Commercial realty: better, but not good

January 02, 1994|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

For someone with good news to share, Jeff Samet sure is glum. And therein lies the lesson of the real estate industry's 1993 -- and 1994.

The commercial real estate market found the bottom in the past year, as metropolitan Baltimore's office vacancy rate fell to 16.9 percent from 1992's 21.4 percent, according to W.C. Pinkard & Co., where Mr. Samet is vice president.

But anything like a strong recovery that brings glad tidings of new investment and jobs is still elusive.

Last year "was an improvement certainly over the past two years," said Mr. Samet, a vice president at W.C. Pinkard & Co. "But it was only one step toward a longer-term recovery."

There are many reasons real estate people remain gloomy about the commercial market. It wasn't just the high vacancy rates that pushed down the value of office buildings, hotels and other commercial projects the last three years -- it also was the low rents landlords had to accept to get or keep tenants in the dog-eat-dog days of 1991 and 1992.

Those leases still have years to run, and even many 1993 leases were for less-than-stellar values. The average office rent in the region has moved all the way back to 1985 levels.

"We were even doing high-teen [annual rent per square foot] deals in expansion space at 100 E. Pratt Street," said Gary G. Dewey, managing officer of the Baltimore office of CB Commercial Real Estate Services Inc. "That's the best location in town and the second-newest building."

Late 1980s leases for the building approached $30 a square foot. But expansion space is cheaper because an existing tenant has the right to take it over in the future.

Another problem for some landlords is what Mr. Dewey called the "flight to quality," in which tenants have fled older, Class B office buildings because newer Class A buildings are cutting their rents.

The downtown Class B vacancy rate reached as high as 25 percent at year-end, according to some brokerage firms.

"Leonard Harlan has a high quality building, and he's making deals at B-plus rates," Mr. Dewey said. Mr. Harlan is the developer of Commerce Place, the city's newest Class A building, which is about two-thirds empty.

The low rents, even more than the still-high vacancy rates, are what threaten to keep any major development from occurring anywhere in metropolitan Baltimore for several years.

The only exceptions are likely to be custom-built buildings for major users like the U.S. Health Care Financing Administration, which last year began development of a new Woodlawn headquarters to open in 1995. Today's rents on multi-tenant buildings simply aren't high enough to support today's construction costs, Mr. Samet said.

"We won't be there before the 1997 to 2000 time period," Mr. Samet said.

The relative bright spot in commercial real estate is in retail space, where landlords of malls and large shopping centers, including publicly traded Maryland companies like The Rouse Co. of Columbia and Bethesda-based Federal Realty Investment Trust, saw their fortunes (and their stock prices) rise smartly in 1993.

"The retail sector, of all parts of real estate, has been the most resilient," said Mathias J. DeVito, chairman and chief executive of Rouse. He said Rouse's 78 shopping malls, where vacancy is only 5 percent, posted sales gains of about 3.5 percent in 1993 and hopes for about the same gains this year.

But even in retail, developers are still shying away from new construction. Both Rouse and Federal have concentrated their growth plans on finding existing shopping centers they can buy and refurbish instead.

"By and large the markets are well-served," Mr. DeVito said. "When you look at Baltimore, I don't think there's a [geographic] sector that's not served" by a regional mall.

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