Slower times for local landlords

Empty offices attest to slump, yet rents are holding up

August 28, 2001|By Meredith Cohn | Meredith Cohn,STAFF WRITER

Business has been so good in the two years since Lee Cohen and Patricia Lobel bought Avenue Gourmet that the Owings Mills specialty food distributor twice asked for more space from its landlord.

"To grow we needed space to add items," said Cohen, a vice president. "We needed certain things, and our landlord found us space and is getting it ready for us now."

The latest lease was for 11,000 square feet, which real estate brokers consider modest. But the landlord, MIE Properties Inc., was happy for the business.

Last year was a banner year for commercial real estate. But the big deals have all but evaporated this year as the economy sagged and technology companies went into free fall.

Local brokers, though not alarmed, are relying more and more on small deals such as Avenue Gourmet's to fill empty space in the region.

"Our statistics indicate that the end of the world has not befallen us," said Gerald J. Wit, MIE's vice president of marketing. "Things have slowed."

MIE's leasing activity is off by only 5 percent, thanks mostly to its steady flow of small deals, the company said.

But now that the downturn is several months old, brokers who relied on big tenants and tech companies to fill their office and light industrial space are likely scrambling for deals, the company said.

Real estate companies, including Transwestern Commercial Services, KLNB Inc., Trammell Crow Co. and Colliers Pinkard, report that leasing has slowed this year.

Local and national companies are rethinking expansions and relocations.

Nearly 18 percent of office space in the region is vacant, according to Costar Group, a real estate information service. Add offices that are being sublet - space that tenants lease but don't occupy - and vacancies rise to almost to 21 percent.

The glut may get worse, since more than a million square feet of office space is under construction.

Vacancies have reached almost 30 percent for flex space, which is used by call centers and light industrial users for assembly and storage. If sublets are added, nearly 35 percent of flex space is vacant.

Although the vacancies are higher than last year, brokers are not too concerned yet. Some calculate that vacancies are lower than the numbers given by Costar.

The oversupply is nothing like it was in the early 1990s, when many more buildings were opening without tenants, existing buildings were half full and rents plummeted.

Lenders foreclosed on many of the buildings and it took much of the decade for businesses to absorb the excess space.

Today, few landlords are cutting rents and empty space is predominantly in new buildings that have not been on the market long.

Landlords say the local industry is in better shape than Northern Virginia and other regions where millions of square feet in office space were built for technology companies that are now scaling back.

A few large leases could erase the vacancies in the Baltimore market, because it is comparatively small, they said.

But because those big leases are tough to sell, at least one area is becoming a concern for brokers: Columbia, where much of the new construction is occurring.

Developers had been scurrying to accommodate a business expansion, especially in technology companies, lead by telecommunications equipment makers Corvis Corp. of Columbia and Ciena Corp. of Linthicum.

But some of those companies have retrenched, leaving more than a dozen new buildings with few signed tenants.

Corvis, for example, is looking for a company to take over an 82,000-square-foot building in Columbia it had built but never occupied.

Dennis Lane, a first vice president at Ryan Commercial LLC, is seeking a new tenant for the building.

"Sometimes the case in the construction business is that they can't build as quickly as businesses require, so businesses have had to look a bit farther in the future," he said. "It takes 18 months to two years to build a building, and in today's economy, lots can happen in two years. Sometimes the businesses no longer need the space, sometimes the new buildings are too small."

Corvis still occupies two buildings adjacent to the empty building and at least six others nearby, Lane said.

He said he will market the company's empty building to nontechnology companies as well.

Greg Masi, a senior vice president for Transwestern Commercial Services, said companies have begun subletting buildings they no longer need. He said those sublets total about 300,000 square feet - adding to competition for tenants.

He believes the vacant office space will fill, but leasing might take longer than in last year's "high-flying" economy.

"Some tenants are cautious and holding off on expansion decisions at the moment," he said. "But a variety of people are looking - regional companies and local companies."

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