Commercial real estate recovers - but slowly

SUNDAY OUTLOOK

June 19, 1994|By Timothy J. Mullaney

The June 7 auction of 24 commercial real estate properties by Manekin Corp. of Columbia and Michael Fox Auctioneers of Pikesville marked a turning point for the commercial real estate market. More than half the properties attracted at least some bidding interest -- which was slightly surprising because most of the properties in the auction had been taken back by lenders and because many of them were no more than undeveloped land.

The successes and failures of the auction -- summed up in the headline, "Buildings Hot, Land Not" -- begged the questions of how far back the real estate industry has bounced from a devastating recession, and what the real estate recovery is likely to look like. What did the auction tell observers about the state of the industry?

Richard Alter

President, Manekin Corp.

To the extent there's a recovery, it will first take care of excess capacity already in the system. The land buyers are either going to be users who need a building immediately, but for whatever reason the marketplace doesn't offer any immediate alternative, or the buyers will be the more speculative end of the investor group, hoping to catch the recovery when the supply/demand equation will make land a more desirable commodity.

When it comes to the recovery for buildings, it's is a very tough question to answer, only because of the differences between the subdivisions [different counties and Baltimore City] are substantial. Manekin is in nine political subdivisions -- the answers vary dramatically based on the subdivision. Towson and the Northeast Corridor [around White Marsh] are probably coming back faster than downtown Baltimore. Frederick, which has a smaller base, will come back faster than Howard County.

M. Ronald Lipman

Partner, Lipman, Frizzell & Mitchell

I was interested in both the results and the non-results [of the auction], and they both tell you something. The first thing you have to do is classify the property types and their geography, because the types of properties that were offered were so widely varying that you can't comment on such a wide variety of properties with any kind of accuracy.

The first division is between land and buildings. Land does not have a ready market, because the standing product [buildings] that has already used that raw ingredient can't find a market. Why would anyone want the land? Interestingly, though, we've begun to see some speculation in land for office building sites. The speculators are paying 30 or 35 cents on the 1988 dollar, which was almost a fabrication. Then we have land in downtown Baltimore. I found it fascinating that someone would bid $2.2 million for the Tower Building site. No one is buying that for an office building site. They're buying an income stream [from the parking lot on the property at Baltimore Street and Guilford Avenue].

I think there is an evolution in thinking. It's one that I have seen happen before, though in my 30 years of experience I've never seen the depths to which the market got this time. Memories are short, and when the market starts coming back investment real estate tends to have a following, and the following tends to some extent to ignore the past devastation. The buyers are optimistic again.

Bottom line, I think the market is coming back. It may even surprise us how strong it gets in a relatively short period of time. Some of the alternatives for investment dollars have not proven themselves of late.

Thomas M. Scott

Executive vice president, Real Estate Group, Bank of Baltimore

It showed that if someone had a real demand, the bidding was there. For our office building out in Towson that used to have a Municipal Savings and Loan in there, several users had a need for the building so it brought a price that wasn't terribly far from its appraisal.

It showed there's not a lot of demand for [multi-tenant] suburban office buildings. And I don't think any of the land sold. If someone has an immediate need for land, they'll pay a decent price for it. Otherwise, they're bottom fishers.

If a bank has a high percentage of its assets in construction, its stock would be punished in the marketplace, because of recent past history, just the perceived risk. We're doing relationship lending. If we're going to have our commercial loan officers bring a relationship into the bank, we'll make the necessary real estate loans to support that relationship. But it would have to be on owner-occupied property. The other thing is that we've seen properties severely devalued because of vacancy. Now you're asking for so much preleasing that it's highly unusual that anyone would meet it.

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