Office construction hits brick wall BUILDING SLUMP

November 26, 1990|By Liz Atwood | Liz Atwood,Evening Sun Staff

An uncertain economy, a shortage of credit and a glut of office space in some areas will cause speculative construction of offices to grind to a virtual halt in the Baltimore area next year, industry experts say.

In Howard County and the Baltimore-Washington Parkway area, office vacancies are hovering at an unhealthy 25 percent, according to W.C. Pinkard & Co., a commercial real estate firm. But even in Hunt Valley and Owings Mills, where office vacancy rates are a relatively low 14 percent, there will be little new construction next year.

"We could go for several years without building any new speculative office buildings," said Robert T. Kleinpaste, president of Legg Mason Realty Research.

This year alone 500,000 square feet of office space along the Baltimore-Washington Parkway entered the market, increasing the vacancy rate of that area from 14 percent to 26 percent, Pinkard said.

The projects that are substantially empty include:

* The KMS Group's 350-acre National Business Park at Md. 32 and the Baltimore-Washington Parkway. Three buildings, totaling 400,000-square-foot been completed so far, but less than 20,000 square feet has been leased.

* BTR Realty Inc.'s Gateway International Project in Linthicum. The first phase of the project was leased on schedule, but a second building, completed this summer and containing 125,000 square feet, stands empty.

* 6751 Columbia Gateway, a 93,000 square-foot office at I-95 and Md. 175. The VI Limited Partnership project was completed in July and stands vacant.

"The market is soft out here," said F. Patrick Hughes, vice president of BTR Realty.

Part of the reason for the oversupply of offices is the time period involved in development, said J. Richard Uhlig, senior vice president of the KMS Group, a subsidiary of Baltimore Gas & Electric Co.'s Constellation Holdings. Planning and design of an office building usually begins three years before completion, making it difficult to predict what the market will be like when the project is ready to lease.

"It's an imperfect crystal ball," Uhlig said. "What we have is a less than ideal real estate market. We're not pleased with where we are, but these things happen."

A number of factors are being blamed for the office development slump. In some areas there simply is too much space on the market. In addition, potential tenants, shaken by gloomy economic forecasts and the Middle East Crisis, are staying put in their present locations and are reluctant to expand into more space.

In addition, lenders, spooked by the savings and loan crisis and a clampdown by federal regulators, have dramatically cut back on the financing of speculative office products.

Fred Glassberg, president of Crystal Hill Investments, said that because he cannot get money for speculative office building, his company is only a "shadow of what we used to be."

Two years ago the Columbia-based developer had 26 employees in nine states. Now he has a staff of 11 in Columbia.

The economic slump has affected his business in other ways, too. Last year he built a 38,000-square-foot office building that was to be the headquarters for a Virginia-based savings and loan. But the thrift went out of business and Crystal Hill, along with its lender, Maryland National Bank, were stuck with the building.

W.C. Pinkard & Co. found a new investor for the project and sold it at a "reasonable discount," said Jamie Smith, vice president of W.C. Pinkard.

Office developers are responding to the slow market by delaying the construction of new projects and offering incentives to attract tenants to the buildings already complete.

In the first nine months of the year, 12 building permits were issued for new office projects in Anne Arundel County compared with 17 during the same period last year. In Howard County, building permits for office construction declined from 19 in the first nine months of 1989 to 10 during the year-ago period, according to the Baltimore Regional Council of Governments.

In Baltimore County, however, the number of permits issued increased from 14 to 19, the council said.

Hughes said BTR will not proceed with the third phase of its Gateway International project until it has substantially leased the building it constructed in phase two. The company also has no plans to start other office projects next year, he said.

"We're greatly curtailing what we're doing," he said.

To lease what already has been built, Hughes his company will aggressively pursue every every possible lease deal. The problem, however, he said, is "a lot of deals just aren't coming into the market."

Buyers and tenants can get good deals because of the oversupply, said Joseph Cronyn, senior associate at Legg Mason Realty Group Inc. In some cases, rents at office buildings are being discounted 40 percent, he said.

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