The commercial office and industrial markets in the Baltimore metropolitan area have been weakened by the recent economic slowdown. Like most other markets around the country, too much construction and weak demand are pushing Baltimore’s occupancy rates below their long-term averages. Lease rates are flat with little escalation. Market performance, however, is not totally discouraging from a historic perspective. As always, the seeds of recovery are sown as the overhang of affordably priced space accommodates the growth of those “gazelle” companies that typically lead an economy out of its doldrums.

Office

When office vacancy rates hit 21.4 percent in the 1991 to 1992 real estate recession, there were 7.7 million square feet vacant in Baltimore’s 34.6 million-square-foot market of non-owner-occupied space. Mid-year 2002’s 14.6 percent vacancy rate represents 7 million square feet of space in a 48 million-square-foot market. So far, today’s downturn does not appear to be as severe as the real estate recession a decade ago. Baltimore did not dramatically overbuild during the “tech” boom in the late 1990s, but has certainly been affected by the collapse of the optical networking and Web-based companies that had to dump space back onto the market. Yes, the office market still has to absorb almost 4 million square feet to return to a 10 percent vacancy rate, but the prospects should be less daunting this time around. A closer look at each of the submarkets will show the opportunities and challenges for the market’s recovery.

The downtown market will finish 2002 with the most new construction. Two Class A buildings delivered this year, the 190,000-square-foot Bond Street Wharf developed by a joint venture of Struever Brothers Eccles & Rouse and H&S Properties, and the 337,000-square-foot 750 E. Pratt Street project developed by The Whiting Turner Contracting Company. Bond Street Wharf, located 2 miles east of the central business district (CBD), was completed October 1, and is expected to be 95 percent leased by year end. Major tenants include international architect RTKL, Brown Advisory & Trust, Morgan Stanley and Johns Hopkins Medicine. The building at 750 E. Pratt Street is 29 percent leased to BGE, Sierra Military Health Systems and Hord, Coplan & Macht.

Another Struever Bros. Eccles & Rouse development, the 400,000-square-foot Tide Point project, has returned to almost full occupancy as established tenants like Mercy Medical, Under Armor and General Fiber replaced the Web technology firms that vacated large blocks of the space in 2001. The most ambitious project in the city may be Himmelrich Associates’ 1 million-square-foot Montgomery Park project, an adaptive reuse of a former Montgomery Ward warehouse located west of the CBD in aFederal Empowerment Zone. Approximately 43 percent of the office space has been leased to the Maryland Department of the Environment, the Maryland Lottery and NCO, a financial services company new to the city. Montgomery Park accounted for almost 57 percent of the construction delivered in the second half of 2002, causing the project to have a disproportionate impact on both the metropolitan and downtown markets. The Cordish Company is completing the 170,000-square-foot 40 Dugan’s Wharf building adjacent to its successful mixed-use Power Plant project in the CBD. Ernst & Young is the lead tenant. It remains to be seen how quickly new CBD projects like 750 E. Pratt Street and Dugan’s Wharf will lease, especially in light of vacancies created by Deutsche Bank and RTKL in One South Street and the uncertain impact of M&T’s acquisition of Allfirst Bank on the downtown market.

The Baltimore County market north of the city lost the most occupancy during the first half of 2002. The largest blocks of both Class A and B vacant space are in the Interstate 83 Corridor North market. The Baltimore County West market had positive absorption, principally because of the large lease transactions in David S. Brown’s Red Brook Boulevard buildings by Euler/ACI and Toyota Financial Services. The vacancy rate in the county’s West Class B market is more than 20 percent.

The BWI Airport market is expected to emerge as the strongest suburban market by the end of 2002. It has a strong tenant base of defense and national security contractors such as Northrop Grumman, Lockheed Martin, CSC and General Dynamics. The National Business Park, adjacent to the National Security Agency, is home to several of these contractors. The Park’s developer, Corporate Office Properties Trust (COPT), has started construction on a 150,000-square-foot speculative building in anticipation of further growth by such firms. COPT is also planning the development of SCIF space in some of its other properties because of the likely demand for more secure space by government contractors.

The Howard County market hopes to capitalize on the same contractor demand to help backfill the space vacated by the optical networking and telecommunications technology firms that have been forced to retrench. The Howard County market was the principal beneficiary of the run up in the high technology sector, building and absorbing more space than any of the other office markets in the metropolitan area. It will have a major backlog of space to contend with until the economy becomes unstuck. Howard County’s location midway between Washington, D.C., and Baltimore and its educated affluent population remain principal assets that will underpin the market’s recovery.

Looking forward to 2003, the office market will remain soft with vacancy rates expected to be in the mid-teens, close to historical levels. Speculative construction will almost stop until lease rates stabilize. Defense and national security contractors are expected to play an increasing role in the regional economy, as well as in the office market recovery.

Industrial

The Baltimore metropolitan area industrial market remained weak during 2002, principally because the bulk warehouse sector had so little positive activity. At mid-year, the bulk warehouse market vacancy rate had climbed to 17 percent, its highest in almost 9 years. The office warehouse market vacancy rate stayed below 9 percent, but industrial flex space was almost 15 percent vacant. Fortunately, only 456,000 square feet of new bulk space was added to the market (less than 1 percent of the inventory), all of which was in the Baltimore-Washington Corridor, the largest and traditionally most active of the bulk markets.

