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Baltimore suburbs rank third lowest in suburban office vacancy rates

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Thanks to demand from the defense sector, the vacancy rate for office space in Baltimore's suburbs is lower than anywhere else in the United States except for two suburban markets in California, a new commercial real estate report shows.

Suburban Baltimore had an office vacancy rate of 14 percent, according to an overview of the mid-Atlantic commercial market released this month by Cushman & Wakefield, a commercial real estate firm that operates nationwide.

That's lower than any other suburban market the firm tracks except for two high-tech hotbeds: the San Francisco peninsula, which has an 11.6 percent vacancy rate, and Silicon Valley, with a 12.7 percent rate. The national vacancy average for suburban offices is 18.5 percent.

Baltimore's suburban office market is benefiting from stronger job growth than some of its neighboring cities and the nation as a whole, thanks mainly to defense contractors that locate themselves near the area's military bases.

Also helping the overall occupancy rates, the suburban Baltimore area had fewer new office buildings under way than other areas when the economy soured. While construction never dried up, Baltimore did not see a speculative building boom before the economy went bust.

"The office market has been pretty strong, at least in relative terms" in Baltimore's suburbs, said Stephen Fuller, director of the Center for Regional Analysis at George Mason University.

"There was pretty strong performance in the Baltimore metro area in 2010, and it was even stronger in 2011," Fuller continued. "While other places were losing jobs, Baltimore was adding jobs and those jobs cut across categories. A lot were office-using jobs."

Cushman & Wakefield's market overview looks at economic and real estate trends in the mid-Atlantic, comparing Baltimore to Washington, Philadelphia and the nation as a whole. The firm tracks 36 suburban markets in the United States.

Baltimore has added 29,000 positions since job creation bottomed out in February 2010, while Philadelphia added 18,000 jobs, U.S. Labor Department figures show. Last year alone, employers in Maryland added 25,000 jobs, according to new Labor Department estimates.

Since February 2010, payroll employment has grown at a rate of 1.9 percent nationally, while it has risen 2.3 percent in Baltimore and 2.5 percent in Washington, government figures show.

New jobs have given a boost to Baltimore's struggling central business district, where vacancies fell to just over 16 percent in 2011, down 2 percentage points from the previous year, Cushman & Wakefield said.

T. Courtenay Jenkins III, a senior director at the firm, said he expected the trend on vacancies, at worst, to remain flat.

"I think the market's going to pause for this year and allow the construction that's been delivered ... to be leased," he said.

While office vacancies in Baltimore's suburbs and downtown rose slightly, to 14.5 percent in the last three months of 2011 from 14 percent in the fourth quarter of 2010, rents are rising, reflecting stronger demand.

Average asking rents have increased or stayed the same in all but one quarter since the second quarter of 2010, the report shows. Asking rents in the fourth quarter averaged just over $24 per square foot, up from just over $22 per square foot in 2010's second quarter.

The Baltimore area's job growth has been strongest in education and health and in professional services, which includes most office jobs — those held by lawyers, accountants, engineers, consultants and government contractors, said Paula Munger, director of research for the mid-Atlantic region for Cushman & Wakefield.

Companies in finance, insurance and real estate made up the biggest chunk of leases last year, with information-media and business services the next two largest categories.

Suburban Baltimore — defined as Howard, Baltimore, Anne Arundel and Harford counties — has managed to achieve a relatively low rate of office vacancy despite recent new office building completions, Jenkins said. Some 1.2 million square feet of new office space was finished in the Baltimore area last year.

Most of the new construction is concentrated in the Baltimore-Washington corridor, especially around Fort Meade, Jenkins said, adding that cybersecurity firms were a significant factor.

"The government may be cutting a lot, but it is not cutting cybersecurity and that's what's going to drive new construction," he said.

Even though office construction slowed in the recession and continuing economic slump, office developers have continued to invest in Maryland, which ranks eighth nationally in the value of new construction, according to a report by the NAIOP Research Foundation released this month.

More than $3.2 billion was invested in 2010, the latest year for which figures were available, reported NAIOP, a trade group for commercial developers, landlords, investors and other professionals. That figure includes direct construction spending as well as the economic impact of that spending.

In Maryland, new construction translated into jobs for 23,000 workers, who earned a cumulative amount of $975 million, according to NAIOP.

The region, which also includes Washington and Virginia, benefited from federal stimulus money; Maryland was helped as well by spending related to the base realignment process, or BRAC, and an increase in jobs and related private contracts at Aberdeen Proving Ground and Fort Meade, said Fuller of George Mason University.

"Maryland wasn't overbuilding going into the recession," Fuller said. "There weren't a lot of buildings that were just starting construction as the economy lost steam ... so it's been able to weather the storm better."

Defense contracts in cybersecurity will likely spur future demand for commercial office space, said Dianna Wilhelm, president of NAIOP Maryland.

"One of the things we've seen is some adaptive reuse to offices" for cybersecurity contractors, she said.

The strength in the local commercial market helped boost business for Towson-based brokerage firm KLNB LLC by 10 percent last year, the company said this week. The firm handled more than $1.2 billion in commercial leasing and sales of properties in Maryland, Washington and northern Virginia, the highest value of transactions in its history.

Besides defense contractors, companies and retailers have continued to be attracted to the Baltimore-Washington and northern Virginia region because of its strength as the fourth-largest consumer market in the United States, said managing partner Andy Georgelakos.

"We envision another strong year ahead," he said.

lorraine.mirabella@baltsun.com

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