Downtown properties back in vogue Strong economy creates climate for skyscraper mania

'Lot of capital flowing in'

Sellers seeing prices that are reminiscent of the late 1980s

Commercial real estate

October 20, 1997|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

From Wall Street to Pratt Street, commercial real estate is taking on the air of a Parker Brothers board game.

Thanks to abundant capital, economic forecasts that project continued white-collar job growth and an investment system that rewards companies unafraid to make huge deals, downtown office buildings are in vogue for the first time in nearly a decade.

And the interest -- especially among high-roller, publicly held real estate investment trusts and government pension funds -- shows few signs of waning, even as some perplexed observers raise eyebrows over escalating prices and make jokes about Monopoly money.

That's because the very survival of both REITs and pension fund advisers often is contingent upon generating returns, which in turn give them more money to do more deals.

"Wall Street loves growth, and REITs -- in order to survive -- have to grow," said Robert A. Frank, director of research at Legg Mason Wood Walker Inc. "That's what's driving prices up nationwide, the public companies' access to capital and the need and desire to grow."

"There's a sense among investors that real estate markets are in good shape, so there's a lot of capital flowing in right now," said Sam Hillers, a BT Alex. Brown Inc. real estate analyst. "But the capital markets really are what's dominating trades right now, and sellers are seeing prices they haven't seen in a decade."

Later this month, for instance, the skyscraper mania emanating from Wall Street will infect Baltimore, when a Boston real estate company flush with cash from a June initial stock offering pays $137 million for a 28-story tower at 100 E. Pratt St.

But while analysts marvel at the anticipated record sale of a downtown Baltimore office property by IBM Corp. -- and most contend the city's office market can sustain sales of more than $200 per square foot -- few expect the phenomenon to end locally anytime soon.

Of course, market dynamics are also driving deals. Even in Baltimore, where central business district offices were among the last in the nation to recover from depression-like conditions earlier this decade, rising rental rates and shrinking vacancies, combined with a dearth of new construction, have combined to make top-tier projects valuable.

For Class A buildings near the Inner Harbor in particular, vacancy rates in the past year have plummeted to around 5 percent, a level that ordinarily supports new construction. Among the many downtown property owners anxious to take advantage of the trend is the Yarmouth Group Inc., a New York pension fund consultant that bought the 26-story 250 W. Pratt St. at the end of 1994 for $32 million.

With the wave of investor interest, Yarmouth has offered the 357,112-square-foot, blue and gray building overlooking Oriole Park at Camden Yards for $55 million. Although the property is not yet locked up, the government of Singapore is considered the front-runner to win the bidding war for the project early next year, sources said.

"The attitude of a lot of out-of-town investors who came in when the market was struggling and improved properties is that they wanted to buy low and sell high," said Timothy J. Cahill, senior vice president and managing officer of the local office of CB Commercial Real Estate Group Inc., which Yarmouth has hired to sell 250 W. Pratt St.

"Yarmouth was no different. They came in, brought some expertise, brought the building to 100 percent occupancy and have decided now is the best time to sell. Plain and simple."

Analysts predict the trend could also extend to other downtown trophy buildings, including Signet Tower, the Crestar Bank Building at 120 E. Baltimore St. and the 35-story Legg Mason Tower, formerly USF&G Corp.'s headquarters.

The high prices may also lead to new, largely speculative construction in Baltimore for the first time this decade, as real estate developers are able to justify the costs.

But with the exaggerated prices -- 250 W. Pratt's offering price is nearly the same amount required to construct the building in 1987 -- some analysts worry that developers might build new, and perhaps unnecessary, space, factors that contributed to the collapse of various office markets -- including Baltimore's -- seven years ago.

"High prices eventually lead to increased supply, and that's a potential problem," Hillers said.

Pub Date: 10/20/97

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