One on One is a weekly feature offering excerpts of The Evening Sun with newsworthy business leaders. Leonard Harlan, chairman of Harlan Co. Inc., of New York, is developer of the 30-story Commerce Place building under construction at Baltimore and South Streets.
Q.Commerce Place is such a large project. Are there other projects in the country that you're working on?
A. Right now this is the only project that we're focused on. Other parts of the country really don't lend themselves to development right now because of the general recession.
Q. What makes Baltimore different than other cities?
A. Well, Baltimore, for one thing, has a very steady economy. Its vacancy rate, when you take only Class A space, is a shade under 10 percent, which is a low vacancy rate. But more important, this is a building which will be the only new construction available [in its class] for the next three years.
Q. You talk a lot about the doubts that other people have expressed about the project. Why are you so confident that this project will be successful?
A. Well it's really a function of the level of reception that we've received. We have a marketing center and just in the last two months when we've begun to present the building to people, even those who we consider to be a bit far out -- in other words, not that likely a prospect -- we've been amazed at the reception and particularly the folks who have asked us to submit a proposal to them -- people that we thought were not that likely a candidate.
So at this point, we've got a very substantial interest in tenant prospects.
Q. How much of your anticipated success is a by-product of having international investors, having Kajima [Development Corp., a division of Japan's largest construction company] as a partner?
A. We set the tone for this whole project at the very beginning. And we were fortunate enough to find a partner who subscribed to the same set of beliefs that we did. So it was really started with us and then was embellished by the Kajima people.
Q. Could you have done it in this market, could you have gotten the financing with an American construction company as your partner?
A. It certainly helped having our Japanese partner because of their well-known financial capacity, and in fact our lender is a Japanese bank.
Q. There are a lot of conflicting opinions out there about how long commercial real estate will be in a slump. Some analysts have suggested that it's going to be as long as 13 years. Coldwell Banker recently said they expect the slump to end by midyear. What do you think?
A. Well, I think the slump in commercial real estate is really a function of the local economies because real estate and vacancies are a function of supply and demand. The supply is being cut off because of the difficulty in getting financing. That's why we're confident in saying that we're the last building to be built for quite a few years.
Now, with supply being cut off, and the economy picking up, the economy will drive more demand and so we'll see the vacancy rate in downtown Baltimore start to shrink, particularly in the class A space where it could shrink rather substantially, rather quickly. The class B situation in Baltimore is a whole other story. There there's a huge, overwhelming amount of supply and that will stay weak for some period of time.
Q. Even if you are successful, many other developers have not been successful in this market. There are a lot of people who believe that with the commercial real estate slump, many larger banks will be brought down, in effect sending the economy into another tailspin. Do you see that happening at all?
A. Well, it has already happened to some degree with the banks taking back properties throughout the country. We'll see more of that, but I don't see that it will be any worse than what we've experienced over the last six or eight months.
Q. You don't foresee additional large bank failures?
A. No, not any future ones.
Q. Why was Baltimore affected by the softening in the commercial real estate market?
A. Well, what happened was that we had building that was anticipating growth in the community, and basically the economic growth in Baltimore flattened over the last 12 to 24 months, and so you didn't have the optimistic expansion plans of entities that you had prior to that.
Q. And when is the slump going to end?
A. Well, in Baltimore, and we really have to talk about downtown Baltimore, in the class A space, I see the slump basically ending over the next 12 months. Now that's in class A space. Class B we'll probably have five years to go.
Q. Were you ever concerned that the real estate market would be so soft that even Commerce Place would fail?
A. Well, I would say a year ago before we were well under way and began our marketing, we had to have questions in our own mind. Any sensitive developer would always do that in an environment like this. But at this point, no. Just by virtue of the reception that we've received.