Asking price no longer seems so high for few office vacancies left

Daily Record, The (Baltimore), Nov 29, 2004 by Barnaby Wickham

The Greater Annapolis office market, like much of the Baltimore- Washington corridor, is seeing strong, and increasing, demand for office space. The Annapolis market now has the Baltimore metropolitan area's second-lowest vacancy rate at 12 percent, trailing only the BWI airport market at 7 percent.

One reason the Annapolis submarket is seeing such interest is because activity in other parts of the corridor - especially near the National Security Agency and Baltimore/Washington International Airport - is making the state capital not seem so expensive anymore.

Annapolis has always been pricier than other parts of the corridor, but the difference is down to just a couple dollars per square foot, says CB Richard Ellis Senior Vice President James Lighthizer Jr. Before, the rent delta was significant. Now, the rent delta is less significant. Companies are willing to pay the slightly extra rate, he said.

Industry players say strong corridor demand is being driven largely by the improving economy and homeland defense. Government spending for the latter has certainly made its impact in and around Annapolis.

NSA is a driver in this market, said Lighthizer.

Indeed, the agency helped launch the successful 20-company, 24,000-square-foot, homeland security-themed Chesapeake Innovation Center incubator in Annapolis, which is sure to drive demand for future office space.

Additionally, the relocation and expansion of Anne Arundel Medical Center has driven up demand in an already-tightening market. Since the hospital has grown, there has been a lot of demand for medical [space], according to Laura Westervelt, Manekin LLC senior sales and leasing associate. One big player is GE Medical Systems, which is occupying a 40,000-square-foot sublease at 445 Defense Highway.

'Landlord's market'

Both nationally and within Maryland, the economy - especially the technology sector - was in a funk until recently. A downsized USinternetworking left a lot of vacant space in the Annapolis market in 2001 at a time when companies weren't growing, according Westervelt.

Now the economy is in turnaround. It's just now becoming a landlord's market, said Lighthizer.

One broker's experience is illustrative.

When three tenants - including primary tenant Wartsila Diesel - vacated 201 Defense Highway in 2003, Columbia broker Transwestern Commercial Services was stuck with a 73 percent vacancy at the 65,000-square-foot building. Today the building is 100 percent leased.

With competitive pricing (unimproved space at $19) and an improving marketplace, Transwestern Senior Vice President Greg Masi signed a series of deals, all in 2004: Trustwave Corp. expanded to 17,000 square feet, up from 6,000; Anteon Corp. took 16,000 square feet; Annapolis city transplants Bay Technologies and National Marine Underwriters occupied 6,500 and 6,400 square feet, respectively; Network Management Resources signed for 5,000 square feet, and Embedded Research Solutions filled 4,000 square feet.

On the supply side, Annapolis always has had limited office stock. The Annapolis market by size is substantially lower than all of the other markets in the [Baltimore] metro area, according to Andrew Smith, Colliers Pinkard senior vice president and principal. The general availability of product has been very limited, especially in the A-tier market.

As of June 30, Greater Annapolis had 727,000 square feet of Class- A office space, compared with 8.3 million square feet in downtown Baltimore and 2.4 million square feet at BWI.

Compounding the dearth of available space is that commercial development in Annapolis has been stunted by a lack of affordable, zoned and developable land, according to Gerald Wit, MIE Properties vice president of marketing. There is a very limited supply of this in sought-after areas of Annapolis, he said.

MIE is fortunate to have some of that supply - the Baltimore developer just broke ground on two 20,000-square-foot buildings in its Annapolis Technology Park. They are scheduled for completion in May and June of 2005. A hotel and 49 high-end townhouses will fill out the mixed-use development.

Other high-profile development projects include two that recently broke ground in the Annapolis city center: Park Place, a $200 million mixed-use project with 200,000 square feet of Class-A office space; and a 70,000-square-foot Severn Savings Bank. Both are scheduled to be on line within two years.

After that, Annapolis will have to rely on redevelopments.

We are out of supply; there is no land left, said Michael Miron, director of economic development for the city of Annapolis. He says the city's vacancy rate is already single digits and will approach 1 or 2 percent before long.

Continued low vacancy rates that push up rents are giving incentive to developers to find a way to create more office space. It suggests speculative construction could be a prudent decision for someone, Smith said.

Of the handful of major Annapolis-area proposed development projects, Smith sees Erwin L. Greenberg Commercial Corp.'s Parole Plaza mixed-use redevelopment as being the most likely to come to fruition.