The Baltimore metropolitan area office market combined surprisingly strong absorption and limited new construction during the first half of the year to lower the metropolitan vacancy rate to 16.9 percent from 18.1 percent at the beginning of the year. There was positive, if unremarkable, absorption in each of the area’s submarkets, led by Suburban West in Baltimore County with 163,000 square feet of absorption. Area developers like Corporate Office Properties Trust (COPT), David S. Brown Enterprises, MIE Properties and Merritt Properties continue to add space in the face of soft market conditions, but each has fared well with new product in the suburban markets. New space in the central business district (CBD) has languished, but developments east and west of the traditional CBD have fared better.

HRPT Properties Trust purchased the Candler Building from Boston Properties for $64 million, or $116 per square foot.

The Baltimore/Washington International (BWI) Airport market remains the tightest. Home to defense and national security contractors, office space in the BWI Airport market is 90 percent occupied. Some of this activity has spilled over into the Howard County market, which is only 80 percent occupied and can offer more space on more aggressive lease terms. Leasing activity in the Baltimore County North market and the greater Annapolis area was slower.

While the market slowly recovers, investors continue to acquire well-leased properties. HRPT Properties Trust purchased the Candler Building from Boston Properties Inc. for $64 million, or $116 per square foot. Affiliates of Harbor Group International paid Crow Family Holdings $134 per square foot ($50.2 million) for the First Union Tower. Johns Hopkins University acquired The Founders Building and South Campus of the St. Paul Company’s corporate campus. In Owings Mills, Merritt Properties purchased three multi-tenant, low-rise buildings in Owings Mills Corporate Campus for $114 per square foot. COPT paid $18 million for 2500 Riva Rd., a two-story, 155,000-square-foot building leased to USi, giving COPT entry into the Annapolis market. USi also sold 175 Admiral Cochrane Dr., a 58,000-square-foot multi-story office building, to KCS Admiral II LLC Group for approximately $121 per square foot. The 138,000-square-foot Merrill Lynch Building in Columbia was sold for $139 per square foot. Cap rates ranged from 9.19 percent to 10.25 percent for confirmed sales.

Downtown

Downtown remains a tale of two markets — the CBD and the developing areas southeast and southwest of the CBD. Downtown has an overall vacancy rate of 18.5 percent: 17.2 percent for Class A space and 20 percent for Class B space. The Class A vacancy rate outside the CBD is 7 percent, principally because of the successful leasing at Bond Street Wharf, where Johns Hopkins University School of Medicine moved into 46,000 square feet of space. The market absorbed 93,000 square feet of Class A space outside of the CBD, but lost 61,000 square feet of Class A occupancy in the CBD. There was positive absorption of 124,000 square feet of Class B space outside of the CBD (principally NCO at Montgomery Park), but negative absorption in the CBD. The vacancy rate for Class B space outside of the CBD is almost 34 percent because of the sheer size of the 1.1 million-square-foot Montgomery Park project. The vacancy rate for Class B space in the CBD is 13.8 percent, abetted in part by the conversion of some buildings into apartments.

Baltimore County

Suburban North

Activity in the Suburban North submarket has been relatively flat, with the vacancy rate stuck in the mid-16 percent range since the beginning of the year. There have been several notable leases despite the lack of market velocity. PHH Arval will relocate into 210,000 square feet in a build-to-suit under construction in the Highlands. Comcast leased an additional 43,000 square feet of space in White Marsh, where Nottingham Properties is building a speculative 75,000-square-foot building at 8140 Corporate Dr. United Equities has leased 18,000 square feet at One W. Pennsylvania Ave., while Morris & Ritchie relocated into 17,500 square feet at Radio Park (1220 E. Joppa Rd.).

Suburban West

The Suburban West market (Owings Mills–Woodlawn) absorbed slightly more space (163,000 square feet) than it added (104,000 square feet). The David S. Brown Company is completing the 150,000-square-foot 800 Red Brook Blvd. building, which is substantially pre-leased to Euler ACI and Progressive Insurance. Merritt Properties completed the 104,000-square-foot 10802 Red Run Blvd. building, which is fully leased. The vacancy rate in the Suburban West market has remained in the mid- to high teens over the past 5 years because of the continuous amount of new construction.

The Class B market absorbed approximately 87,000 square feet during the first half of the year, which helped lower the vacancy rate to 16.6 percent from 18.5 percent at the beginning of the year.

Greater Annapolis Area

There was limited activity in the Annapolis market during the first half of the year, principally relocations internal to the market. However, the Anne Arundel County Economic Development Corporation leased 24,000 square feet at 175 Admiral Cochran Dr. to house a high-tech incubator with a focus on tenants providing products or services for homeland security. A small 17,000-square-foot building was added at 115 West St. The overall vacancy rate remains in the 13 percent range.

