O'Connell refocuses firm, cuts vacancies from 40% to 12%


December 01, 1992|By Timothy J. Mullaney | Timothy J. Mullaney,Constellation Real EstateStaff Writer

You probably wouldn't have wanted to be Dick O'Connell this time last year. He had just become president of Constellation Real Estate Inc., and more than 40 percent of the company's office space and retail stores were empty.

Its biggest building, a 12-story tower near Fort Meade called One National Business Park, had been empty for more than a year. Its biggest residential deal, the 4,200-unit planned community at Piney Orchard in Odenton, opened in May 1991, with the housing market in a devastating recession.

But if you were J. Richard O'Connell today, you would be enjoying the first titters of the last laugh. Constellation has turned things around, mostly with a pair of big deals; today its properties are 88 percent full. It's been some kind of a year.

"It's nice to be able to say after the last two years that there is light at the end of the tunnel for the [Baltimore-Washington] corridor economy," Mr. O'Connell said. "At least in the corridor, where we play hardest, it has reached bottom and is beginning to pick up."

Constellation didn't employ any flashes of genius to pull itself out of its downturn -- Mr. O'Connell said the company simply shifted its focus from developing new buildings to leasing the space it already had. Neither were the mistakes Constellation made to get itself into last year's mess unique.

Back in 1989, Constellation, a subsidiary of Baltimore Gas and Electric Co. then called KMS Group Inc., didn't see the impending end of the housing boom. But then, neither did NVR L.P., the parent of Ryan Homes, which was the biggest homebuilder in the nation at the time and now is in Chapter 11.

Neither did Constellation executives sniff out the impending collapse of the Soviet Union, which would wreak havoc on the defense contractors that anchor the Interstate 95 corridor commercial real estate market. But then, neither did the CIA.

"National Business Park and Piney Orchard were developed with regard to the demographics that might have developed with the NSA [National Security Agency] and NASA," Mr. O'Connell said. Both agencies have major operations within a 20-minute drive. "When those projects were on the drawing board in the mid-1980s the prognosis for that was very strong. It changed."

Understandable or not, missteps like those left partnerships led by Constellation with huge commitments at the worst possible time. One National Business Park, in Annapolis Junction, sat empty for two years. The 10-story Constellation Centre in Oxon Hill was nearly empty for eight months before finding a tenant for about 40 percent of the building in early 1990. Then the building didn't land another major tenant until last month.

Piney Orchard did better than most housing developments when it opened. One reason was that it opened after restrictions on new construction in the Odenton area were lifted, letting Piney Orchard take advantage of pent-up demand. But for the offices, the key to the turnaround was this summer.

"The gulf crisis probably helped us, rather than hurt us, in [National Business Park]," Mr. O'Connell said. "When the Russians surrendered, that was the biggest event in terms of our business. . . . It took a while for agencies like NASA and NSA to figure out what their missions would be."

The military's mission still isn't clear enough to make defense contractors bold enough to lease office space en masse. So Constellation made the same concession to the recession that other developers have. At buildings like Constellation Centre and National Business Park, space the company once thought would be leased to corporations doing business with the government has been leased directly to the government instead.

The Internal Revenue Service gave Constellation Centre a big lift by leasing 85,253 square feet of the building in late October, boosting occupancy to 98 percent from just over 50 percent.

But the granddaddy deal of them all came this summer when the U.S. Army Corps of Engineers went shopping for space on behalf of the NSA -- and leased all 12 floors, all 240,000 square feet, of the One National Business Park tower.

Taking government tenants, which many developers were reluctant to do before the recession, was the big reason Constellation has pulled itself out of the soup. But Gary Dewey, senior vice president of CB Commercial Real Estate Group Inc., said Constellation did some other things right as well.

"They did build some excellent products," Mr. Dewey said. He said Constellation had trouble in part because it was among the first office developers to build around Oxon Hill and Fort Meade, but said those were good long-term decisions.

"They were major intersections. It makes sense to be at Route 32 and 295," he said.

Today 84 percent of Constellation's offices are occupied, as is 95 percent of its retail space, mostly in community shopping centers like Valley Centre in Owings Mills and Cranberry Square in Westminster.

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