Metropolitan Baltimore's office market is responding to slowe demand by cutting back on construction and by moving away from speculative building toward build-to-suit projects in areas where any major amount of development is happening, real estate professionals say.
The slower market means there is no immediate solution for downtown Baltimore's glut of older, or so-called Class B, office space. In addition, there still doesn't appear to be room for all of the shiny new Class A office towers that have been proposed during the past year.
But Baltimore has so far been spared the fate of other cities where construction raced ahead after demand peaked, leaving those cities with lots of empty new office buildings. Vacancy rates are up in Baltimore, but are still below national averages.
"We're in a period of slower growth, with both lagging tenant demand and less construction in the short term," said Jeffrey B. Samet, a vice president at W.C. Pinkard & Co., a commercial real estate brokerage firm in Baltimore. "The slowdown was not unexpected. I think we realized the momentum in service-sector employment growth that we enjoyed in the mid-1980s wouldn't last indefinitely."
"Things are basically slow," said Andrew J.A. Chriss, vice president for brokerage at Manekin Corp. of Baltimore, a company that is also a major regional office developer. "It's an indication of the economy in general. ... We're not seeing the expansion."
Indeed, the office market slowed last year from 1988's near-record pace, and has stayed slow this year. Tenants leased 815,000 square feet of office space in metropolitan Baltimore in the first half of the year, according to a study by broker-developer Manekin, slightly below last year's pace. That pace is well below where the market stood in 1988, when companies leased nearly 2.9 million square feet of space.
The region's vacancy rate at midyear was 14.7 percent, the Manekin study said. A study by competing broker W.C. Pinkard & Co. puts the regional vacancy rate at 16.4 percent. Manekin put the vacancy rate at 13.5 percent at the end of 1988.
But the amount of space under construction in the region has fallen 51 percent during the first half of this year, according to a Pinkard study. That leaves the rate of vacant space plus space under construction at 19.7 percent, below the 21 percent rate at the end of 1988 -- and very little more office space is expected to begin construction soon.
"It's all connected to the lending market," said Sharon Caplan, manager of Manekin's Baltimore County commercial brokerage
office in Lutherville. "They're not lending anybody anything unless the building is substantially occupied."
Nowhere around Baltimore is that dilemma clearer than in the hotly competitive downtown Class A market. More than 4.2 million square feet of office space are proposed for downtown, which only has 6.7 million square feet of Class A space now. Brokers say that the customers for that scale of development aren't there right now and that buildings won't get financing until the customers commit to leases. That means the bulldozers stay in the garage.
"You don't hear much talk about the Lazard building anymore, or about the Trammell Crow building," said Milton H. Miller Jr. to a broker at Smithy Braedon Co. in Baltimore. Trammell Crow Co. Inc. of Dallas hopes to construct Baltimore's tallest building at 45 stories and 750,000 square feet, and a partnership led by Lazard Realty of New York has proposed a 600,000-square-foot building on the Pratt Street site of the old News American building.
Mr. Chriss noted that the Trammell Crow and Lazard projects, like several other proposed buildings, would be much larger than what has been built in the city before.
"The generic Baltimore office building is 300,000 or 350,000 square feet," he said. "Some of these are double that."
The two downtown office towers that are in the works each have tenants that signed up to lease a major chunk of the building and have become equity partners in the deal as well. The 26-story addition to the T. Rowe Price Associates-International Business Machines Corp. building on Pratt Street is expected to open late next year, with T. Rowe Price and IBM as major tenants.
The next building to open, in 1992, will be the 450,000-square foot Commerce Place project at South and Redwood streets, where the architecture firm RTKL Associates has signed on as lead tenant and part-owner as well as designing the building.
With little new construction coming, the market for Class A space is likely to get tighter, said J. Joseph Casey, president of Casey & Associates in Baltimore. That could mean that the rent )) incentives and other costly marketing tricks developers have used to fill space could become harder to find by next year, he said.