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As Long as We Remember...

February 12, 2013

Regionís Commercial Office Market Cramped

Earl 'Rocky' Mackintosh

With additional cuts looming and the impending loss of Bechtel jobs to Virginia, Frederick needs new employers more than ever.


CoStar analytics opened their 2012 office market recap with this somewhat dubious statement: “If you didn’t like 2012, you probably aren’t going to like 2013.” However, in the end they delivered a mixed bag of good and bad news.


The U.S. office market is more or less reflecting the U.S. economy: hot in some spots, a sluggish recovery overall, but moving in the right direction at least.


Absorption overall in the U.S. office market has improved, meaning that more space is being leased than is becoming vacant. Not surprisingly, office markets with high concentrations of technology and energy businesses are red-hot right now: Seattle, San Jose, and Pittsburgh (which posted the lowest vacancy rate among the 20 top markets in the U.S. due to its coal and shale industries).


The Washington D.C./Maryland/Northern Virginia market has already seen the negative effects of government spending cutbacks. Absorptions in that market dropped. In fact, Northern Virginia had the steepest decline (4.5%) in net absorption of any major market nationwide. Interestingly, despite the increase in vacant office space, the rents are continuing to climb in Northern Virginia (perhaps because private businesses continue to flee Maryland for Virginia’s business-friendly tax structure).


Real Estate Investment Trusts (REITs) are now buying portfolios of office buildings (as opposed to single purchases of large iconic buildings in top markets like New York and Washington). In fact, CoStar declared “the window for top-dollar deals in D.C. has closed.” REITs are shopping instead in secondary and tertiary markets for buildings that offer better yields than top markets will bear.


Bechtel is vacating 123,000 SF of office space in Frederick this year. That is a blow to the Frederick market, and is nudging Frederick’s office vacancy rates up to almost 15%, which otherwise would have remained stable around 13.5%.


The loss of a major employer like Bechtel and higher vacancies in Bethesda and Rockville will likely put some pressure on the Frederick office market this year. And we don’t yet know what the total fallout of government spending cuts will be.


There’s really only one solution to the problem, as MacRo Report Blog has covered repeatedly: Maryland needs more private employers.


During a recent roundtable of Frederick’s commercial real estate professionals, my colleague Gary Large, of Ausherman Properties, said it best: "We can’t fill three million square feet of unoccupied office space with companies from Frederick.”


Here are the 2012 top five commercial office sales in Frederick.


1) $16,511,000 PNC Bank Building – 110 Thomas Johnson Drive

Greenfield Partners purchased this office building in a portfolio sale of 23 properties worth $161,900,000 from Corporate Office Properties Trust (COPT) in July. The building is 122,491 SF in size ($134.79/SF).


2) $3,350,000 North Ridge Professional Center – 130 Thomas Johnson Drive. This 13,204 SF medical office building with multiple tenants sold in June ($253.71/SF).


3) $950,000 45 East All Saints Street. An investor purchased this 5,585 SF office building that backs up to Carroll Creek in downtown Frederick ($170.10/SF).


4) $714,010 Conley Farm Building 1 – 7101 Guilford Drive, Unit 100. A Square Investments, LLC, purchased this office condominium in September from Clagett Enterprises. The property is 3,097 SF ($230.55/SF).


5) $670,000 New Market Professional Center – 164 West Main Street, Units E & F. Lighthouse Financial Advisors sold this property in July. The two office condominiums total 2,897 SF ($231.27/SF).


There were a couple of office buildings that sold in Frederick that qualified for this list based on recorded selling price, but as they appear not to be arms-length transactions and not necessarily representative of true market value, they were not included.


Rocky Mackintosh, is president, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland


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