Weak federal, private demand leaves office market stagnant in Maryland suburbs -- Gazette.Net


Continued weak demand from federal and private tenants is prolonging the office market doldrums in the Maryland suburbs of Washington, D.C., according to Cassidy Turley’s second-quarter report.

The absorption of property in Montgomery and Prince George’s counties increased slightly during the last three months, showing negative 28,580 square feet, compared with negative 54,000 square feet in the first quarter. But new office property seems overpriced, sitting almost half vacant with average asking rents 16 percent higher than overall class A space.

“New product will continue to struggle to find tenants in suburban Maryland due to stagnant government leasing demand and a limited number of tenants looking for large blocks of space,” the broker predicted.

The overall vacancy rate was unchanged at 15.5 percent, while asking rents fell to $26.28 per square foot from $26.58 during the first quarter.

One area of strength is the Bethesda-Chevy Chase submarket closest to the District line, which showed 9,191 square feet of positive absorption and a 60-cent increase in asking rents to $36 per square foot.

The Gaithersburg submarket was the weakest in Montgomery County, registering a vacancy rate of 15.8 percent and negative 20,006 square feet in net absorption.

Montgomery County overall showed 10,422 square feet in positive absorption while Prince George’s County registered negative 39,002 square feet.

Most of the leasing activity for the quarter was limited to lease renewals, the largest of which was the National Institutes of Health re-signing for 99,500 square feet at 10401 Fernwood Road in North Bethesda. Among private tenants, Boston Consulting Group renewed and expanded into 54,000 square feet at 4800 Hampden Lane in downtown Bethesda, while Texas Instruments renewed its 52,000-square-foot lease at 20450 Century Blvd. in Germantown.

No new office buildings delivered during the quarter and the first quarter’s delivery at 7700 Old Georgetown Road in downtown Bethesda remained only 15 percent leased. A few blocks away, the renovation project at 7550 Wisconsin Ave. is scheduled to deliver 120,000 square feet of class A office space in the third quarter but there were no pre-lease deals as of the second quarter.

Elsewhere, Choice Hotels International of Silver Spring already has pre-leased 138,000 square feet at Rockville Metro Plaza II, which is expected to deliver in the second quarter of 2013. Next to the White Flint Metro station, the Nuclear Regulatory Commission will be moving across the street from its current location at 11545 Rockville Pike into its new 360,000-square-foot facility at North Bethesda Center 1 in the third quarter.

Time of the signsTwo sign companies, anticipating expansions and more sales, have moved to larger quarters in Frederick.

SMI Sign Systems, which provides signs for health care, property management and other commercial customers, relocated to a 15,000-square-foot building in the Stanford Business Park that it acquired through the Small Business Administration and with financing from Sandy Spring Bank, spokeswoman Tricia Rawlings wrote in an email.

The company previously leased 10,000 square feet in Rockville, she said.

“It was time for SMI to upgrade our facility to accommodate our growth,” company President Max Aronow said in a statement. “We were searching for the right facility in the right location for our evolving business. It made great sense for our company to select Frederick. The Frederick market strategically positions us centrally in the Baltimore/Washington, D.C., corridor allowing us to expand our footprint into several new ancillary markets.”

SMI has 25 employees, hopes to expand to 30 to 35 by the fourth quarter, Rawlings said.

The company provides fabrication, installation and service for interior and exterior signs, both illuminated and non-illuminated, plus directional signage, lobby directories and reception signage.

Meanwhile, Signs By Tomorrow moved into a larger building at 7313-E. Grove Road.

“We are so thankful to the Frederick County community who supported us to make this expansion happen,” Debbie Truelove, franchise co-owner with her husband, Rob, said in a statement.

The new location has 4,250 square feet, versus 1,600 square feet in its previous location. The new building has an indoor vehicle bay. Besides signs, the company produces custom decals and labels, outdoor banners, trade show displays and vehicle graphics, according to its website.

Home Properties pays $186M for Ellicott City apartments

Home Properties announced that it paid $186 million for Howard Crossing, a 1,350-unit garden apartment complex in Ellicott City.

The Rochester, N.Y., company plans to spend about $12 million during the next three years to upgrade individual units and exteriors to improve marketing and retention while reducing future repair and operating costs.

“This newly acquired property is located less than one mile from Charleston Manor, an 858-unit property we acquired in September 2010 that has exceeded our underwriting expectations,” Edward J. Pettinella, Home Properties president and CEO, said in a news release. “Based on our familiarity with this submarket, we expect Howard Crossing will achieve similar success.”

