Owners of office properties north of Lombard Street in downtown Baltimore need to embrace changing demand if struggling properties want to avoid bigger problems, such as developers losing buildings.
Law firms that were the core tenants for these properties have downsized and relocated in recent years, Robert Manekin, a senior vice president at JLL, said. Firms such as McGuire Woods, Venable LLP and Shapiro Sher Guinot & Sandler are among those that moved to offices along Pratt Street from offices to the north over the past decade.
That has left a lot of difficult-to-fill space in the city’s traditional central business district, which, barring an unlikely a boom in new tenants eager to lease traditional office space, will stay empty.
“Landlords will have to adopt more flexible options (to compete),” Manekin said.
Kirby Fowler, president of the Downtown Partnership of Baltimore, said there are certain buildings that owners need to invest in re-positioning downtown. He would like to see the pace at which the city attracts businesses from outside the market pick up. But he remained optimistic about the ability of office properties north of Lombard to remain viable and wasn’t particularly concerned about foreclosures.
“I see less reason to worry than I did eight years ago,” Fowler said.
The amount of leased office space north of Lombard Street downtown has decreased significantly during the last two decades. In the last 18 years, according to data from JLL, the amount of space leased north of Lombard peaked at 9.7 million square feet as late as 2006. That number has steadily dropped in the ensuing years to its current 7.6 million square feet.
Meanwhile, tenants in the city continue to migrate to space closer to the Inner Harbor. Leased office buildings south of Lombard Street, along Pratt Street and extending to Harbor East now represent 47 percent of the market compared to 31 percent in 2000.
Baltimore has created incentives, such as tax credits, to generate interest from developers in transforming less desirable office buildings into apartments. The goal of these incentives is to cut down on an abundance of outdated office space while promoting the growth of a live, work and play environment downtown.
The incentives have generated a bevy of rehab projects that have increased the number of residents living downtown. Based on an expected capture of 20 percent of the annual projected market for market-rate housing, according to the Downtown Partnership of Baltimore, the city center is expected to support between 6,685 and 7,025 new rental and for-sale units over the next five years. At the same time, according to research from JLL, conversions paired withthe limited development pipeline, have decreased supply of downtown office space by 8.5 percent since 2011.
Yet, experts at JLL argue, the conversions on their own aren’t enough. The problems with finding tenants for space north of Lombard, according to JLL research manager Patrick Latimer, can’t be solved simply by subtracting space.
“We can’t just take buildings out of the equation,” Latimer said.
The industries that are producing jobs in Baltimore’s economy, such as the health and education sectors, aren’t looking to lease the traditional spaces offered in these buildings, he said.
Barring something dramatic happening, such as Maryland shuttering its State Center offices and moving state agencies downtown, Manekin said, there’s just not enough demand for traditional office space in the market. Cutting rents, which are already near rock bottom, also won’t be enough to bring in tenants to fill the space.
The best hope to lease these spaces, he argues, are co-working firms and other smaller users.
Co-working firm Spaces, a JLL client, has entered the market and leased two large blocks of space totaling more than 40,000 square feet at each site. Cordish Co.’s successful conversion of Class C office space in the Offices of Power Plant Live into co-working site Spark, Manekin said, is also proof of demand from such tenants. Currently, co-working firms, such as We Work, are actively seeking space in the downtown area.
But changing classic office properties north of Lombard to meet the needs of these new users isn’t a plug-in proposition. It requires owners to make capital investments, in some cases as much as $300,000, to break spaces into smaller spaces along with various other needed changes.
At the same time, financing those improvements may be difficult because lenders will be concerned about a lack of track record in making these shifts. Moving to the short-term leases often demanded by new tenants demand also may make lenders balk when considering a loan for capital improvements.
“It represents something of a gamble,” Manekin said.
But the alternative is a dead zone dragging down overall performance of the city center. If it’s an owner that doesn’t know what it’s doing, which Manekin said isn’t particularly rare, it could mean foreclosures.
“I think developers are going to lose buildings,” he said.