Commercial real estate looks for continued health

Vacancy, interest rates should remain low, industry experts say

January 24, 1999|By Kevin L. McQuaid | Kevin L. McQuaid,Sun Staff

Ed St. John has seen more than a few peaks and valleys over the course of three decades in the commercial real estate business.

And in the mind of the MIE Properties Inc. president, 1999 will mirror the year before: While healthy, it will be neither zenith nor nadir.

He isn't alone in that prediction. Throughout the Baltimore-area commercial real estate market, industry experts say the coming 12 months will be prosperous for all types of real estate.

"I think you'll see continued momentum at work in both the office and industrial sectors," said Robert A. Manekin, president of Casey & Associates Inc., a Baltimore-based real estate services firm. "But it's clear there will be hot spots, like office space in Columbia and Owings Mills and industrial space in the I-95 corridor south of the city."

Analysts believe the industry will thrive locally thanks to continued low vacancy and interest rates, the influence of real estate investment trusts and dissipating fear of an economic recession.

At the end of last year, the metropolitan area's office vacancy rate stood at 9.8 percent, while 13 percent of the region's industrial space was available, according to statistics compiled by Colliers Pinkard, a Baltimore-based real estate services company.

Those vacancy rates could fall even further by the end of this year, if present trends continue.

Glenn R. Mueller, managing director of real estate research at Legg Mason Wood Walker Inc., said tight capital markets will also help, because the lack of access to construction loans should hamper the kind of overbuilding that stifled the market a decade ago.

At the same time, a lack of new building will allow landlords of existing space to raise rental rates, Mueller said.

"The office market locally is indicative of what's going on," said Anthony W. Deering, chairman and chief executive of the Columbia-based Rouse Co.

"While the office market is experiencing high occupancy rates, I think you'll still see limited new development, because any new building is going to be governed by capital markets that are still relatively tight," Deering said. "Compositely, I think you'll see positive results across the board."

At least part of the industry enthusiasm stems from the robust performance the area racked up last year, pushed ahead by a 10-year high for the amount of space removed from the market via leasing activity, according to Pinkard statistics.

But just as hot spots will likely propel the market forward, potential economic trouble could cool things off, some analysts warn.

The Regional Economic Studies Institute predicts that job growth will be in the 1.4 percent range for the metropolitan area this year, a drop from the 1.7 percent it predicted at the start of 1998.

Meanwhile, growth in the nation's gross domestic product is slated to tail off after a 3.8 percent gain in 1998, to between 1.5 percent and 2 percent, Mueller said. Without either new jobs or significant business expansion, the vacancy rate could again rise.

Perhaps even more disturbing are signs that the corporate downsizing of the early 1990s continues at a fevered pitch, a trend masked by the expanding economy. As a result, a sort of business "musical chairs" has developed, where workers continually shift from one company to another. If an economic slowdown occurs, displaced workers may be left standing, some economists fear.

"We're forecasting that the market will be strong, but not as vigorous as it has been," said Jeffrey B. Samet, a Pinkard partner and vice president. "But the fundamentals for the area remain sound, and the level of new construction is supportable. We're not being overbuilt."

Samet notes that much of the office market's fire has been fanned by a few companies, such as investment firms T. Rowe Price Associates Inc. and Legg Mason Inc., Aerotek, Ciena Corp., U.S. Foodservice, RWD Technologies and Magellan Health Services.

"Ultimately, the market performance is determined by their performance," Samet said.

Other analysts point to events last year such as the foreclosure and subsequent sale of the 25-story Crestar Bank Building downtown as ominous signs that perhaps the office market isn't completely healthy.

Although the 120 E. Baltimore St. project was sold before foreclosure auction to the state's retirement system for an inflated $46 million, many contend that if a Class A building of Crestar's quality can fall into trouble in this market, others are just as susceptible.

Added to the mix is the vast amount of new space being completed. Nearly 1 million square feet of new office space is being readied for occupancy in Howard County, while 1.2 million square feet of new distribution space -- developed without tenants in place -- is expected throughout the area in 1999.

"I'm cautiously optimistic about this year," said Robert Z. Smith, a principal at KLNB Inc., a Towson real estate brokerage and management firm that specializes in industrial and retail projects.

"While leasing activity in 1998 was solid and above most projections, rental rates, particularly for newer projects, failed in some cases to meet projections, and that's potentially troublesome going forward," Smith said.

MIE's St. John is undaunted. His company recently placed the largest brick order in its history to accommodate spring and summer construction starts. The 1.85 million bricks will be sent to nine construction sites, from Cecil to Frederick counties, where MIE plans to break ground for new buildings.

"I'm very bullish on the economy," St. John said. "I think we're in the middle of the business cycle, and we have a few more years to go yet."

"It's clear there will be hot spots, like office space in Columbia and Owings Mills and industrial space in the I-95 corridor south of the city."

Pub Date: 01/24/99

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