Central Md. commercial real estate has slow start in 02

Daily Record, The (Baltimore), Jun 25, 2002 by Ezra Fieser

Commercial real estate in Central Maryland has yet to shake the effects of the recession.

Hampered by a slew of new buildings and not much demand to fill them, industrial and office markets are dealing with inflated vacancy rates midway through 2002.

According to the latest market research by Colliers Pinkard, during the first half of 2002 the industrial market vacancy rate hit a nine-year high at 15.4 percent. The office market vacancy rate also increased from year-end 2001, albeit by just 1 percentage point, to 14.6 percent as of June 2.

"The office vacancy rates should continue to increase as the year progresses. ... It is predicted to surpass its historical average of 14.7 percent by year-end," said Colliers Pinkard Vice President Terry Dunkin. In the industrial market, "when corporate confidence in the economy returns, industrial vacancy rates should improve fairly quickly. ... [But] the overall vacancy rate should peak by year-end or early 2003."

Industrial Bulk warehouse product accounted for 79 percent of total vacant industrial space, bringing the overall vacancy rate to its highest level since 1993, according to Dunkin.

"One of the things that makes it look a little worse is that large corporate users have shown a tendency to opt for build-to-suit instead of occupying existing space," Dunkin said.

Demand for large blocks of warehouse space have led corporations to Harford and Cecil counties, where land is cheaper and more plentiful. More than 700,000 square feet of warehouse product is expected to deliver in Harford County alone by year's end.

But as corporations relocate into new space, the space they leave has flooded the market with vacant class B space. The vacancy rate may exceed 20 percent in that submarket by year's end, Dunkin said.

Meanwhile, demand for office-warehouse product has remained strong. The market's 8.6 percent vacancy rate is outpacing the bulk warehouse and flex sectors. Flex has a 14.6 percent vacancy rate, according to the research

MIE Properties Inc., the Maryland leader in flex product with 9 million square feet of space, has seen its occupancy rate rising slowly, said Vice President Gerard Wit.

"It dropped to 94 percent earlier this year, but it's climbing back slowly. ... We were at 95.9 percent last week," he said.

MIE has seen success with its Maryland Science Technology Center in Prince George's County, where its first five 30,000-square-foot flex buildings were leased shortly after they opened. But near Baltimore-Washington International Airport, where MIE owns several parks, leasing has been "flat," Wit said.

The only Central Maryland submarket in which vacancy rates have not increased in 2002 is the suburban west market, which dropped 3.6 percent to 9.95 percent.

"Landlords have aggressively attracted tenants by offering concessions but have not lowered rental rates," Dunkin said of the Owings Mills and Interstate 70 area. "There is some pressure to lower rents, but landlords are slow to do that for obvious reasons. Instead, we're seeing some free rent ... from a couple of months to six months."

Office Construction that delivered in the end of 2001 and first quarter of 2002 has hampered the office market.

The 900,000 square feet delivered in 2002 is well below the 2.8 million that was built in 2001, but 1.8 million additional square feet, mainly in downtown Baltimore, is expected to come online by year's end, Dunkin said.

In downtown Baltimore, 1.5 million square feet of space is expected to deliver in 2002.

Some of the projects, like the Cordish Co.'s 150,000-square-foot Pier 4 Building in the Inner Harbor, have seen substantial activity. Cordish has preleased 70 percent of the building, which is due to open late this year.

When the 80,000-square-foot Canton Crossing office building delivers this year, it will be at least 88 percent leased.

But at other projects, like the nearly complete, 350,000-square- foot 750 E. Pratt St., leasing has been slow, said Dunkin.

Still, the downtown market's 11.4 percent vacancy rate is better than the suburban rate of 16 percent. Those markets, particularly in Howard County, were plagued by slow absorption as new buildings became available.

The suburban market has seen 720,359 square feet of space built this year, with another 249,099 under construction. Just 163,719 square feet of suburban class A and B space has been absorbed this year.

Vacant class A space in Howard County jumped from 18.9 percent at year-end 2001 to 24.1 percent by June 2.

Corporate Office Properties Trust, a Columbia-based real estate investment trust, has 1.4 million square feet of space in Howard, mainly in the Columbia Gateway Business Park, of which it owns 40 percent. But COPT's holdings have remained 94 percent occupied, said Chief Financial Officer Roger Waesche.

"I think it's not like it was in 1999 and 2000, but it's not bad," Waesche said of the demand for space in the park.