U.S. proves vital to office market

September 13, 1992|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

Just two years ago, developers were scrambling to line up banks and other big companies as anchor tenants for beautiful new office buildings. Little did they know that the zenith of the early 1990s market would be established by government bureaucracies such as Medicare.

Hurt by the recession, companies aren't spending money on new offices as they did five, or even three, years ago.

That has left the federal government as the biggest player in Baltimore's office market this year. And with construction of speculative private office space virtually halted, the government could be the biggest force in building for several years.

"The government is probably not in the market [nationally] any more than it would be otherwise," said John Thompson, a spokesman for Philadelphia-based Region III of the U.S. General Services Administration, which handles real estate affairs for most federal agencies. "In a depressed market, it's more evident because it's the only game in town."

That's an understatement. Consider:

* At Baltimore-based RTKL Associates Inc., Maryland's biggest architecture firm and one of the biggest in the nation, billings for federal projects rose to 15 percent of total revenue last year, from 10 percent in 1990, and are expected to rise more this year.

Government contracts probably provide 30 to 40 percent of the revenue from RTKL's local work, said Ted Niederman, senior vice president. "I added up all the acronyms of agencies we're working on. It's 45 letters."

* At One National Business Park, near Fort Meade in Anne Arundel County, a 240,000-square-foot lease for the National Security Agency filled a 12-story building that had been empty since opening in 1990. That lease was nearly three times the size of the biggest private-sector lease signed this year, the recent deal by Maryland National Mortgage Corp. to rent 83,500 square feet at the Candler Building in downtown Baltimore.

* At St. Paul Plaza, a tower at 200 St. Paul Place, new leases this year from the Drug Enforcement Administration and the Customs Service brought the building to virtually 100 percent occupancy. They also will provide crucial revenue that developer David Kornblatt needs to bring both the building and his company out of bankruptcy court protection.

Government projects will dominate office construction in the Baltimore area for several years.

The biggest project: the 875,000-square-foot, $123 million headquarters for the U.S. Health Care Financing Administration -- Medicare's parent agency -- planned in Woodlawn. Then there's the 250,000-square foot, $37 million City Crescent tower being built downtown for the U.S. Army Corps of Engineers and other agencies.

By contrast, no developer plans to move ahead with any private-sector office building in Baltimore once work on Commerce Place wraps up later this year. And only one relatively small speculative building is under construction in the suburbs, said Jeff Samet, a vice president of W.C. Pinkard & Co. in Baltimore.

The government also is busily building in Washington's Maryland suburbs. Some projects under construction or being planned: an 885,000-square-foot building for the Internal Revenue Service in New Carrollton, a 125,000-square-foot computer center for the Census Bu reau in Bowie and a 1.6-million-square foot National Archives storage facility in College Park.

With developers and construction companies begging for business, the federal government has been able to wring some benefits.

"Better quality space has been offered to us at competitive rates than before the downturn," Mr. Thompson said. And grabbing more posh space is consistent with GSA's policy of upgrading federal workplaces from the good-enough-for-government-work days of the past, he said.

Mr. Thompson added that City Crescent is giving four months' worth of free rent at the beginning of a lease of up to 15 years, and DEA got six months' free rent on its 10-year lease at St. Paul Plaza, Mr. Kornblatt said.

Still, free rent has become common during the recession, and some private companies at other buildings have had longer free rides. GSA -- unlike some companies -- has not demanded rent reductions from landlords already leasing space to government agencies, Mr. Thompson said. And GSA is less aggressive in seeking concessions than private sector tenants are, Mr. Kornblatt said.

Agencies are looking for more space because government is still a growth industry.

Growth at the U.S. District Court and the Internal Revenue Service, for example, squeezed other agencies out of the Edward A. Garmatz Federal Courthouse and the George H. Fallon Federal Building downtown. And HCFA needed a new headquarters building because it has sprawled over nine buildings in Woodlawn.

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