Class A vacancy rate downtown at 16.3%The...


Class A vacancy rate downtown at 16.3%

The regional office market continued its slow improvement in the third quarter, as the Class A office vacancy rate downtown dipped toward some numbers that were familiar before the fallout of the recession.

Casey & Associates said the downtown Class A vacancy rate fell to 16.3 percent during the quarter. Users have moved into 481,000 square feet more space than they have moved out of this year, which brokers call "absorbing" space, mainly because of the state's purchase of 6 St. Paul Centre. The 305,000-square-foot tower had been mostly empty since its completion in 1985.

The Class A market had shown "negative absorption" -- meaning that tenants moved out of more space than they moved into -- in both 1991 and 1992. The downtown Class A vacancy rate stood at 22.4 percent at year-end, according to Casey.

"One of the real positive things is that the Class A market is now below 17 percent," said Thomas C. Jackson, the research director for the Baltimore commercial brokerage firm. "We're approaching 1980s levels, finally."

That's true. But there's an important difference, as he admits.

When vacancy rates fluctuated into the upper teens during the 1980s, developers were counting on the then-expanding market to bring the rate down quickly. No one expects that to happen now.

A quarter of the vacant Class A space downtown continues to be at Commerce Place, the tower at South and Redwood streets that has 317,000 of its 450,000 square feet available.

The Class A market in Towson actually showed a slight drop in absorption because the law firm of Whiteford Taylor & Preston has put its 38,000-square-foot office in the Court Towers building on the market.

Whiteford Executive Director Patrick J. Brady said the firm expects to shrink its office in Towson rather than close it. "The most likely option is to sublease a fraction of the space," he said.

Overall vacancy rates run like this: Baltimore City, 20.4 percent, with the 25 percent vacancy rate in older, Class B buildings offsetting improvements in Class A; Baltimore County, 16 percent, down from 17.8 at year's end; Howard County, 16.3 percent, better than the 17.1 percent year-end rate; and Anne Arundel County, 17.3 percent (though still topping 30 percent in the vicinity of Baltimore-Washington International Airport), down from 19.4 percent at year's end.

The region-wide rate is 18 percent, down from 19.4 percent nine months ago.

Nonresidential construction on rise

The same modest, spotty improvement shown in the leasing market has occurred in the non-residential construction business, according to the August building permit figures from the Baltimore Metropolitan Council.

"New nonresidential construction ended the month of August on an up note, due to a few major government/institutional projects," the council said in its monthly report. "Over $71.8 million [worth of non-residential construction] was permitted in the region, compared to only $18.7 million during the same period of 1992, an upturn of 284 percent."

But the lion's share of that money is concentrated in a handful of big jobs, the council said. A cool $50 million represents one of the permits for work on the new $122 million headquarters of the federal Health Care Financing Administration, now under construction in Woodlawn.

Another $10 million represents the biggest job authorized in Anne Arundel County, for a Women's Hospital at Anne Arundel Medical Center in Annapolis.

The biggest permits in Baltimore were for $4 million of work on a parking garage at the Harborview condominium complex and $3.5 million for a two-story building at Gilman School.

Howard County's biggest permit was for $1 million for a Bertucci's restaurant in Columbia, Harford County authorized a $1.2 million addition to rebuild a firehouse in Havre de Grace, and Carroll County's authorized a $350,000 warehouse/office building in Westminster.

Real estate may be good investment again

It may not be for widows and orphans yet, but real estate might be a good investment again, a report from Salomon Bros. Inc. says.

The five analysts who wrote the report aren't just talking about real estate investment trusts either, though they note that REITs sold $3.9 billion of stock during the first eight months of the year, including $1.7 billion in August alone.

"After a bitter winter -- one that lasted several calendar years -- signs of spring are beginning to emerge. It is not just a January thaw, but the real thing."

They offer several reasons. First, real estate prices have fallen so much that today's buyers can expect returns competitive with other types of assets. In fact, prices are so low that real estate has become an income-oriented investment, rather than the lose-early, make-a-killing-later capital gains play it was in the 1980s.

Second, many cities are showing recovering job growth, the key engine of real estate demand. And third, investors have the world to themselves because no one is building anything that might become competition in the future.

"With forecasts for single-digit stock market total returns and little prospect for a significant interest rate decline, the relatively high current return from real estate assets implies that real estate is positioned to deliver attractive returns, even with little or no price appreciation," the report said.

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