Downtown owner gives up 14 sites Kenilworth Equities is hurt by low demand for old office buildings

'Looking for turnaround'

Goldman, Sachs Co. affiliate gets properties bought in '80s boom

November 12, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Downtown's largest owner of older office buildings, unable to stave off a crumbling market, has relinquished ownership of 14 buildings to an affiliate of investment firm Goldman, Sachs & Co.

Kenilworth Equities Ltd.'s decision to turn over control of the buildings to the New York brokerage house marks the latest evidence of the continued deterioration of the so-called Class B office market downtown, which for years has been struggling against an abundance of vacant space and competition from newer properties. Class B buildings are so named because of their age and because they lack on-site parking and modern amenities.

"The overbuilding of the market [in the late-1980s] affected the occupancy of properties in Baltimore, just like it did every other city in America," said Robert E. Morrow, Kenilworth's president. "Sometimes you don't make what you anticipate, and that's a part of business. But the transaction was done on a very friendly basis, and we continue to be committed to the area."

Kenilworth, a New York investment firm, spent more than $15 million to purchase the properties -- including a 10-story structure at 16 S. Calvert St., an 11-story project at 301 N. Charles St. and two buildings at the Water Street mews -- in the mid-1980s, when a heated economy fueled commercial rental rate increases and real estate buying downtown.

The company will continue to own numerous downtown office projects, however. The 17-story Court Square Building at 200 E. Lexington St., the Classic Building at 401 W. Redwood St. and Marlboro Square, a seven-story project at 410 W. Lombard St., will be unaffected by the Goldman, Sachs deal, Morrow said.

For Goldman, Sachs affiliate WHCB Real Estate Ltd. Partnership, the Kenilworth transaction comes at a time when nearly 40 percent of downtown Class B office buildings are vacant. That figure is 10 percentage points higher than the previous record set four years ago. Kenilworth's properties have an average occupancy of between 50 percent and 65 percent.

By comparison, vacancy rate for top-tier Class A buildings ringing the Inner Harbor is less than 10 percent, having topped out at roughly 20 percent in 1992.

But Goldman, Sachs will be better positioned than Kenilworth to compete because it won't have to contend with mortgage payments that add several dollars to rent rates, analysts said.

The Class B office market's troubles can be traced back to 1990, when an oversupply of office space combined with an economy racked by bank consolidation and corporate downsizing caused the local commercial real estate market to crash, sending values of older properties into a tailspin.

Since then, depressed rental rates have forced many landlords to choose between keeping pace with their mortgage payments and maintaining their properties, and Kenilworth is no exception. Owners of most Class B properties also have struggled to meet Americans With Disabilities Act requirements that have forced them to pay for structural changes.

Several local real estate analysts, however, said the Kenilworth portfolio was maintained better than many competing properties.

The 14 Kenilworth buildings now owned by Goldman, Sachs contain 340,000 square feet of office space, roughly equivalent in size to the 35-story NationsBank Building at 10 Light St. All of the properties were constructed before the Great Depression, and lack modern amenities desired by tenants, such as parking and large floor space.

Goldman, Sachs became involved with the properties a year ago, when Chemical Banking Corp. of New York transferred several Kenilworth mortgages to WHCB Real Estate, city records show.

In the past week, the investment house has retained the Archon Group of Texas, another affiliate, and Manekin Corp. to lease and manage the 14 buildings.

"While the Class B market has slumped, a lot of these buildings are well-positioned and Kenilworth properties have always competed well," said Andrew Chriss, a Manekin Corp. senior vice president.

Goldman, Sachs officials could not be reached for comment, and an Archon Group executive refused to provide details about the Kenilworth deal, or say if any significant improvements would be undertaken at the properties.

"They may be looking for a turnaround, albeit a protracted one, where they can reposition the properties and sell them at a profit," said J. Joseph Casey, chief executive of Casey & Associates Inc., a Baltimore commercial real estate firm.

Pub Date: 11/12/96

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