At closing, Howard Crossing was 92.6 percent occupied at monthly rents averaging $1,111. The property is off U.S. 40, with easy access to U.S. 29, Interstate 95 and the Baltimore Beltway.

Built in phases from 1968 through 1975, Howard Crossing comprises 42 three-story brick garden-style apartment buildings. There are 680 one-bedroom units and 670 two-bedroom units. The average unit size is 854 square feet.

The complex includes two commercial buildings with a total of 14,371 square feet, currently producing about $150,000 in annual rental income.

Management anticipates a 5.9 percent first-year capitalization rate after allocating 2.7 percent of rental revenues for management and overhead expenses and before normalized capital expenditures.

Legg Mason tower lines up $180M in permanent financing

CBRE Capital Markets announced that it arranged $180 million in permanent financing for the Legg Mason tower, the centerpiece of the Harbor East market in Baltimore owned by H&S Properties Development.

The 24-story, 612,613-square-foot trophy office building at 100 International Drive was completed in 2009 and helped spur an exodus of class A tenants from the city’s central business district. The building is named for its primary tenant, asset management company Legg Mason.

“Harbor East has quickly evolved into Baltimore’s premier submarket,” Joe Donato of CBRE’s Washington Capital Markets, said in a statement. “It’s a credit to H&S that tenants are willing to pay a premium to locate in Harbor East due to the dynamic environment they created. This location combined with the asset’s overall quality and stable, long-term cash flows created a very competitive process resulting in favorable financing terms for the borrower.”

Harbor East is on 70 acres between Baltimore’s Little Italy to the east and the Inner Harbor to the west. The planned development calls for 10 million square feet of mixed-use space and its attractions already include a 256-room Four Seasons Hotel and a Whole Foods Market grocery.

General Growth wins new loan for Baltimore Harborplace & Gallery

General Growth Properties of Chicago announced that it lined up $3.1 billion in new financing during the second quarter of 2012 for shopping malls in eight states, including Harborplace & The Gallery in Baltimore.

The Inner Harbor complex — originally developed by the Rouse Cos. in the 1970s — secured a new loan of $82 million at 5.24 percent, which was the highest rate the company reported for its new financings for nine shopping centers. The deal replaces a $61 million loan at 7.89 percent, which also was the highest previous rate reported. All told, the company said the average interest rate for all of its new loans was 4.2 percent, compared with its previous rate of 5.24 percent.

The Baltimore property’s loan now matures in May 2022, replacing the previous termination date of June 2014.

General Growth acquired the Baltimore retail center in 2004 as part of its $12 billion takeover of Rouse, a high-debt financed deal that figured prominently in the bigger company’s eventual filing for bankruptcy in 2009.

Rouse has since all but disappeared as a corporate entity in Maryland, where founder James Rouse became a pioneer in master planning with the development of Columbia and the revitalization of Baltimore’s once-seedy Inner Harbor. Last year, the Rouse name was slapped on a group of 30 underperforming malls in isolated locations as part of a spinoff of centers that averaged $279 per square foot in tenant sales, compared with almost $500 per square foot for the remaining General Growth retail properties.

The Columbia commercial and residential holdings — excluding the Mall at Columbia — now are owned by Howard Hughes Corp., a separate General Growth spinoff.

Corporate Office asset selloff hits $214.8 million

Corporate Office Properties Trust announced that its disposal of assets to improve its balance sheet reached $214.8 million with the sale last week of an office building in the U.S. 29 corridor of Silver Spring.

The Columbia company traded 11800 Tech Road for $21.3 million, netting $5.3 million after debt repayment and closing costs.

For the first half of 2012, the company sold a total of $138.2 million and realized net proceeds of $115.1 million on properties and adjacent land. The deal covered about 776,500 operational square feet of space that were 70.5 percent leased at the time of sale.

Since announcing its strategic reallocation plan in April 2011, the company sold a total of $214.8 million of underperforming properties and adjacent land containing about 1.7 million operational square feet, realizing net of $184.6 million. These properties represent 21.4 percent of the company’s total leases but only 7.6 percent of its consolidated operating square feet in place at March 31, 2011.

Staff Writer Robert Rand contributed to this report.

Commercial real estate news items may be mailed to Robert Rand, The Business Gazette, 9030 Comprint Court, Gaithersburg, MD 20877; emailed to rrand@gazette.net; or faxed to 301-670-7183.