The Baltimore office market saw little significant movement in the third quarter, but analysts and brokers say there was enough activity to make them a little more optimistic about a recovery in commercial real estate.
The overall vacancy rate increased slightly to 13.8 percent from the second quarter, according to Cushman & Wakefield’s latest MarketBeat report. And office vacancies in Baltimore’s central business district, which includes downtown, hit a historical high of 18 percent. But a major lease in the old Legg Mason building, and increased government and Base Realignment and Closure activity in the suburbs, is giving hope to the industry heading into next year.
“We feel confident that we’re out of the dark days that hit the market over the last two years,” said David Baird, senior managing director of Cushman & Wakefield’s Baltimore office. “We’re seeing that contributing to stability in rents and overall vacancy.”
The big news of the quarter was that one of downtown’s iconic locations — 100 Light Street — found another large tenant following Ober Kaler’s second-quarter deal for nearly 93,000 square feet of space. Transamerica will take up more than 140,000 square feet in late 2011, joining Bolton Partners, which is subleasing 15,000 square feet in the building. If the Transamerica lease had been included in the third-quarter numbers, the vacancy rate in the central business district would actually be 17 percent, according to Cushman & Wakefield researchers. But it doesn’t get included until the tenant actually moves in.
Baird said that even though vacancy rates have gone up slightly, it’s nothing like the vacancy rates and the negative absorption the local markets were seeing in 2008 and part of 2009.
“Because of a lot of space being put back on the market, the net absorption is slightly negative,” Baird added. “But last year, the year-to-date activity was very minimal. Most of these markets were flat.”
Analysts and brokers still point to BRAC movement, federal government demand for space, continued growth of the health care industry and proximity to Washington, D.C., as reasons to be cautiously optimistic about commercial real estate in the region.
Washington and its suburbs saw some positive movement as well, according to Cushman & Wakefield data, with vacancy rates in suburban Maryland dropping 0.2 percent to 17.6 percent. Leasing activity in Montgomery County improved significantly, with more than 2 million square feet worth of leases signed so far this year. That compares with 1.2 million square feet at this time in 2009.
Washington’s vacancy rate went down a full percentage point from last quarter to 13.3 percent and Northern Virginia saw a drop as well, from 15.7 percent in the second quarter to 15.4 percent in the third quarter.
BRAC activity started to make a dent in Anne Arundel and Harford counties, as government contractors such as Stanley Corp., Mantech International Corp. and L-3 Communications signed leases and construct or renovate new buildings. The growth is driven by the need to be closer to their main customer — the Defense Department, which will house the National Security Agency, the Defense Information Systems Agency and other agencies at Fort Meade by 2011.
Analysts say a continued recovery will also depend on health care. CareFirst BlueCross BlueShield announced a major expansion in Cumberland, Mercy Medical Center unveiled a plan to open clinics around the Baltimore Beltway and the Johns Hopkins University acquired the Zurich Insurance Co. building earlier this year.
“The Baltimore Metro market has experienced some overall market slowness but because of its diverse economy driven by health care and government activity, we forecast it will outperform the national economy in 2011,” said Stuart Rienhoff, managing director of Jones Lang LaSalle’s Baltimore office.
Some, however, aren’t as optimistic and say the Baltimore office market has a lot of work ahead to get back to normal levels.
“It’s no longer pouring down rain but it is a light drizzle,” said Jim Caronna, a principal at NAI KLNB. “As we move forward into 2011, it’s still going to be a slog, but we’ll see some gains and absorption.”