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Solid year seen in real estate

With the economy slowing, those who build, sell and lease real estate are expecting a solid but not a banner year in 2001.

Few say the real estate market is overbuilt, as it was in the late 1980s. And, while many expect that the region will get more shops, offices and warehouses and perhaps even a major hotel, the onslaught of development and leasing may not be what it's been.

"Everything seems to be OK. But how long will the recovery last? That's the question," said Charles Fitzgerald, a senior vice president in charge of real estate at Bank of America Corp.

Many owners and investors in real estate went bankrupt under a crush of vacant buildings in the early 1990s. But many who survived likely went on to some of their best years as the economy soared later in the decade.

So at the first signs of a softening economy, banks and Wall Street investors in real estate take a more cautious approach. Fitzgerald said he would be looking for developers to take a larger equity stake in their projects and to lease more of their buildings before they break ground.

Further muddying the picture are technology companies that have filled a large number of buildings in recent years but are now scaling back or going out of business. Landlords are asking for more rent upfront.

Some of the standouts from 2000 will remain standouts in the next year, local agents said. They include the Baltimore-Washington corridor's office market and Harford County's warehouse market.

But the region will reflect a national slowdown, said David Houck, of the Staubach Co. While even Columbia has been no match for the hottest markets, including San Francisco, Boston and Northern Virginia, all will see a slight cooling-off this year.

"The frenzy, the panic is gone from the marketplace," he said.

  • On the regional office front:

    Office buildings are planned on the fringes of downtown, such as in Locust Point and Inner Harbor East, said Douglas E. Schmidt, a senior associate at CB Richard Ellis Inc. They are becoming "legitimate" office addresses for tech companies and others.

    Some tech companies are locating in Class B buildings in the central business district, lured by cheap rent from Boxer Property Management Corp., but experts are skeptical about any major Class A development in the central business district.

    Development companies including J. J. Clarke Enterprises and Lockwood Associates have sites but no construction dates.

    Financing remains the problem.

    Developers with expensive pieces of land need to build large towers, but there are no large anchor tenants to fill them and attract investment.

    Another problem is rents, said Courtenay Jenkins, senior vice president at Trammell Crow Co. Vacancy rates will continue to drop in the city and Baltimore County, and that will force up rates, but not enough to pay for new construction. Class A rents in the city are about $30 a square foot a year and county rents are around $25 a square foot.

    "We're not looking for a bang-up year in 2001," Jenkins said. "Companies in the city and county will pretty much stay put due to lack of alternatives."

    In the Baltimore-Washington corridor, which has been the hottest market in recent years, top-tier offices will likely continue to attract financing because there are still in demand. More definite need for space will be clear by February as companies decide what their expansion needs will be, said Randall M. Griffin, president and chief operating officer of Corporate Office Properties Trust.

    "I expect good solid growth," he said. "The projects under way are probably OK. It's the next round that people should look at carefully."

  • In the flex and industrial markets:

    A company that's made its name in flex buildings, now popular with tech companies that need some laboratory space and some offices, is MIE Properties Inc. MIE expects the segment to remain strong in the Baltimore-Washington corridor, even in the face of a national slowdown.

    "We don't see demand slowing down, especially in the high tech corridor," said Jerry Wit, MIE's marketing director. "The market is maturing but there's still demand there."

    Flex and office-warehouse space has been so hot in the past couple of years that there isn't a lot left to lease in the corridor, said Michael Elardo, a vice president and principal at Colliers Pinkard. There is about a half-million square feet of industrial space under construction but much of it is spoken for and there's little raw land left, he said.

    Companies could begin looking outside the traditional Interstate 95 corridor, he said.

    Baltimore County is in the same boat, with little land left to develop, said Craig S. Lewis, an industrial specialist at Colliers Pinkard.

    Companies needing bulk warehouse space, which is larger than the office-warehouse space, will continue to target Harford County where there are still large blocks of land available.

    Harford County has about 1.6 million square feet of industrial space under development in five projects and almost three-quarters is pre-leased, he said.

    "I see continued development and investor appetite there," he said. "It could be another good year."

  • For hotels:

    Real estate experts said they don't expect many new hotels in 2001. Heavily dependent on the economy and people traveling, they are among the riskiest real estate ventures.

    "I continue to be surprised by they way the hotel market has held up," said Bank of America's Fitzgerald. "But I'm skeptical about building another major downtown hotel."

    He said he doesn't expect much more development around the airport, either, because there has already been a substantial increase in the number of rooms.

    The cautious attitude of lenders isn't stopping some, though.

    In Baltimore, H&S Property Development Co. plans to open its 750-room, $132 million Baltimore Marriott Waterfront Hotel in February. H&S also has opened a 207-room Courtyard by Marriott in Inner Harbor East and is considering a third, smaller hotel.

    On the other side of the harbor, L. I. Square Corp. plans a $140 million Ritz-Carlton on Key Highway with 90 to 95 condominiums and 225 hotel rooms.

    The company is in the planning stages and is still negotiating with Ritz about specifics of their deal. No dates for construction have been set.

    Peter G. Angelos has also been investigating for some time another convention hotel on two sites near the convention center. No agreement has been reached with a hotel chain or with the city about help in financing the project.

    Other, smaller hotels, including ones at Clarke's and Lockwood's sites, have been held up with the rest of their projects.

    Fitzgerald said he believes that other developers and lenders will watch how the new rooms developed by H&S are absorbed, particularly those in the convention hotel, before actually breaking ground on another large project.

  • In the retail market:

    On the heels of the opening of 1.3-million-square-foot Arundel Mills, no one is expecting any big new retail developments locally in 2001.

    "You really have to look at the markets that need it and there aren't many markets left," said Reed Cordish, a vice president at the Cordish Co.

    He and Thomas H. Maddux IV, president of KLNB Inc., agreed that retail activity would focus on redevelopment. Also, retailers such as groceries and drug and hardware stores will follow population growth from Westminster to Ellicott City to Bel Air.

    New construction includes the retail portion of a large mixed-use project planned around the Owings Mills Metro station. And in Baltimore, Starwood Ceruzzi plans to break ground on a power center of so called big-box retailers in Port Covington.

    Others plan street-level retail in their mixed-use projects, such as Cignal Corp.'s Canton waterfront development. The city and developers also plan to return retail to the Howard Street corridor on the city's West Side.

    "Retail follows population," he said. "It's not as exciting but this is far from over."

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