BWI Airport

The Airport area remains the strongest overall market, in large measure due to its attractiveness to defense and national security companies. The Class A vacancy rate is 7.1 percent, with two new buildings totaling 277,000 square feet under construction in National Business Park. COPT, the largest owner of multi-story office space in the Baltimore-Washington Corridor, is developing both buildings. One of the buildings is a 157,000-square-foot building at 2720 Technology Dr. leased to The Titan Corporation.

Howard County

Howard County has been a beneficiary of the tight BWI market. Defense and national security contractors like SPARTA and SAIC expanded. SPARTA leased 33,000 square feet at 7075 Samuel Morse Dr., and SAIC leased 22,000 square feet at 7120 Columbia Gateway. A division of the U.S. Department of Homeland Security leased 150,000 square feet at the former Bookham Technologies building at 9140 Route 108. Because of the demand for space at the National Business Park adjacent to the National Security Agency in Anne Arundel County, Ameritrade found it advantageous to relocate to 40,000 square feet at Woodlands II, a COPT-owned building in Howard County.

Other notable transactions during the first half of the year included Office Depot (20,425 square feet), Science & Engineering (27,000 square feet), Novastar (33,000 square feet) and Columbia Bank (35,000 square feet). In addition, Loyola College expanded its Howard County campus by leasing 64,000 square feet at 8890 McGaw Rd.

Howard County will need more of this activity to reduce its 20 percent vacancy rate, the highest in the metropolitan area. Fortunately, construction of new space has almost stopped.

Office Outlook

The outlook is for a slow recovery. The vacancy rate remains high (16.9 percent) compared to Baltimore’s long-term structural rate of 14.8 percent, with an additional 1.3 million square feet under construction. Only 9 percent of new construction in the Downtown market is pre-leased, with the 260,000-square-foot 500 E. Pratt St. project being built on a speculative basis. By contrast, 157,000 square feet of the 303,000 square feet being developed in the BWI market has been pre-leased, as has 225,000 square feet of the 295,000 square feet being built in Suburban North.

The metropolitan economy still has not been able to replace the total number of jobs lost since 2001, a first step in re-populating the large amounts of existing vacant space. The office market has to absorb an additional 3.5 million square feet to return to a 10 percent vacancy rate. Nevertheless, the market took a good first step during the first half of this year.

— Jeffrey B. Samet is vice president/principal with Colliers Pinkard.

Retail

While Baltimore officials tout the city as offering retail investors a greater return on investment than other parts of the country, the reality is that development moratoriums, rising land costs and a scarcity of suburban sites make Baltimore somewhat of a challenge for retail investors.

One of the top development projects in the Baltimore area is Arundel Mills, the 1.25 million-square-foot mall owned by the Mills Corporation. A new entertainment-based retail and dining concept will soon occupy a 63,000-square-foot building at the northeast corner of the mall. The Medieval Times Dinner & Tournament, with seven restaurants in California, Texas, Florida, South Carolina, Illinois and Canada, will offer a medieval-themed dinner and jousting match experience.

Arundel Mills, which opened in 2000, has attracted retailers including Wal-Mart, Circuit City and Staples to the surrounding area. Baltimore development firm Linden Associates is acquiring 20 acres near the mall for additional commercial development.

The waterfront area of Baltimore is also driving development in the city. Upscale apartments, top-notch restaurants, and luxury offices and hotels are planned and under construction. The 24-hour neighborhood hopes to attract additional retail and food establishments. Harbor East, a mixed-use development that includes a Whole Foods supermarket, is expected to open by 2006.

In an award-winning public-private partnership, Belvedere Square has been redeveloped. City and state funding composed $4.2 million of the $14 million deal, which revitalized the nearly vacant center. Black Oak Associates is redeveloping the Food Depot-anchored Belair Edison Crossing shopping center into a power center.

Retailers entering the market or expanding in Baltimore include A.J. Wright, a TJX Companies apparel concept coming to Westside Shopping Center, and Giant Foods, which plans to open stores in Waverly and at Reisterstown Road Plaza. The Cordish Company purchased and is redeveloping Reisterstown Road Plaza. The addition of Marshalls and The Home Depot will bring the center to 772,400 square feet, an increase of more than 100,000 square feet.

