Commentary: Baltimore real estate markets lack consistency in 3Q

Daily Record, The (Baltimore), Nov 29, 2004 by Shelly Schwartz

The Baltimore office market showed few signs of life during the quarter just ended. But hope remains for local landlords as rents edge higher and government contractors seek out large blocks of space.

According to CoStar Group Inc. of Bethesda, which tracks the commercial real estate market, third-quarter vacancy rates for the Baltimore metro region grew fractionally to 13.3 percent from 12.9 percent in the three months prior. Nationally, the office market vacancy rate is closer to 14 percent.

Net absorption, meanwhile, for the overall Baltimore office market came in at positive 304,063 square feet for the three-month period, down significantly from the positive 883,000 square feet absorbed in the second quarter and 550,000 square feet absorbed in the first, according to CoStar.

Offering hope to brokers and landlords are leases being signed by defense contractors and other government-related entities, according to CoStar's latest office market report.

Indeed, defense contractors and government agencies claimed the lion's share of newly leased space during the third quarter, with the federal centers for Medicare and Medicaid snapping up 77,000 square feet of Class-A office space at 7111 Security Blvd. in Woodlawn.

Defense contractor Northrop Grumman Corp.'s electronics systems sector, based in Linthicum, also preleased the entire 104,000- square-foot building at 191 National Business Parkway near Baltimore/ Washington International Airport.

Third-quarter rental rates for the region averaged $19.97 per square foot for all classes of office space, a 1.9 percent quarter- over-quarter gain, CoStar reports.

Dallas-based commercial real estate firm Trammell Crow Co. notes local asking rents have declined as much as 20 percent since mid- 2001.

But T. Courtenay Jenkins III, a broker for the company, adds he expects rents to begin moving higher by late next year as supply falls back in line with demand.

The economy continues to grow, which is good for real estate in Baltimore, he said. With the exception of one, there really isn't any new construction planned for the central business district, so we expect rents to begin an upswing as available space gets absorbed.

During the quarter, nine buildings totaling 810,000 square feet were completed in the Baltimore metro market, up from seven buildings totaling 341,000 square feet in the second quarter.

A few notable deals include the Booz Allen Hamilton Inc. consulting firm of McLean, Va., which preleased 162,500 square feet at the National Business Park, according to Trammell Crow.

The company also cites CMC Investments, an Irish firm, which bought the 231,400-square-foot office tower downtown at 300 E. Lombard St. for $40 million.

Also during the quarter, Harbor Group International of Norfolk, Va., purchased the 168,400-square-foot building at 10 E. Baltimore St. downtown for nearly $16.5 million.

Trouble ahead for industrial market

Type of deal: Purchase

Square feet: 454,000

Address: 1332 Londontown Blvd., Eldersburg

Tenant: Miller Investments LLC

Tenant representative: Trammell Crow Co.

Falling vacancy rates and large lease deals gave the Baltimore industrial market a shot in the arm during the latest quarter. But that momentum may be lost in the months ahead as inventory outpaces demand, sources say.

CoStar reports third-quarter industrial vacancy rates for the Baltimore region fell to 12.8 percent, from 13.1 percent in the second quarter - the first quarter this year to have rates below 13 percent. Nationally, industrial vacancy rates are hovering near 10 percent.

At the same time, net absorption for Baltimore metro spiked 36 percent to 798,000 square feet during the third quarter, up from 588,000 square feet in the second.

CoStar's latest market report notes the up-tick is due largely to big lease deals including Restoration Hardware's 102,000-square- foot-lease at 8411 Kelso Drive in Rosedale. Hampstead-based clothing retailer Jos. A. Bank Clothiers also signed for 290,000 square feet at 626 Hanover Pike in Hampstead.

And local investment firm Miller Investments LLC purchased the 454,000-square-foot warehouse at 1332 Londontown Blvd. in Eldersburg for $6.1 million.

Demand for smaller blocks of space also is strong, said James Lighthizer, a local broker with Los Angeles-based commercial real estate firm CB Richard Ellis.

North Bay Distributors, for example, renewed its 78,000-square- foot lease at 6660 Santa Barbara Road in Eldridge, while event planner The Becker Group of Baltimore expanded into 73,000 square feet at 2000 Washington Blvd. near the central business district.

We've seen an above-normal level of leasing activity, primarily in tenants looking for 30,000 square feet to 80,000 square feet, Lighthizer said. That's a good sign because that was the sector of the market that previously was pretty slow. There are an awful lot of proposals floating around for prospective tenants to lease new space.

Rental rates for the local industrial market ended the third quarter at $5.32 per square foot, a 4-cent increase over the second quarter and a 10-cent increase over the first, CoStar reports.