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Peering into commercial real estate’s crystal ball

The heartbeat of commercial real estate began to beat back to life in 2010, after essentially flatlining in 2009.

Some notable office and industrial leases were inked and the hum of the BRAC spool-up emerged in Anne Arundel and Harford Counties as developers readied projects to accommodate anticipated growth. While this is certainly good news, the commercial side is still in the vapor trail of a sustainable residential recovery whose arrival is uncertain.

National employment dynamics still govern the overall economy and until the job creation machines of corporate America hit their stride, the commercial real estate markets will only creep along to recovery.

Gazing through the crystal ball, here are my 2011 predictions for the local and regional real estate markets.

Location boosts office market
Forty miles from the capital of the free world is a pretty good place to be a white-collar employee, relative to the rest of the country. Look for continued strengthening as a result of growth within homeland security and defense-related firms.

The medical and educational components of the regional economy will continue to grow, providing much-needed construction jobs. Mercy Medical Center, Franklin Square and University of Maryland BioPark are good examples of expansion.

Tenants will continue to have opportunities to cut good deals with landlords as the loan windows have not opened as wide as hoped and landlords realize it is less expensive to renew an existing tenant than to find and install a new one. One interesting twist: Now we’re seeing scrutiny of the landlord’s financials by the tenant, instead of just the other way around.

Industrial assets in place
An exceptional grid pattern of road access, a port, a strong airport and an embedded institutional ownership base create both stability and upside for our industrial markets.

Add to this a shortage of zoned land in footprints large enough to accommodate modern logistics and you have a foundation of stable cash flow.

The threat is that as well-located as our industrial buildings are, they may become candidates for some repurposing as they age. Inflation-adjusted growth in rental rates has been low, which is appealing to tenants.

Multifamily projects should grow
With a relatively curtailed pipeline over the last several years and growing demand as a result of a confluence of forces, the apartment market will strengthen over the next several years.

Additional factors that auger well for this segment include echo-boomers entering their prime renting years and tighter standards for obtaining mortgage credit.

These, combined with the ability of developers to obtain financing through government-sponsored entities (i.e. Fannie Mae), will enable construction to occur at an appropriate pace.

Retail still sluggish
Do not look for national retailers to fall over themselves to enter our market. Store openings have been virtually nonexistent for the last two years and only the most dynamic or large markets are getting the attention of the retailers coming out of their store-opening hibernation.

Look for our regional market to become home to more Walgreen’s stores, a Wegman’s or two, and new supermarkets like Harris Teeter and Safeway. The smaller tenants that generally follow the grocers may be a mixed bag of second and third stores from experienced entrepreneurs and new shops grown from downsized executives searching for their next career.

Hospitality market gets a reboot
Expect continued growth in the hospitality segment both from the strengthening of existing brands, the arrival of selected new entrants to our market and the “rebooting” process that is a part of failed projects.

Downtown Baltimore has at least one of each: Fairfield Inn, Hotel Monaco and Hotel Indigo.

Lenders look for best project/corner/borrower
A Dickensian reference seems appropriate when describing the current lending environment as “the best of times and the worst of times.”

Interest rates are low and it appears as though leased projects below $5 million have the ability to attract at least some level of financing from local lenders. Above that threshold, the rules change dramatically.

Best project, best corner and best borrower rule the day in the eyes of lenders whose interest may be further coddled with a depository relationship. Speculative development of any scale is dead on arrival, but pre-leasing of space will allow the financing conversation to at least continue.

Lenders’ balance sheets are strengthening, enabling them to mark loans to market without draconian impairment charges or dramatic increases in their reserves requirements.  It seems as though orderly workouts are becoming the norm as opposed to the exception.

I predict that 2011 will mark a period past the midpoint of a recovery whose speed and depth will be governed by other forces outside our control.

Geographically speaking, we are fortunate and have not experienced the real estate troubles of the rest of the country. Ultimately, this should bring us to a recovery sooner than our southern, northern and western counterparts.

Owen Rouse Jr. is senior vice president, director of capital markets at Manekin LLC and can be reached at