Mercantile's headquarters is being sold for $51.2 million to Norfolk realty firm

Bank company plans to lease same downtown office space

buyer has other buildings here

October 26, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Mercantile Bankshares Corp. said yesterday that it had agreed to sell its headquarters tower in downtown Baltimore for $51.2 million to a Virginia real estate investment company that has been buying commercial properties in the city.

Mercantile, the state's largest independently owned bank, would lease back its space in the 21-story building at 2 Hopkins Plaza for at least another decade under its contract with the buyer, Harbor Group International LLC of Norfolk. The sales contract gives the buyer 30 days to complete the deal or opt out of it. The deal is set to close in mid-December.

"We're not abandoning the city," Edward J. Kelly III, president and chief executive of Mercantile, said yesterday. "We're not going anywhere. We're taking advantage of the real estate market."

Kelly said the sale of the building does not mean he's planning to sell the company. "If I were going to sell the firm, I would not have just signed a 10-year lease," he said. Thanks to low interest rates and growing interest from outside investors in Baltimore's downtown office properties, Mercantile was able to command what brokers and development officials called a strong price, despite the building's age - it opened in 1971 - and location several blocks from the Inner Harbor.

Harbor Group would pay $126 per square foot for the Mercantile tower and an adjacent three-story pavilion, which together contain 406,000 square feet of office space.

Harbor Group International declined to comment yesterday on plans for its latest Baltimore purchase. Last month it purchased the 16-story red brick and glass building known as the W.R. Grace Building, at Baltimore and Charles streets, for $16.4 million, well above its assessed value of $11.5 million.

In January last year, the company acquired its first Baltimore property - the high-profile Wachovia Tower less than a block away at 7 St. Paul St., for $50.2 million, or $132 a square foot - a price observers at the time called relatively high.

"The $126 a foot for that building is a solid price," said Philip C. Iglehart, executive vice president of Colliers Pinkard, the Baltimore commercial real estate brokerage. "I don't think it's too high or too low. One of the things that really is terrific is the parking. It's got tremendous parking under the building. A lot of the value is being driven by the rent that Mercantile is willing to pay and the length of its lease."

Mercantile said it has agreed to pay $20 a square foot to lease half of the building it now occupies, with provisions for an additional floor. It also has two five-year options.

The building, acquired by the banking company in a foreclosure, has been Mercantile's headquarters since the early 1970s and now houses about 500 employees. Another major tenant is the law firm Venable LLP, which has a lease that runs through 2011.

Prices of downtown office properties have been rising, with one office building at 300 E. Lombard St., a block from the Inner Harbor, selling last month for $40 million, or $172 per square foot, according to CoStar Group Inc., a Bethesda company that tracks commercial real estate information.

"The real estate market has been pretty strong in Baltimore. Especially with interest rates still low, real estate is a pretty good investment," said Marshall Snively, vice president of economic development and planning for the Downtown Partnership, a business advocacy group.

"With Baltimore being a second-tier city, a lot of the buildings here are considered bargains. It's encouraging that people are getting good dollars for property outside of the harbor, and seeing more investment in places outside of the water, making other parts of downtown, like the city center, more attractive to investors."

Mercantile officials said they began exploring the sale of the building earlier this year to free up capital to invest in growing the banking business. The bank announced in May it would seek a buyer and hired Trammell Crow Co. to market the building. It received a first round of bids in June.

"Our vision is that we're here to make loans to customers and not to invest in real estate," said Terry L. Troupe, Mercantile's executive vice president and chief financial officer. "These have been excellent times from the standpoint of appreciation of real estate, combined with low interest rates."

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