Wegmans Food Markets will enter the Baltimore market with a 130,000-square-foot store at the former Hunt Valley Mall, which is being redeveloped into a lifestyle center and renamed Hunt Valley Towne Center. In what is being promoted as the single best daily retail draw in Baltimore, the 21-year-old mall will be transformed by Erwin L. Greenberg Commercial Corporation. For more information, please see “Hunt Valley Mall Gets Main Street Makeover” on page 24.

Recent grocer activity in Baltimore includes Safeway Inc. backing out of negotiations to anchor the 55,000-square-foot Old Town Mall, which is being redeveloped by Peterson Companies. A replacement tenant has not yet been announced. In a separate transaction, Bruns & Merkel Family Market, a $2 million independent venture, will compete with established Baltimore grocers Weis, Shoppers, Super Fresh, Giant and Safeway. A 32,000-square-foot store will debut in August in the Finksburg Plaza along Route 140. The area has become hot since attracting The Home Depot, Target and Lowe’s Home Improvement Warehouse.

Taubman Properties recently invested $500,000 in renovations that transformed Dulaney Plaza into a mini-lifestyle center. The center, which is more than 40 years old, is now attracting retailers such as Starbuck’s Coffee, Ann Taylor Loft and Chico’s. The lifestyle concept is both competing with and complementing regional malls such as Towson Town Center.

Significant transactions include Golden Ring Plaza, a 158,926-square-foot Giant Food-anchored center in Rosedale. Edens & Avant acquired the center from Pence-Friedel for $15.9 million. In January, DLC Management acquired Mount Clare Junction, a 239,000-square-foot Safeway-anchored center, for $13 million. GE Capital acquired Lakeside Village, a 59,985-square-foot Food Lion-anchored center in Owings Mills, for $9.6 million from Continental Realty Corporation.

— Lynn Leonard is vice president - marketing with NewBridge Retail Advisors.

Industrial

These days, it is both the best of times and the worst of times to be an industrial real estate broker in Baltimore. On one hand, there are more buyers than sellers of industrial product in the area, creating quick turnover and some of the highest per square foot prices on record. On the other hand, there is currently more bulk industrial space for lease than tenants can fill, and some speculative developers are building more of it, even in the face of skyrocketing vacancy levels and longer lease-up times.

With interest rates at historic lows and the stock market unpredictable, investors and users want to own real estate. Subsequently, there has never been a better time to sell industrial product. The availability of inexpensive money has pushed prices upwards, and bidding wars have ensued for well-located and well-designed properties. Industrial real estate owners are reaping the benefits of this cycle. Corporations are dropping cash to the bottom line and enhancing shareholder value by selling unused, excess property, while individual owners are doing some profit-taking and often plowing those profits back into more commercial real estate by deferring their capital gains from the sale through the use of tax code 1031.

Whether it’s Honeywell Corporation’s long-term lease, sale and development of 25 acres at Inner Harbor East; the sale of 315,000 square feet on 100 acres on behalf of Baltimore Aircoil in Jessup with an ensuing build-to-suit; or the transfer of Johns Hopkins University’s 40,000-square-foot book distribution center in Baltimore City, prices were strong, buyers plentiful and, in each case, the sellers had the luxury of reviewing many competing offers.

Owners of bulk industrial space for lease are not faring quite as well. Large industrial vacancies litter the landscape, with parts of Glen Burnie and Odenton being shining examples. Corporate bankruptcies, downsizing and a general economic malaise have resulted in holes such as the 346,000-square-foot availability in the former Webvan building in Marley Neck; 300,000 square feet of empty space in Brandon Woods that once belonged to Fila; and 292,000 square feet in Baymeadow that once housed a Panasonic distribution facility

A bit further south, Opus continues its successful developments in Odenton, as the company adds another 400,000 square feet to the market in two buildings. Given the sluggish leasing market, timing could be a bit better, since the new development will directly compete with another 500,000 square feet of available industrial space in the immediate area. The area received a positive shot in the arm in June, with the signing of a 168,000-square-foot lease to La-Z-Boy for a regional distribution center. Even Baltimore City adds to the vacancy mix with 300,000 square feet of warehouse space in what is now known as Montgomery Park. Tenants seeking large industrial space have a world of choice before them, and rates start at $3.50 per square foot, triple net.

With interest rates remaining low but the economy still sputtering, NAI KLNB sees no end to this divided market in the greater Baltimore metropolitan area. The good news is that the continuation of speculative industrial building construction only emphasizes the high degree of confidence developers have in this market — and justifiably so. This is an industry that has always moved in cycles and, with “best of times” just over the horizon, an experienced real estate professional with a long-term view will usually have his patience rewarded.

— James V. Caronna, SIOR, is principal of NAI KLNB in Baltimore.

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