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12/16/2009 : Emerging Trends for CRE in Baltimore

A Look Ahead at Commercial Real Estate: Emerging Trends in the Baltimore Metro Area in 2010

 

From Citybiz.com.  Click here to link to the story on-line.

December 16, 2009

When Stephen W. Shaw, an executive at Merritt Properties, recently spoke at the Urban Land Institute’s Emerging Trends Program, he identified what he considers to be the major trends and issues that will influence the commercial real estate industry in the Baltimore-Washington market in the coming year.

 

1. Local Engines
Compared to the national real estate market overall and some regional markets that have been devastated by the current real estate recession (e.g., the Midwest, Florida and Atlanta), those of us who do business in the area are very fortunate. There are significant economic engines – including the Federal Government, Johns Hopkins, University of Maryland Medical System, Fort Meade, Aberdeen Proving Ground and NSA – that churn no matter what larger economic forces are at play.

 

The market will also benefit from BRAC, which will have two locations, to the north and south of Baltimore, and which will demand significant office and residential real estate development in the next 1–4 years.

 

2. Flight to Value/Flight to Quality
Two trends that are indicative of a changing market are the flight to value and the flight to quality.

 

Some tenants will look at market conditions like ours and decide they can save money by moving from a higher-priced space (e.g., $25/SF in a two-story building) to a single-story building that rents for $12 - $15/SF. That’s the “flight to value.”

 

Others with leases coming up realize that if they’re paying $28/SF, they can make a lateral move and pay the same rate in a much better building. That’s the “flight to quality.”

 

Either way, we’re looking at a market that’s still tenant- or buyer-driven.

 

3. Land Constraints
Real estate operates in a supply and demand market. With vacancy rates above 10%, it’s a tenants’ (or buyers’) market. At rates below 10%, it’s a landlords’ market.

 

This is an older market with very few large parcels and little fallow land. These conditions create a natural barrier to development. Markets with an abundance of raw land often develop at a rate that more readily creates overbuilding, which of course means a longer recovery period will be needed to absorb the available space.

 

4. Reducing Complexity
One of the key trends now, Transit Oriented Development (TOD), encourages mix-use development (live/work/play environments) near transit centers. It’s a nice idea.

 

Unfortunately, the hotel, rental apartment, condominium, office and retail markets are all in pretty bad shape. Complex TOD development is challenging enough when the market is doing well, but the current market is struggling to lease these developments. As a consequence, lenders are hesitant to finance them.

 

Simpler, single-use projects, such as retail centers, apartments or industrial/flex buildings, will be easier to develop and finance.

 

5. When Will Spec Development Return?
Until the market can sustain returns of 10% or more on investment, I don’t think we’re going to see much, if any, spec development. Lack of supply, increased rental rates and an overall vacancy rate in the single digits are the traits of a healthy real estate market. It could be years before new spec projects come online.

 

6. Sponsorship
For a while, neither tenants nor brokers seemed to care who the landlord was. An “every owner is the same” attitude prevailed. Now, with landlords going out of business, the value proposition of any tenancy is affected. A small, under-capitalized landlord, versus a well-financed owner, can put your business at risk. Long-term financial viability, a strong reputation, and a large inventory of space are now very attractive to tenants.

 

7. Tenant Credit Issues
With so many big-name companies going under or suffering major setbacks, what constitutes a good tenant is a question every property owner has to grapple with today. Who do you lease to, if not the once high-profile companies that declared bankruptcy in the past year?

 

Now more than ever, we have to do our due diligence when it comes to leasing and be smart about our transactions.

 

8. Revitalizing Existing Properties
With no new spec development going on, it makes sense to reposition and improve the value of existing properties. With few new projects online and in-house personnel available to make improvements, changing facades, making green upgrades and enhancing the value of current portfolios is one way to sustain (if not increase) market value.

 

As the new year begins, we will all need to keep a close watch on major factors we really can’t control, including interest rates, identifying sources of long-term financing and whether this real estate recession is nearing the end or if this is just the first wave.

 

Stephen W. Shaw
Steve co-manages leasing, retention and new development activities for Merritt’s Baltimore and Northern Virginia portfolios. With more than 21 years in the industry, he is a member of the National Association of Industrial and Office Properties (NAIOP) and chairs the National Forum for Mixed-Use Development. A graduate of the University of Delaware, Steve has completed several Harvard executive education courses, including the Advanced Management Development program.