Angling for the Big One

ANTERO PIETILA

August 21, 1993|By ANTERO PIETILA

This is a tale about bottom-fishing. Its conclusion: There arelots of fish waiting to be caught. Some big ones perhaps. But few fishermen.

We start near The Block, Baltimore's rundown red-light district. George Piendak is eyeballing nearby buildings and saying, ''If you look out here, everyone who owns a building has been over to us to talk about it.''

For years, during William Donald Schaefer's mayoralty, George Piendak was the city's finance director. More recently he has been one of the few bottom-fishers, amassing increasingly cheap downtown commercial real estate for the Baltimore International Culinary College.

Just this week, he closed on the historic Commerce Exchange Building, near the Customs House, and the 185-room Comfort Inn, the former YMCA at Franklin and Cathedral streets. ''I'm not an empire builder,'' Mr. Piendak protests.

Let the record show that largely during his tenure as chairman of that 21-year-old college's board, it has acquired a downtown real estate portfolio consisting of 23 buildings.

''We have to be very opportunistic about what's available,'' says Mr. Piendak, whose latest acquisitions for the college were financed through an $11.5 million state bond sale.

Yet apart from the state of Maryland itself, which has been acquiring cheap downtown office buildings in recent months, bottom-fishers are few. Many would-be anglers feel the downtown commercial real estate market has not bottomed out.

They may be right.

When Metropolitan Life Insurance Co. earlier this week took a calculated, multi-million dollar bath and reacquired the 22-story One Charles Center building from an overextended borrower, the $11.5 million transaction established a new low for prime office space: an amazing $36 per square foot.

But even that may only be a temporary bottom. Industry insiders generally expect MetLife to sell the tower for even less.

The One Charles Center example is significant for several reasons.

It could set a trend. Many bullet loans on downtown office buildings will come due soon. Unless they can be refinanced -- a big if because of plummeting appraisals -- other lenders also may end up taking back buildings -- and unloading them. ''The warning light is on for institutional and pension company loans,'' says J. Richard Latini of CB Commercial.

One Charles Center is also important because of its symbolism. The tower, a knockoff of the Seagram Building in Manhattan by Ludwig Mies van der Rohe, started Baltimore's urban renaissance.

When it was finished in 1962, it was the first major office building erected in the city since the 1920s.

That was such a watershed that offices completed after One Charles Center are classified as being ''A'' -- or premium -- space and those constructed earlier are known as ''B'' -- or second-tier -- space.

This neat but arbitrary categorization determined rents until the 27-story IBM building on Pratt Street was finished in 1991. In the middle of the recession, it added so much glut to the overbuilt office market that aggressive marketers suddenly began telling tenants they could lease ''A'' space at ''B'' prices.

''That really started the slide of rents,'' says Robert T. Cashman of CB Commercial.

On the heels of such discounting two other changes rocked the Baltimore market. Downsizing and restructuring transformed USF&G and Maryland National Bank from the largest commercial tenants in the city into its largest landlords.

The story isn't over yet, either. With Maryland National soon to be merged into Nationsbank, even more surplus space will flood the market. This will further swell downtown Baltimore's high vacancy rates, currently 18 percent for ''A'' space and up to 30 percent for ''B'' space.

''Maryland National is so big, they are all over the place,'' observes Mr. Cashman, who estimates that bank alone accounts for as much as 8 percent of all downtown office leases.

For many building owners, this is a difficult time. They are being forced to lower rents in order to keep their properties occupied, but they are not getting the cash flow to meet loan obligations. Foreclosures follow.

Meanwhile, tenants have seldom had it so good. They are being wooed aggressively and can renegotiate their existing rents down. Prime downtown office space, even with attendant high parking and security costs, is dirt cheap.

For bottom-fishers, there may be fish there. But many are bony.

Antero Pietila writes editorials for The Baltimore Sun.

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