PLENTY OF NOTHING Stalled projects leave developers holding the bag

THE BALTIMORE SUN

In 1987, Robert A. Manekin's view from the corner of Baltimore Street and Guilford Avenue was bright. His family's development company was building the Bank of Baltimore building a block away and had picked up the site of the old Tower Building from the carcass of Old Court Savings & Loan -- Old Court had held the loan on the property -- where they planned to do the same shiny, profitable thing all over again.

Now homeless people sleep on benches in the small park the company built -- at the city's insistence, Mr. Manekin said -- at the Tower site. And the prospects for developing the land soon are almost as grim as the prospects of its temporary residents.

Everyone knows by now about the plight of developers stuck with office buildings they can't rent. But behind them stand the owners of a half-dozen more big-time development sites downtown, in for as much as $20 million in land and pre-development costs.

They're stuck with their land and their tied-up money not just until the economy recovers, but until the city's backlog of office space is occupied. It could take years.

"In terms of a speculative office building, I don't think we'll see another one for the rest of the century," said J. Joseph Casey, president of Casey & Associates, a real estate brokerage firm in Baltimore. "Not only is the downtown market like that, but also the industrial market and everything else."

Manekin Corp., where Mr. Manekin is a senior vice president, has lots of company in the dream-deferred category.

Capital Guidance Corp. and its foreign investors still own the land for what was supposed to be Baltimore's biggest building, at One Light Street.

The Rouse Co. can't move ahead with developing the old McCormick spice factory site across Light Street from Harborplace.

Schulweis Realty of New York is asking the city for permission to use the block once occupied by the News American building at 300 E. Pratt St. as a parking lot for two more years.

Provident Bank of Maryland scrapped plans for a headquarters tower and has had its land on Calvert Street between Lexington and Saratoga streets on the market for two years.

And Glen Burnie developer Leonard Attman is still seeking city approval of revised plans for Baltimore Financial Centre at Redwood and Charles streets amid skepticism that it ever will be built.

All of those sites were purchased when developers still were eager to cash in on 1980s-style speculative building. The idea was to get a few tenants, start building and lease the rest of the space during construction or after the opening. It worked great -- if the builder got started soon enough to beat the recession.

But that was before the downturn.

Now, tenants are scarce, and banks, chastened by bad real estate loans and pressures from federal regulators, are loath to finance speculative construction. And plans are changing all the time.

"It's unlikely we'll be doing anything speculative there [at the McCormick site]. I don't think we'll be doing anything speculative anywhere," said Cathy Lickteig, a spokeswoman for the Rouse Co.

She pointed to the company's most recent office project, the Ryland Group Inc. headquarters building in Columbia that was completely leased before construction, as a model.

"That's the direction we would be going in," she said. For now, 414 Light St. is a parking lot.

Manekin and its partners don't have a clear plan for their land, Mr. Manekin said. They were disappointed in March when the city passed over their proposal to build a new police headquarters at the Tower site, choosing instead to move to the old Hecht Co. building on Howard Street.

"If the Hecht site doesn't work out or the numbers don't work, we could [still] be in it," Mr. Manekin said. But he knows that's a long shot. "We're not holding our breath."

Some of the sites probably won't ever be developed as large office buildings. Mr. Casey, who holds the listing on the Provident Bank site, sees it being developed for mixed uses, probably a blend of retail, parking and offices.

"I don't see it being all any one thing," he said. "It's going to be creative."

All of the projects were held up by the recession, but some also were affected by other events. A Provident spokeswoman said "a leadership change was a factor" in the bank's decision to shelve its building, of which the bank would have occupied only a small percentage.

And One Light St., the 45-story, $200 million behemoth (by Baltimore standards), was put off largely because the developers lost a major tenant.

"When we entered the project, it was represented to us that Maryland National [Bank] would be the main tenant," said Amer Hammour, executive vice president at Capital Guidance's Washington office. But Maryland National backed away from the deal before a lease was signed, he said.

"If we proceeded, we would have a speculative building of 700,000 square feet," Mr. Hammour said.

MNC spokesman Daniel G. Finney declined to comment.

No one puts up speculative buildings of 700,000 square feet anymore. No one wants to build them, and no bank wants to finance them. The reason is an office market so glutted that it would be years into a moderate economic recovery like the one economists have projected before the glut is cleared up.

Downtown Baltimore had 1.1 million square feet of Class A office space, or space in buildings that are either new or have prestigious tenants such as top banks and law firms, vacant at the end of 1991, according to a W.C. Pinkard & Co. report. Another 450,000 square feet is under construction at Commerce Place, a South Street building scheduled for completion this year.

If the city's businesses leased as much vacant space as they did on average from 1985 to 1990, it would take more than three years to lease it all.

But even that would mean a huge recovery from leasing levels of 1991, when tenants actually moved out of more Class A space than they moved into, a phenomenon brokers call "negative absorption."

Such a recovery, set back by the demise of the law firm Frank, Bernstein, Conaway and Goldman, which occupied 89,000 square feet at 300 E. Lombard St. and the move of CSX Corp.'s Baltimore offices from One Charles Center to Florida, is not in sight.

"We're going to have a negative one [absorption rate] this year too," Mr. Casey said.

Reversing the trend could be especially tough, since many of the few customers available look at both suburban and downtown locations, said Sally McGraw, a broker for Manekin's downtown office.

"Our biggest concern is keeping the downtown viable," she said. "Bobby's [Robert Manekin's] famous line is 'Stay alive till '95.' And the response is, 'For what?' It's going to be tough."

Still, not everyone agrees with Mr. Casey that the next speculative building will be built -- from the real estate industry's perspective -- in the next eon.

Mr. Manekin said a 1997 or 1998 opening is likelier. Even before then, cranes could dot the skyline during construction of buildings designed for individual tenants -- similar to the new Ryland headquarters in Howard County.

One possibility is the headquarters of the U.S. Health Care Financing Administration, if the federal government chooses a downtown site controlled by a Rouse-led partnership instead of a location in Woodlawn.

That decision is scheduled for August.

Meanwhile, work is under way on Crescent City, an 11-story office building at the southwest corner of Baltimore and Howard streets. But Crescent City is more a 1990s building than one based on the speculative model of the 1980s: Crescent City is 95 percent leased to federal agencies, including the U.S. Army Corps of Engineers.

When it is time to build again, everyone agrees, development will be a different game from what it was in the late 1980s. Mr. Hammour said downtown Baltimore is unlikely to see more than one new building a year for a fairly long time.

All agree that banks aren't likely to make construction loans until a building is at least 40 percent leased (by comparison, Commerce Place is 22 percent leased).

The early leasing guarantees that someone will be paying rent when the building opens, which lets a developer get a long-term mortgage to pay off the shorter-term construction loan. That keeps banks out of the hot water that singed them in 1990 and 1991.

And all agree that the next speculative building to be built -- whenever that is, it isn't likely to be speculative by recent standards -- will be the one that gets a major tenant capable of leasing half a building or so.

"What will determine it is who gets the preleasing first," Mr. Hammour said. "There isn't going to be construction financing for anyone who doesn't have the preleasing, which means an anchor tenant plus [other, smaller tenants]. After that, I hope everyone will be reasonable and not rush in all at once."

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
21°