In a year marked by an end to new office construction, a surplus of commercial real estate and a lack of companies interested in expanding, local commercial real estate brokers say Howard County is likely in for more of the same in 2003.
An abundance of unoccupied office space combined with more space available on the sublease market drove the county's vacancy rate to the highest it has been in several years - 26 percent - and brokers say they expect the combined rate to remain there for a while.
The hefty sublease market alone has driven the county's office space absorption rate significantly into negative territory and intensified pressure on landlords to lower prices. It could be late next year before Howard's real estate market sees increased demand, and 2004 before there is significant new construction, brokers say.
"I think we limped along, [and] I kind of see more of the same. We're going to be back looking at the more moderate absorption of years past, the mid-'90s era," said E. Hayes Merkert, senior vice president at Manekin LLC, a local commercial real estate brokerage. "I think we'll see good years ahead, new employment opportunities, I'm sure, but in the short run we'll have to get through the product we have in the marketplace. I think it'll be another 12 to 18 months."
In the past 12 months, the largest new lease in the county was a 50,000- square-foot contract that landed health insurer CareFirst BlueCross BlueShield in a Columbia Gateway office building owned by Corporate Office Properties Trust. That building, completed last fall, stood several months without a tenant.
An analysis by Manekin shows direct-leasing tenants took up 106,700 square feet of space this year. That number drops below zero - minus 265,700 square feet - when the amount of space given back to the market for subleasing is subtracted. Today, single-story office space in Columbia Gateway, the county's premier office park, is available for as little as $14 a square foot.
By comparison, companies leased more than 1 million square feet of space in the county in 2000, the analysis showed, and 975,300 square feet after sublet space is subtracted. The same single-story office space in Gateway went for about $19 a square foot.
'In a recovery mode'
But things are not as bad as they could have been, said J. Allan Riorda, a principal with NAI/KLNB Inc. The lack of land and market restraints have saved the area from the kind of overbuilding that could have long-term effects, he said.
"We're kind of in a recovery mode this year," he said. "What helped us this recession was the fact that we did not have overbuilding. The construction - due to, in part, the land constraints - helped keep the vacancies manageable."
The financial backing of the area's developers and owners also has kept rents from spiraling, said Ed Eli, vice president and director of land sales with the Rouse Co.
"A desperate seller does different things than a strong seller or owner does," Eli said. "Rents have held up amazingly well compared to the last sell-down we went through. That works to our benefit."
Defense sector
Another thing that could help keep Howard afloat is its proximity to the National Security Agency, observers say. Howard has historically had a strong defense sector, and while the companies that have been driving the real estate market recently have been in the finance, insurance and real estate sectors, COPT President Randall M. Griffin said, defense could re-emerge as a strength.
"There's a lot of defense contracting and government needs revolving around [NSA] now," he said. "We're seeing some faint signs of some of that spilling over into Howard right now."
And things are not so sour for everyone. Brokers leasing smaller spaces are finding the market a little easier. Liberty Property Trust has a complex of single-story office buildings at Dobbin Road and Route 175 that has leased well for spaces between 2,000 square feet and 20,000 square feet.
The third building in the six-edifice project is 95 percent leased, and the company expects to begin building the second half of the complex as early as next month, said James K. Flannery, regional vice president.
"It's slow, but there are still deals out there," he said.
Most brokers agree that although the year has been slow, the county is still in a good position to recapture a fair share of leases when companies once again are looking to relocate or expand. The area's location between Baltimore and Washington, its proximity to Baltimore-Washington International Airport and its highly educated work force will be factors in the eventual recovery.
"I think we're healthy," Merkert said. "It's still a great location."