Steady as it's gone seen likely for 2003

Professionals call pickup possible near end of year

Commercial property

January 12, 2003|By Meredith Cohn | Meredith Cohn,SUN STAFF

The slow but steady pace of activity in the commercial real estate market is likely to continue through the year, possibly picking up by the end, professionals say.

Low interest rates have spurred investors and users to buy property of all kinds, and some are refinancing their buildings. But the economy has business executives in a wait-and-see mode when it comes to leasing or building large amounts of new space.

While members of the industry say they continue to do business, many of the deals are smaller.

"In 2003, we'll continue to see what we're experiencing now," said Christopher C. Smith, chief executive of TriAlliance Commercial Real Estate Services LLC, which primarily leases and sells office space. "We are active. We're even pre-leasing [speculative] office buildings. I'd say the size of the tenant is smaller than in a different economy."

Landlords of area office buildings have not lowered rents. But they are likely to offer other concessions such as larger outlays for tenant improvements.

Few buildings are expected to be built around Baltimore in the new year as the region absorbs the space it has, Smith and others said.

About 14 percent of the region's 56.7 million square feet of the region's office space was vacant in the fourth quarter of 2002, according to MacKenzie/Oncor International, a commercial real estate firm.

Typically, developers build new offices when the vacancy rate dips below 10 percent.

MacKenzie reported that 1.2 million square feet of new space is under construction.

Among the warehouses and other industrial buildings, vacancy was 12.8 percent in December, MacKenzie said.

About 940,000 square feet were under construction last month.

Vacancy rates should shrink into single digits by the end of this year, said David P. Scheffenacker Jr., president of Preston Partners Inc., which leases and sells real estate and arranges financing.

"By the end of 2003, we should be fine," he said. "The absorption of space should be slow but steady in both office and industrial markets."

Scheffenacker said low interest rates make this a favorable time to build. And by the time the buildings are finished in 18 months to two years, the economy should have ramped up.

But with developers more cautious, Scheffenacker doesn't expect new projects to pick up until late in the year.

"By the end of the year, we'll start to see some construction starting again," he said.

While waiting for development to cycle back up, market professionals will keep busy selling and refinancing property.

One segment of real estate likely to become more active is hotels. Several aimed at the business traveler are slated to break ground this year. They tend to be smaller hotels with no large meeting spaces.

The hotels include a Marriott Residence Inn, a Hampton Inn & Suites and maybe an Embassy Suites, all on Redwood Street downtown. In Inner Harbor East, a Homewood Suites is planned.

Luxury hotels, including a Four Seasons and a Ritz-Carlton, also are on the drawing board. A handful of other hotels are planned around the city, including a convention headquarters hotel next to the convention center downtown.

Financing for all hotels remains tough to obtain, especially for the large, expensive hotels.

"There's not a lot of lending for new full-service hotels, period," said Warren Marr, a hotel consultant with PricewaterhouseCoopers LLP.

Developers had an easier time finding lenders last year to pay for new apartment buildings that will open this year. But occupancies and rents were not rising significantly by the end of last year, and enthusiasm waned somewhat for new projects.

"There are two reasons for that: One is lack of job growth essential to apartment rentals and the other is interest rates that are drawing more than a normal number of people to purchase homes," said Thomas S. Bozzuto, president of Bozzuto & Associates Inc., which builds and manages apartment buildings. The company develops about 1,000 apartments a year.

"We'll see some improvement in 2003 because I expect we'll begin to see job growth," he said. "By the end of next year, we'll see an improved economic outlook."

Several downtown projects financed last year are nearing completion or are under way.

The Munsey Building on Calvert Street and the Stanbalt Building on St. Paul Place will sign up renters this year.

A former office building on Saratoga Street is being converted to apartments and a building is under construction in Inner Harbor East. Other, high-end apartment buildings are planned on Water Street and on Pratt Street.

Lewis Bolan, a consultant at Bolan Smart Associates in Washington, said apartment buildings could be the highlight of this year. He did not foresee a comeback for commercial real estate in general until next year, after the overall economy picks up.

He said offices would take the longest to recover, because of a phenomenon called "phantom space." That's the space that companies lease or buy but are not using.

"It's not for rent, it's not for sublet, but it's there, and no one knows how much of it there is," Bolan said. "It concerns me that some of the published vacancy numbers are a little low."

As the economy picks up steam, companies will not look for more space because they have room they are not using, he said. It will take some time to absorb it all.

Other than apartments, neighborhood shopping centers might be the only other bright spot this year, he said.

"They [apartments and centers] are leasing, they're selling, occupancies are stable," Bolan said. "But next year in general, in Baltimore and nationally, it will be a modest year in the commercial real estate industry. I don't see any honest-to-goodness recovery until 2004."

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