SOUTHEAST SNAPSHOT, DECEMBER 2006

Baltimore Office Market

Baltimore’s central business district (CBD) continues to be the hub of real estate activity in the Baltimore metropolitan area. Overall, the market has tightened although the markets in the north and west suburbs are trailing the surrounding areas.

Last year, the Class B market inventory was reduced due to office properties being converted to non-office uses. This trend has continued throughout this year. Office sales remain the most significant story of interest as REITs, private equity groups and institutional owners continue to acquire office buildings in Baltimore. This year, 23 office buildings were sold with a total sales volume of $186.2 million and an average price per square foot of $115.03. The majority of buildings sold were in the CBD. Classified as a hotel, and not included in the statistics above, is the largest transaction this year – the $78 million sale of the Harbor Court Hotel located across from the Inner Harbor at 575 South Charles Street. Hospitality Properties Trust purchased the building, which has an office component and a garage, in the first quarter of this year.

During the past year, direct vacancy in the CBD has decreased to 10.81 percent, a significant improvement from 14.15 percent 1 year ago. Overall velocity is weak with mostly “shuffle the deck” deals. There is a flight to quality for some tenants in search of better space, particularly Class B users who are relocating due to the conversion of buildings from office use to hotel and residential use. With only one tower under construction in the greater downtown area, 600 Exeter Street, vacancy rates should remain healthy in the 10 percent range at year’s end.

The delivery of Canton Crossing Tower at 1501 South Clinton Street increased inventory by 476,000 square feet. The most current leasing activity in this project was CareFirst BlueCross BlueShield, signing for 87,450 square feet, and Thomson Prometric, leasing 75,000 square feet. Thomson Prometric is scheduled to take occupancy this month and CareFirst is expected to take occupancy in September 2007.

Baltimore office sales continued to be very active through the first half of this year, however there are indications that the market for both investment grade properties and properties to be rehabbed is slowing. Of the third quarter sales of office buildings in Baltimore City, the majority of the properties were purchased for potential rehabilitation into non-office uses or for demolition as part of a larger development project. One South Street and 300 West Pratt Street were purchased as pure investment grade properties while 235-239 Holliday Street, 221-223 North Gay Street and 101 North Charles Street in combination with 111 North Charles Street were purchased with the idea of either rehabbing the buildings into residential uses or utilizing the buildings as part of a larger development project.

The steep decline in residential sales, the large number of projects currently underway for new residential condominiums and apartments and the redevelopment of office buildings into non-office uses has contributed to the slow down in sale activity in the Baltimore market. In 2004 and 2005, the majority of office building sales, particularly in the Class B and C markets, were driven by new demand for hotels and residential condominiums and apartments in the Baltimore City area.

Activity in the construction sector is heavy as four projects throughout the city dominate current construction figures: the Science and Technology Park located north of Johns Hopkins Hospital; Canton Crossing located 4 miles east of CBD; UMB Bio Park at 801 West Baltimore Street and 600 Exeter Street.

Construction should begin soon on Harbor Point, the long-contaminated former site of a chromium plant and the largest undeveloped tract along the Inner Harbor. This $725 million project will include nearly 2 million square feet of offices and retail space – practically a whole new neighborhood southwest of Fells Point. Also, in Fells Point, a new development named Union Wharf will include approximately 109,000 square feet of Class A office space with typical floor sizes of 24,000 square feet. The ground floor of the building will have 20,000 square feet of prime retail space. The building will feature a generous ratio for on-site parking as well as 52 boat slips. Additional buildings in the planned mixed-use development will include more retail and high-end condominiums, making Union Wharf a true destination for people to live, work and play.

The construction and redevelopment in Baltimore follows the local trend of people moving into the city to improve the quality of their lives. The higher residential component contributes to increased foot traffic and retail, which makes Baltimore City more attractive to the large local employers. This activity translates into a strong commercial real estate market for Baltimore City, which is good news for the entire Baltimore metropolitan region.

— Clare Berrang is a tenant representative for MacKenzie Commercial Real Estate Services, a member of the Cushman & Wakefield Alliance, in Baltimore.

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