Better market is predicted for 2nd half of year

Space: Some of the region's empty offices could be filled by more government spending, lower interest rates.

Commercial real estate

January 20, 2002|By Meredith Cohn | Meredith Cohn,SUN STAFF

A heap of government spending, some low interest rates and a sprinkling of pent-up demand for space could be just the recipe for some new building in 2002. Or, more likely, it could fill some empty pockets of commercial real estate.

While few developers or brokers are predicting a hot market in the next year, some say it could improve in the second half of the year as the general economy improves and businesses and government agencies begin looking for space in large numbers.

"Real estate really follows the economy," said Greg Crum, senior vice president at Trammell Crow Co., a national real estate services firm. "What we've seen is a lot of companies standing on the sidelines and not taking the plunge on new space. When the economy turns there will be a lot of people ready to drop in right away, rather than waiting three to six months."

Crum said even in the Baltimore-Washington corridor - where developers could not build fast enough for a time last year - offices are sitting empty. That includes a Trammell Crow building.

Prompted by technology companies and government entities, developers had about 1 million square feet of office space in the pipeline when demand fell off last year. They still have few commitments.

Overall, there is a small amount of empty office and industrial space in the region - even considering the empty buildings in Columbia and other submarkets in the corridor.

The greater Baltimore area has about 80.7 million square feet of offices, 12 percent of which is empty, according to CoStar Group, a real estate information company. Another 7.6 million square feet is under construction or proposed, with building begun on just about 1 million square feet. Nearly all of the space already in the development pipeline is expected to be completed in 2002.

Projects that have not broken ground or locked in financing have been mostly shelved for the first part of the year.

CoStar also reports that there is about 37.7 million square feet of industrial and flex space, which is commonly used for research and development. None is under construction, the company said.

That general lack of overbuilding in the region is likely to protect landlords from the grim concessions they made in the early 1990s, when floors and floors of abandoned space caused rents to plummet and buildings to go into foreclosure.

Therefore, experts say businesses should not expect sweetheart deals in the next year, although rents are not likely to rise much, either.

Absorbing the new space could also take a while.

"I see virtually no new construction in any greater Baltimore submarket in the next three or four years," said David M. Fick, a managing director for real estate research at Legg Mason Wood Walker Inc.

Fick said rents would have to rise significantly to justify new office buildings, and they won't rise so long as landlords have to compete for tenants. He also didn't expect any new industrial, retail or hotel projects in the coming year.

He also questioned if there is enough demand to fill several apartment buildings planned in downtown Baltimore.

And several office buildings that were planned downtown before the economic downturn have broken ground and could also pose a problem for the city in 2002, if tenants do not step up to fill them, said Lewis Bolan, a real estate consultant at Lewis Smart Associates.

Among the larger projects are the Cordish Co.'s building on Pier 4 in the Inner Harbor, Lockwood Associates' building on Pratt Street and Willard Hackerman's building on Pratt Street.

No one is really sure when the strong demand for any space will ramp back up. But with many economists suggesting that the recession will end this year, many expect the real estate slump will also end.

"Things are a little up in the air," said Mickey Miller, a principal of Insignia/Miller commercial real estate. "My guess is that maybe by May or June we'll start seeing things return to normal. Business is still out there. I'm optimistic."

Things had been cooling in all sectors of commercial real estate before the terrorist attacks in Washington and New York, but the events made prospective tenants even more uncertain about moves and expansions, some said.

The future got murkier. But industry experts say things are not so bad.

"It's been very slow since spring, but, of course, Sept. 11 caused everyone to go into a holding pattern," said C. Patrick Creaney, a principal of the Creaney & Smith Group. "I don't expect a lot of new construction. Things are fairly disciplined right now; we're not adding to the vacancy. And we're absorbing what's there. I see a positive uptick in the next six months."

For many of the region's submarkets, the recovery from the early 1990s recession did not prompt a massive building spree.

"This is so different than we've ever seen before because there hasn't been overbuilding," said Sharon Caplan, a senior vice president and partner at Manekin LLC who focuses on office leasing in Baltimore and Baltimore County.

"It's a very constant, consistent, healthy market. I've seen some hesitance since Sept. 11, but I've seen just as many people move forward. I'm very busy."

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