Old offices yield new bucks Renaissance: Two real estate speculators have the touch for getting old office buildings to turn a profit.

August 23, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Mickey Miller and Ira Miller, two entrepreneurs in their 30s who run a real estate brokerage downtown, never intended to spark a renaissance.

But, unwittingly, that's what they did when they bought a nearly vacant five-story building at 31 Light St. just over two years ago, after guaranteeing a $571,000 loan.

Today, after investing $1.2 million to strip the 94-year-old building of an outdated aluminum foil-like skin and other work, it is fully occupied by Miller Corporate Real Estate Services LLC, Ikon Office Solutions, a CVS pharmacy and other tenants.

Just as important, the 30,000-square-foot building is serving as a beacon to other risk-takers that rehabilitating older, so-called Class B buildings is not only possible, but profitable.

"Our rationale was, it's in the central business district, close to the harbor, and if we put enough money into it in the right places, it would become a Class A project inside with a historic facade," said Ira Miller.

As the vacancy rate in downtown's skyscrapers is whittled down and developers remain fearful of building because of Baltimore's shaky economy, speculators such as the Millers are taking calculated risks in buying Class B properties.

The Millers' success is fostering what some analysts expect to be a rebirth for at least some of the city's older buildings, despite inherent disadvantages such as a lack of parking.

Since fixing up 31 Light St., for instance, the Millers have snapped up six other downtown buildings, including the Water Street Mews. They're spending $1.75 million to rehabilitate the mews, a collection of offices, retail stores and restaurants dating from the early 1900s.

Although they decline to discuss specifics, the Millers say the properties generate a return of more than 10 percent.

The latest sign of a possible renaissance came this month, when Boxer Property announced it had acquired the three-story Brown's Arcade building on North Charles Street, the first in a planned eight-building Class B buying spree that will cost the Houston firm more than $8 million.

When the purchases are completed, Boxer Property will own nearly 450,000 square feet, as much space as in the 30-story Alex. Brown Building.

"We're going to offer space in some cases for roughly the same amount as a person's monthly lunch budget," said Andrew Segal, Boxer Property's 31-year-old president and founder.

The Class Bgame is simple: Buy a building cheap, renovate and modernize it, then rent it at $9-$15 a square foot to tenants who can't afford glittering office towers with views of the Inner Harbor, where the cost is often twice that.

In perhaps the best example of what can be done with older space, a division of General Electric Co. bought the dilapidated Candler Building at 111 Market Place for $20 million in 1986 and spent $40 million making it one of the city's best office locations, with a marble lobby and upgraded amenities.

Although too late for GE -- the company sold Candler for $22 million two years ago -- the improvements paid off.

Last month, the 85-year-old building, considered Class B space because of its age and lack of parking, was sold to a Boston real estate firm for more than $60 million.

But as GE demonstrated with Candler, the game of renovating Class B space is also one of chance and risk.

The cost to buy and renovate older buildings may be too high to make them profitable. And some analysts wonder if renovating older buildings is about as smart as investing in a comeback of eight-track tapes.

"It's swing space," said Jay Gouline, a Johns Hopkins University professor and owner of a real estate investment firm. "It takes between two and three years to develop new space, and demand constraints occur during that time. So when new Class A space opens, the Class B market tends to soften. It's the first space to be vacated."

That's exactly what happened in 1991, when the city was rocked by a glut of new office space and subsequently the worst commercial real estate slump since World War II. As struggling developers of Class A skyscrapers lowered their rents to keep their buildings from becoming see-through spectacles, businesses flooded out of older buildings to take advantage of the discounts.

The so-called "flight to quality" crippled the downtown Class B market of nearly 80 buildings and 7 million square feet. At one point, a third of all the Class B space -- typically defined as more than 25 years old and lacking parking and other modern amenities -- was empty, with few tenants waiting in the wings.

Economic development groups and Mayor Kurt L. Schmoke began encouraging the idea of converting Class B office space to apartments, copying New York, Philadelphia, Cleveland and a host of other cities.

Governments on all levels have stepped in to encourage Class B redevelopment, too, providing significant tax breaks if developers invest certain amounts of capital and meet renovation standards.

Taxes frozen 10 years

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