The bulk warehouse market is quickly changed as large blocks of space are leased. Although there were fewer large transactions this year, there were some worthy of mention. The Charming Shoppes is buying the 392,000-square-foot Warner Brothers building in the East market for a new distribution operation in the area. Pier 1 Imports leased 346,000 square feet at 400 Old Post Road in the Harford County market, while Interstate 95 Distributors leased 128,000 square feet of older space at 1601 Wicomico Road in the city. IKEA also purchased a large site in Cecil County for a major build-to-suit project, which is indicative of the projects that will open up Cecil County for additional distribution center operations.

Investor appetite for bulk industrial buildings continued as well, because of the stable returns from the property type, as well as the favorable long-term demographics, port and transportation infrastructure in the region. In the Corridor market, AMB Property Corporation has bought the 142,000-square-foot 8230 Sandy Court and 8301 Patuxent Range buildings for $33 per square foot. Whitehall Industrial Properties has bought the 475,000-square-foot property at 9325 Snowden River Parkway, as well as the 221,000-square-foot former Mack Truck facility, which will be re-positioned and re-leased. Mullins Associates has acquired the 121,675-square-foot building at 4615 Hollins Ferry Road in the Southwest market. In the Harford County market, GE Financial Services paid $42 per square foot for two 300,000-square-foot bulk buildings in Riverside Business Park. Also in the Harford market, Catellus paid $58 per square foot for the 472,000-square-foot 501 Hickory Drive property owned by TIAA.

The office warehouse market eked out a little absorption, but maintained a single digit vacancy rate in the absence of completed new construction. One new project, which is nearing completion, is a 74,000-square-foot spec project by FRP Properties in the Hillside Business Park in the Corridor market. The industrial flex market did add new construction and had its vacancy rate increase from just under 13 percent at the beginning of the year to 14.6 percent two quarters later, primarily due to sluggish deal flow.

The outlook for the industrial market is gloomy for the next few quarters. Manufacturing activity is down, as are corporate inventories, consumer confidence, and retail sales — all of which affect the demand for the warehousing and distribution of products. Typically, the industrial market leads the economy out of downturns, and this is likely to happen here again. Despite softening conditions, the lack of substantial new construction will allow the excess inventory to dissolve faster.

Jeffrey B. Samet is vice president/ principal with Colliers Pinkard.

 

BALTIMORE’S RETAIL MARKET HOLDS ITS OWN Thomas H. Maddux Retail activity in the metropolitan Baltimore area is much stronger than it was 1 year ago, and the region seems to be more resilient than other parts of the country. Interest rates continue to remain low, consumers have refinanced their homes either one or two times, generating more disposable income, and the general economic mood seems to be one of optimism in this market. Historically, demand for space has allowed Baltimore to consistently outperform both national and regional vacancy averages. For instance, during the recession of the early 1990s, vacancy never reached more than 9 percent in the Baltimore area, while many comparable cities saw vacancy hit 10 percent or higher. This can be attributed, in part, to the fact that the Baltimore retail market had been undeserved throughout the 1980s and into the early 1990s. Vacancy rates had fallen to 4 percent overall in 1994 before construction activity ramped up and vacancy trends began to move upwards. In the 2001 to 2002 period, with consumer spending somewhat curtailed and numerous retail bankruptcies, Baltimore, like many metropolitan areas, has seen an overall decrease in space demand with year-end vacancy projected at 6 percent. Additional new construction could further outpace demand going into 2003 and 2004. The big box users, consisting of users in excess of 100,000 square feet of space — including Wal-Mart, Target, The Home Depot, Lowe’s, Costco and Sam’s Club — continue to drive new development activities in the metropolitan Baltimore region. New retail construction is focused on established growth areas such as Columbia in Howard County, Owings Mills and White Marsh in Baltimore County and Bel Air in Harford County. A new Home Depot Expo Design Center opened in the heart of Columbia. A proposed retail center adjacent to the project will attract high rental rates. New developments properly positioned in high-traffic growth areas continue to perform well, while aging retail centers struggle to retain occupancy levels on the back-end. The bankruptcy of once-dominant Hechinger’s has created a domino effect of available big box spaces, with the majority gobbled up by expanding grocery stores. Several other obsolete big boxes remain available for the taking and new, undersized grocery store spaces have also entered the market as a result of these moves. NAI KLNB’s brokerage team continues to see aggressive moves on the part of retailers to secure the prime locations, with secondary spots subject to slashed rents or the transformation to non-traditional uses. A local developer is turning 20,000 of space at the Edgewood Retail Center in Edgewood to stage a weekend flea market and has designs on leasing the remaining 30,000 square feet to traditional retailers. In another instance, a 50,000-square-foot SuperFresh grocery store was re-leased to a one-off International Food Market. Five new Sam’s Club and Wal-Mart stores opened in the greater Baltimore metropolitan market this summer and Wegmans Food Market is eyeing several locations in the Maryland area to initiate their entry program, which would complement recently acquired sites in Virginia. In 2002, because of the economic cycle and new construction, rental growth has remained stagnant overall. Average asking rents hover in the $17 to $18 per square foot range. Small in-line space is commanding rates of up to $40 per square foot or more in some submarkets. When the economy fully recovers from the current down cycle, we expect to see rental growth rates more in line with inflation, in the range of 2 to 3 percent, for 2003. There have been eight shopping center sales in 2002. The total dollar volume of those eight transactions was $102.5 million with the average size of the centers being approximately 165,000 square feet. The average price of those centers sold was $78 per square foot and the average cap rate was 10.3 percent. The largest sale, accounting for just over half the total volume, occurred at the beginning of the year. The 437,000-square-foot Festival at Bel Air sold for $52.5 million. Thomas H. Maddux is president of NAI KLNB, Inc.

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