-to-suits of 300,000 to 1 million square feet than for the existing buildings, Latini said.

FLEX

Address: 9212 Berger Road, Columbia

Square feet: 59,049

Submarket: Columbia South Industrial

Landlord: Petticoat Hill LP

Landlord representative: Platt Develop-

ment Group

Sign date: 2/1/2005

The state of the flex market mirrors the industrial market, with certain submarkets outperforming others. Gerard Wit, vice president of marketing with MIE Properties in Baltimore, said, We are seeing a lot of activity and a healthy state of equilibrium. There is not a lot of overhanging inventory, nor are there many unmet tenant demands.

Wit said MIE's energies are focused on the BWI Business District, where the company has three projects in development, including Cromwell Business Park, BWI Technology Park and Quarterfield Center.

Additionally, he said MIE is hopefully three months off from grading at the 1,000-acre industrial zoned property (the last in Maryland, he noted) in White Marsh, Baltimore Crossroads at 95; another is the Owings Mills at Dolfield Project, which includes 600,000 square feet of office and flex space and 150,000 square feet of retail for Dolfield Exchange.

MIE has added about 1 million square feet a year for the past few years statewide, and it looks like that will happen again in 2005, he said. Our vacancy rate is 6 percent in our portfolio. But Harford County is 25 percent vacant, which is much slower than the Corridor or BWI.

Indeed, the Columbia/95 Corridor market has been very active and could use more space.

There has not been a lot of space in that market, period. When it comes up, it gets leased, said Vincent Bagli of Merritt Properties in Baltimore, adding that his company saw more activity in the southwest in the first quarter than we did all of last year. It was very quiet then. It's the same in the Glen Burnie area.

But flex has improved since the first of the year with lots more activity driven by Department of Defense-related requirements, said Dennis Lane, first vice president with Ryan Commercial in Hanover. We are encouraged by where flex is now. It has been slower than office to recover since the right types of users have not been active.

Typically, office recovers first because flex is more related to light manufacturing and R&D-type activities. It is truly a hybrid. So, if industrial is lagging, so will flex, to a certain degree, he said, adding there will be some major flex deals announced by the end of the second quarter.

RETAIL

The retail sector has easily been the most stable of the four markets in recent years.

There's nothing bad going on, that's for sure, said Peter Framson, principle with Green Light Retail in Bethesda. As fast as things can be built, they are getting built. The prices are stable and going upward, even for redevelopment. It's a very challenging market because of the demand.

There is virtually no vacancy, with more developer and retail demand than there is available space to satisfying it, Framson said. There's not much left in Baltimore, either. Everyone wants to be in Maryland, D.C. and Virginia.

And so it goes. All I can do is echo what Peter said, said Richard Darrell, broker with Manekin LLC in Columbia, who offered the example of a recent auction near Towson. It was for an unanchored 9,000-square-foot strip center with 2,800 square feet of lower-level storage in Riderwood. It went for $2.4 million, he said. That's unbelievable.

While it's a nice center with good tenants, Darrell noted that it went for more than $203 per square foot. That just illustrates how hot the market is, he said.

Darrell, among many others, attributes the demand to the malaise of the stock market. If you have money, CDs, bonds and the stock market are not paying much. If you have money, you have to park somewhere.

He pointed out that the retail vacancy rate statewide is about 4 percent. There is next to no vacancy, and rents are rising. Plus, there have not been as many retail bankruptcies recently as there were in 2003 and 2004. It can hardly get much better than this.

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