Costs drove USF&G out of harbor

January 21, 1995|By David Conn | David Conn,Sun Staff Writer Sun staff writers Michael Ollove, John E. Woodruff and Brad Snyder contributed to this article.

For USF&G Corp., a company just starting to build momentum after several years of tough times, it was inevitable that the decision to move out of its 35-story Inner Harbor headquarters would boil down to dollars and cents.

The insurer occupies only two-thirds of the downtown tower, where the rent is more than twice the market rate. It owns a half-empty set of office buildings in Mount Washington. And after cutting its work force by half in recent years, USF&G is trying to rebuild its business during a period of extreme competition in the insurance industry.

"There is blood on the floor all over in this industry right now," Norman P. Blake Jr., USF&G's chairman and chief executive, said yesterday. "First and foremost, I wanted to build a survivor."

But the symbolism of Thursday's announcement that the company would move to Mount Washington was powerful. Its timing, coming just after several other pieces of bad news for the city's business district, has forced some companies and urban boosters to examine a larger issue: What does downtown Baltimore have to offer businesses, and can it remain viable?

"Do we have to be downtown? Probably not," said Raymond A. Mason, chairman of investment bank and brokerage house Legg Mason Inc., which is housed at the Inner Harbor. "The major reason that you're down here is you're trying to be a good corporate citizen."

But information-based businesses such as USF&G no longer need to be downtown. And takeovers have robbed the city of several corporate headquarters. MNC Financial Inc. was bought by NationsBank Corp. in 1993 and much of its headquarters functions were moved out of town. Most recently, the new parent of the Bank of Baltimore said this week it will lay off 500 employees at the bank, many of them in Baltimore. The business losses were compounded earlier this month when the trustees of the NFL's Tampa Bay Buccaneers decided not to sell the team to either of two Baltimore bidders, dashing hopes for a new stadium downtown any time soon.

The message behind USF&G's move, though unintended, disappointed some who helped orchestrate the Inner Harbor revival in the late 1960s. "I'm sorry to see this happen, because USF&G has been a prominent part of the Inner Harbor redevelopment," said Walter Sondheim, one of the city's urban development patriarchs. "The hard thing is to have that many people's jobs moved away from the center of the city."

Others saw the decision as a warning. "It is fundamentally and vitally important for the city of Baltimore to come to understand what is behind these departures," said Michael A. Conte, director of regional economic studies at the University of Baltimore.

USF&G recognized the impact its move would have on the city's core. But the final decision was primarily an economic one, Mr. Blake said. "I recognize the long-standing tradition and commitment USF&G has had to downtown Baltimore," Mr. Blake said. "I was sensitive to trying to be a good corporate citizen."

In fact, the company will remain in Baltimore -- the Mount %J Washington Center is half in the city -- and will continue its philanthropic commitments, Mr. Blake added. But ultimately, he said, "What's best for Baltimore is having the very best, successful insurance company, and keeping it in Baltimore, but not necessarily downtown."

The company has only recently returned to profitability after several years of enormous losses. It cut costs to the bone, including layoffs of more than 5,000 employees, but still finds its overhead expenses above industry averages, Mr. Blake said.

USF&G's costs last year of $14,100 per employee were more than twice the industry average, Mr. Blake said. The move to Mount Washington, which will begin in five or six months, will lower that cost to $5,300, he said.

USF&G said the move would cost it $190 million in the fourth quarter, which represents the rent at the tower until 2009, when the lease runs out. But the company expects to recoup $70 million over that time by subleasing its vacated two-thirds of the 530,000-square-foot building. Also, the write-off will be offset by a boost to profits of $210 million, representing part of tax benefits that remain from money-losing years.

While painful, USF&G's decision will not necessarily result in long-term damage to the fate of either the city or the tower, downtown executives and real estate analysts said. "That building is very marketable," said Walter D. Pinkard Jr., chief executive of Colliers Pinkard, a property management firm that has contracts for the 21-year-old tower and Mount Washington Center.

The downtown office market has performed miserably of late. But, "there is a difference between the best seven or eight Class A buildings in Baltimore and the rest of the market, and the USF&G tower certainly is one of the seven or eight best."

The other corporate departures will be more than compensated for by the coming of the Christopher Columbus Center and the revival of retail business, said Dr. Lenneal Henderson, senior fellow in the William Donald Schaefer Center for Public Policy at the University of Baltimore.

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