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As Long as We Remember...

August 7, 2012

Industrial Real Estate Bargains Abound

Earl 'Rocky' Mackintosh

Nationwide, the flow of European investment capital into the United States has combined with our sluggish economy to bring the cost of capital to historic lows, which in turn has real estate investors hunting for good deals.


The biggest news in industrial real estate in Frederick during the second quarter of this year was the sale of the BP Solarex property to Bristol Frederick, LLC at the bargain price of $3 million ($100 per square foot for the building or a surprising $2.99 per square foot for the 23 acres of land alone). At that price, it could be that the structure will be razed and the land potentially re-subdivided.


When you consider that the old 84 Lumber site in Mt. Airy was sold just 10 days earlier to Spirit Finance Group for $4.5 million ($147.25 per square foot for the building, or a $3.49 per square foot for the 29.58 acres of land alone), it helps to put that price into perspective.


Bristol Capital of Bethesda is co-owned by a principal of the Farragut Group, a consulting firm in Washington, DC, specializing in distressed commercial real estate assets. Spirit Finance is a commercial real estate investment firm in Scottsdale, AZ. No word yet on whether either of those investors have prospective tenants in their sights.


It’s a buyer’s market out there, people, provided you are one of the lucky investors who can get their hands on some of that cheap investment capital.


Another bargain that hit the news recently was the sale of the former John Deere facility at the southwest corner of New Design Road and Agro Drive in one of the county’s very few remaining parks zoned for general industrial use. This 5.64 acre site with 13,500 square feet under roof sold for$1.38 million ($102 per square foot for the building, or a $5.62 per square foot for the 5.64 acres of land alone).


Due to the shortage of general industrial zoned property in the county other sites are actively being marketed in the high $8.00 per square foot range. These sellers are capable of patiently waiting, knowing that the short supply will eventually attract buyers willing to pay their price.


Overall, results for Frederick’s industrial real estate leasing market were a mixed bag this past quarter. According to CoStar Group, vacancy rates continue to tick down, posting 16.2% versus 18.1% during the second quarter last year, and absorption of vacant space took a significant jump. Those results were offset by a slight decline in rental rates to $6.71 from $6.85 this time last year, however.


Will this buyer’s market eventually translate to improvements in Frederick’s commercial real estate market? Hard to say.


The phone is certainly ringing more these days at MacRo. While deals are being made many sellers and buyers remain very cautious when it comes to pulling the trigger.


It’s still difficult for smaller local investors to get financing for deals; and, for the most part, sellers are not motivated enough to overcome their frustration at the stagnated values of commercial real estate assets.


We spoke to Michael Pugh, one of Frederick County’s rising commercial real estate appraisal gurus, to get his birds-eye view of Frederick’s industrial market. He had the following insights to share:


“The industrial market was arguably the hardest-hit segment of commercial real estate in Frederick, given that the backbone of that market was residential and commercial building. Commercial construction companies that can chase government contracts are doing well, but not much construction is going on in the private sector. Until the construction industry gets straightened out, Frederick’s industrial real estate market needs more manufacturing jobs [to offset that loss].


“The Frederick News Post recently reported that the old Alcoa site [former Eastalco Aluminum facility in Adamstown] is in the running for a manufacturing facility. That would be great for Frederick; I’m on pins and needles hoping it happens. But the fact is that U.S. manufacturing companies look to Alabama, Tennessee, Virginia, and even China to start new operations. The less than friendly business spirit out of Annapolis has made it too hard for them to start up and operate profitably in Maryland.


“Frederick County’s unemployment rate was up a little bit again last month, which is worrisome. At the height of the real estate boom, unemployment in Frederick was 3.5%, and today it stands at 6% – nearly double. And under-employment, which no one at any level of government seems to be talking about, is at its highest level ever. What that means is that a lot of people who are working aren’t working at their full capacity.


“The European debt crisis is still not quite resolved, the election is looming, and as a result American credit markets are still very skittish. Banks are not loosening up capital – in fact it’s just the opposite. I’m hearing from strong local banks – banks with solid asset management – that their regulators are requiring them to increase debt coverage ratios.”


So, there you have it – as the country collectively waits for November, it doesn’t appear that much is going to change in the economy, or for Frederick’s real estate values.


Rocky Mackintosh is the owner of a land and commercial real estate firm based in Frederick. He is also the editor of the MacRo Report Blog.


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