Mickey Miller and Ira Miller, two entrepreneurs in their 30s who run a real estate brokerage downtown, never intended to spark a renaissance.
But, unwittingly, that's what they did when they bought a nearly vacant five-story building at 31 Light St. just over two years ago, after guaranteeing a $571,000 loan.
Today, after investing $1.2 million to strip the 94-year-old building of an outdated aluminum foil-like skin and other work, it is fully occupied by Miller Corporate Real Estate Services LLC, Ikon Office Solutions, a CVS pharmacy and other tenants.
Just as important, the 30,000-square-foot building is serving as a beacon to other risk-takers that rehabilitating older, so-called Class B buildings is not only possible, but profitable.
"Our rationale was, it's in the central business district, close to the harbor, and if we put enough money into it in the right places, it would become a Class A project inside with a historic facade," said Ira Miller.
As the vacancy rate in downtown's skyscrapers is whittled down and developers remain fearful of building because of Baltimore's shaky economy, speculators such as the Millers are taking calculated risks in buying Class B properties.
The Millers' success is fostering what some analysts expect to be a rebirth for at least some of the city's older buildings, despite inherent disadvantages such as a lack of parking.
Since fixing up 31 Light St., for instance, the Millers have snapped up six other downtown buildings, including the Water Street Mews. They're spending $1.75 million to rehabilitate the mews, a collection of offices, retail stores and restaurants dating from the early 1900s.
Although they decline to discuss specifics, the Millers say the properties generate a return of more than 10 percent.
The latest sign of a possible renaissance came this month, when Boxer Property announced it had acquired the three-story Brown's Arcade building on North Charles Street, the first in a planned eight-building Class B buying spree that will cost the Houston firm more than $8 million.
When the purchases are completed, Boxer Property will own nearly 450,000 square feet, as much space as in the 30-story Alex. Brown Building.
"We're going to offer space in some cases for roughly the same amount as a person's monthly lunch budget," said Andrew Segal, Boxer Property's 31-year-old president and founder.
The Class Bgame is simple: Buy a building cheap, renovate and modernize it, then rent it at $9-$15 a square foot to tenants who can't afford glittering office towers with views of the Inner Harbor, where the cost is often twice that.
In perhaps the best example of what can be done with older space, a division of General Electric Co. bought the dilapidated Candler Building at 111 Market Place for $20 million in 1986 and spent $40 million making it one of the city's best office locations, with a marble lobby and upgraded amenities.
Although too late for GE -- the company sold Candler for $22 million two years ago -- the improvements paid off.
Last month, the 85-year-old building, considered Class B space because of its age and lack of parking, was sold to a Boston real estate firm for more than $60 million.
But as GE demonstrated with Candler, the game of renovating Class B space is also one of chance and risk.
The cost to buy and renovate older buildings may be too high to make them profitable. And some analysts wonder if renovating older buildings is about as smart as investing in a comeback of eight-track tapes.
"It's swing space," said Jay Gouline, a Johns Hopkins University professor and owner of a real estate investment firm. "It takes between two and three years to develop new space, and demand constraints occur during that time. So when new Class A space opens, the Class B market tends to soften. It's the first space to be vacated."
That's exactly what happened in 1991, when the city was rocked by a glut of new office space and subsequently the worst commercial real estate slump since World War II. As struggling developers of Class A skyscrapers lowered their rents to keep their buildings from becoming see-through spectacles, businesses flooded out of older buildings to take advantage of the discounts.
The so-called "flight to quality" crippled the downtown Class B market of nearly 80 buildings and 7 million square feet. At one point, a third of all the Class B space -- typically defined as more than 25 years old and lacking parking and other modern amenities -- was empty, with few tenants waiting in the wings.
Economic development groups and Mayor Kurt L. Schmoke began encouraging the idea of converting Class B office space to apartments, copying New York, Philadelphia, Cleveland and a host of other cities.
Governments on all levels have stepped in to encourage Class B redevelopment, too, providing significant tax breaks if developers invest certain amounts of capital and meet renovation standards.
Taxes frozen 10 years
One program, from the Commission for Historic and Architectural Preservation, locks in for 10 years property taxes based on the purchase price amount only, rather than the typical purchase price, plus improvements.
Some, including the Millers, contend that a more drastic solution is needed, and compare the city's Class B market to some of Baltimore's notorious public housing high-rises: That to save it, you have to destroy it.
"In order for the Class B market to be healthy, you have to demolish certain buildings that aren't viable and won't ever be occupied fully again," said Mickey Miller.
"That's hard for a lot of preservationists to swallow, and many of the buildings are architecturally significant, but that's what has to be done. There's a couple of million square feet that's just beyond repair."
One building that has been repaired but has failed to attract significant tenants thus far is the American Building, a 14-story building on East Baltimore Street purchased by a Laurel construction firm at auction for $260,000 nearly four years ago.
At the time, analysts believed Orion Construction Corp.'s low purchase price and $5 million capital improvement plan was a sure hit. But today, the 118-year-old building is still looking for more tenants, despite the introduction of a food court.
New life as parking garage
Orion's experience with the American Building has also dampened its hopes for turning the former USF&G; Corp.'s old eight-story headquarters at Calvert and Redwood streets into new offices. Instead, the company is now focusing on converting the interior of the building to a parking garage.
Other Class B building landlords, including the owner of the 10-story Equitable Building at 10 N. Calvert St., are contemplating the same fate for their structures, concluding that the office space is obsolete.
Today, while the apartment studies continue and developers scratch their heads at the enormous renovation costs, the Class B vacancy rate is beginning -- slowly -- to come down.
At mid-year, 18 percent of the city's Class B space was available, down from 23 percent at the end of 1997, according to statistics compiled by commercial real estate firm Colliers Pinkard.
And that's why speculators like Boxer's Segal -- whose company boasts it can rent space quicker, cheaper and more conveniently than competitors, based on its experience with more than 50 buildings in Texas and Oklahoma -- are optimistic they can make Class B projects work.
Less Class A space
Segal and others are also buoyed by downtown's shrinking Class A vacancy level, which now stands at roughly 10 percent, with availability in Inner Harbor buildings even tighter.
By year-end, Segal is expected to have purchased a portfolio of projects from an affiliate of Goldman, Sachs & Co., which took control of a 10-story structure at 16 S. Calvert St., an 11-story project at 301 N. Charles St. and others in November 1996.
Not that the New York investment firm wanted the buildings, which were previously owned by Kenilworth Equities Ltd. The New York developer relinquished the projects after losing confidence that the Class B market would ever fully recover.
Kenilworth gave the projects up because, among many reasons, the firm felt severe problems with Class B buildings can ultimately hamper their redevelopment.
The biggest difficulty, analysts and tenants agree, is a lack of on-site parking. Without it, employees are often forced to deposit their cars in garages blocks way from their offices, and many workers can't afford the fees.
Still, Segal sees the problems as more of marketing challenges than structural dilemmas.
"The buildings we're buying have never lacked investment," Segal said. "They're well positioned but have been poorly marketed. You have to find someone who values the quirkiness of older buildings."
"This is how a market corrects itself," he said. "It just doesn't make sense to have well-located buildings vacant."
Pub Date: 8/23/98