Commercial market entering 'recovery mode'

January 18, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Fueled by a stable local economy and anticipated job growth, Baltimore's commercial real estate market will continue to surge ahead this year, local analysts predict.

Unlike the past years of this decade, though, the coming 12 months will be ones in which developers will begin new office projects, in reaction to a dearth of new construction, shrinking vacancies and increasing rent rates throughout the metropolitan area.

"We're in a recovery mode in all sectors," said Anthony W. Deering, chairman and chief executive of the Rouse Co., the Columbia-based real estate concern that controls the 28-story Legg Mason Tower and Harborplace downtown and a collection of office buildings and retail malls in the suburbs. "Locally, I expect 1998 to be a very strong year. But there's a ceiling on how far it can go. As prices reach replacement costs for new buildings, developers will proceed with new product that could impact existing stock."

Baltimore's office market begins the year with an overall 12 percent vacancy level, its lowest point in at least a decade.

Just as significantly, many of the new buildings -- from Columbia to Owings Mills to Annapolis -- will be constructed without significant tenants in place, a somewhat risky proposition that nonetheless highlights the confidence developers have in the market's strength.

The planned speculative development isn't the only change. Baltimore's commercial real estate market also will benefit from Wall Street's seemingly endless bull run and a nationwide industry evolution that is replacing local, entrepreneurial developers with well-capitalized real estate investment trusts.

Throughout 1998, local analysts anticipate that REITs will emerge as the primary buyer of local office and industrial buildings, following on several key purchases in the past year, such as Boston Properties Inc.'s acquisition of the 28-story 100 E. Pratt St.

"REITs will have a big impact in the coming year," said Mike Anikeeff, director of the Johns Hopkins University's Allan L. Berman Real Estate Institute. "Baltimore has always been viewed as a tertiary market, but I think 100 E. Pratt St. is an indicator that investors are beginning to discover the city."

REITs also likely will pay top dollar for the properties they covet: Boston Properties, for instance, paid $137 million for its 630,000-square-foot skyscraper, a record price for a single downtown office project.

And the publicly financed REITs will make their presence felt through new development, too. As part of a plan to acquire Riparius Development Corp. of Timonium, for instance, a North Carolina-based trust intends to build a new 125,000-square-foot structure in Owings Mills that will kick off a long-planned 180-acre business park, in response to perceived demand for new space.

"It's the high-growth companies like Ciena Corp., T. Rowe Price Associates Inc., Greenspring Mental Health, J.P. Foodservice and MBNA Corp. that are driving demand and the growth in commercial real estate," said Jeffrey B. Samet, a vice president and principal at Colliers Pinkard, a Baltimore real estate firm.

"We're finding the amount of job growth in the metropolitan area is concentrated in a limited number of sectors," he added. "And we see that continuing."

In all, Maryland's employment is expected to grow by 2.2 percent in 1998, an increase that is certain to benefit commercial real estate, since the industry's fate is so closely tied to that of the overall economy.

While the suburbs are expected to be the beneficiary of most of the new projects, downtown is unlikely to see multiple cranes gracing its skyline anytime soon, thanks in part to the bevy of older, uninhabited and often obsolete buildings that distort vacancy numbers.

The only two major new office buildings being contemplated downtown are at 500 E. Pratt St., on a parking lot that is part of the Community College of Baltimore's downtown campus, and at 1 Light St., where a decade ago the Trammell Crow Co. proposed building a 45-story high-rise.

The plans being formulated by J.J. Clarke Enterprises Inc. and Capital Guidance Corp. for the Southern Hotel site on Light Street call for two smaller structures, one of which would include a limited-service hotel.

At the community college site, a Connecticut development firm has proposed a 12-story office tower that would likely become the new headquarters for law firm Piper & Marbury LLC, whose lease at 36 S. Charles St. expires early in 2001.

Not to be overshadowed, the area's industrial market is expected to continue humming in the coming year, though not with the intensity -- or the speculative development -- of 1997.

"I expect speculative construction to be in 1998 half of what it was in 1997," said Matthew J. Ryan Jr., president of Ryan Commercial Real Estate Services LLC, a Columbia real estate firm.

Ryan predicts the distribution sector will add 850,000 square feet of space in the Baltimore-Washington corridor without tenants in place in 1998, including new buildings in the Marley Neck Industrial Park in Anne Arundel County.

Overall, more than two million square feet of new warehouse space is being added to the mix, including new buildings at the Marshfield Business Center in Baltimore County and the Lakeside Business Center in Harford County. Still, demand has thus far checked the area's vacancy rate at about 15 percent, with newer buildings faring better than older ones.

Ryan predicts the flurry of speculative space built beginning late in 1996 will be leased by next June.

Pub Date: 1/18/98

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