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Commercial property vacancy rises
Retail hit harder than office space, experts say
Friday, Oct. 16, 2009
 Click here to enlarge this photo Staff photo by EMILY BARNES
A lease sign is in front of a building on Industrial Park Road in Waldorf on Oct. 14. Commercial vacancy rates are rising nationwide and the Federal Reserve Board fears another real estate collapse.
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A Federal Reserve presentation given last month to banking regulators suggested that the national market for commercial real estate could collapse in a manner similar to the housing market, The Wall Street Journal reported Oct. 7, because banks have not amassed enough reserves to cushion themselves if a large volume of loans goes bad. Nationally, more than 10 percent of retail space is vacant, also according to The Journal.
Anecdotally, more and more "for lease" signs are appearing in front of commercial properties locally, but the situation might not be as dire as that forecast for the rest of the country, at least not yet. Real estate participants and experts say Southern Maryland's market is feeling the effect of the national crisis but that Southern Maryland has characteristics that could shield it from the worst.
Representatives of the Maryland and Southern Maryland associations of Realtors said commercial vacancy rates and other data are generally not tracked and are unavailable.
While Southern Maryland is buffered from national trends in some ways, rising unemployment has hit here, too, necessarily impacting commercial real estate markets, according to Anirban Basu, chairman and CEO of Sage Policy Group, a Baltimore-based economic consulting firm. But office space has held up better than retail space as the plummeting appetite for goods eliminated the need for many stores.
"Retailers in recent years have sought to vastly increase their Southern Maryland footprint because of the region's outstanding demographics and capacity for growth. This has been true in each of the three Southern Maryland counties, though for different reasons. … In any case, Southern Maryland has recently experienced the types of job loss that have been experienced in many communities, including in construction and financial services. This has reduced the demand for space," Basu said.
While the recession "likely" ended some time this summer it will probably be years before local business properties are worth as much as they were before December 2007, Basu said.
To attract interest, landlords will have to reduce rent.
"There needs to be a certain level of growth, a certain duration of recovery and job growth and we're simply not there yet as a nation or as a state. Until consumers see jobs, see jobs numbers improve they will be in a foul mood and in no mood to return to behaviors of consumption, if they ever will," he said, while tight credit also makes real estate investment difficult.
But things might look a bit better to those on the ground.
A commercial agent with Baldus Real Estate, Bob Johnston sees the local commercial market beginning to rebound but said many businesses have already closed or moved into smaller spaces to save money.
As chairman of the commercial investment committee at the Southern Maryland Association of Realtors, Johnston said the attitude of other agents reinforced his belief that things are looking up.
On the 81-member committee, on "commercial and industrial [properties], the feeling seems to be the same. A lot are saying, ‘We wish the market was a little bit better,' but we all kind of agree it's coming along. Probably, I think, we're looking at another year of this," he said.
Baldus itself was part of the consolidation trend, closing its residential and commercial offices in Waldorf early this month and moving everything to its main building in La Plata to save money, Johnston said.
Johnston's optimism is shared by La Plata-based attorney Louis Jenkins Jr., whose practice specializes in real estate transactions and represents Community Bank of Tri-County among other clients.
"Typically the commercial market will trail the residential market for several months, and now that there has been some stability in the residential market I think the commercial market has stopped its decline and leveled off," Jenkins said. "… Realtors, lenders have indicated to me that their commercial business has actually picked up over the last 30 days. Hopefully that's an indication of things."
Still, it is a renter's market for now and possibly for some time to come, and landlords will have to accommodate themselves to potential tenants.
"There's certainly numerous commercial spaces available, but again it would be my expectation that over these next several months [some] would again be filled, just because I believe that entrepreneurs are getting back out into the market and landlords have become more negotiable in their terms," Jenkins said. "I think it will still be a gradual incline. … I think it's going to take several years with minimal progress; I think it will take several years to continue to improve to where it was several years ago. It's not going to be an overnight return to the splendor everybody enjoyed in years past."
Maxine Spence, co-owner of a building in downtown Hughesville, said she and her partners are expecting it to take about a year to rent 1,800 square feet of vacant office and warehouse space.
"We're kind of waiting for the economy to pick up some, and hopefully for the town to revitalize a little bit. I kind of think it's going to" after the Southern Maryland Electric Cooperative expands its offices, she said.
Even when the national economy fully recovers will there be too much commercial space in Southern Maryland?
Dave Fegan, president of Prince Frederick-based Mar-Ber Development Corp. and an agent at Calvert Commercial Real Estate, thinks so, at least in Calvert County.
"On the retail end [new construction] was needed and it was absorbed — that's not the issue — but on the office buildings, I can't account for it. A lot of individual people built a lot of offices here and there ... I can't account for why, and it seems like the office space in town doubled overnight and that's going to take years to digest," he said.
Moreover, a tight credit market makes it difficult even for those with the finances and desire to complete transactions. One client had to reach deep into his pocket to buy an industrial lot in La Plata when a bank denied a loan, Johnston said.
"The person who was buying it had very good credit. I said, ‘Well, what do you want me to do? Help you find a bank?' [He replied], ‘No, I'll use my own bank,'" Johnston said. "He wrote the contract up, [then] he said, ‘Guess what? They want 50 percent down on that lot — it was a $200,000 lot. I just pulled the money out of my pocket and paid it all.' I think he left the bank, too."
The slowdown has not changed the way Community Bank of Tri-County does business because the bank always lent money conservatively, focusing on owner-occupied homes and user-occupied business space, according to Michael L. Middleton, president and CEO.
The bank is still lending, he added, saying the bank has made $130 million in commercial real estate loans since the beginning of the recession. The bank avoided catastrophe by shying away from more speculative forms of real estate investment.
While Southern Maryland is affected by broader trends, the dire national forecasts don't apply here, he said, partly because of mushrooming federal employment.
"Regionally, Southern Maryland is in a remarkably strong position due to the increased level of financial activity now centered in the Washington region as opposed to Wall Street. The growth of government, its role in supporting the economy is now basically focused in Washington. Therefore that, plus having the military facilities, has put Southern Maryland in the very unique position compared to the country. While activity [here] pauses and resets its priorities, I don't think that portends a material reduction of values going forward," Middleton said.
"… No, we really haven't changed. We want owners to have a stake in the game and we want to have consistent debt coverage, reasonableness, safe and sound — that's what we've always been doing. I guess that we don't mind being the ‘turtle.'"
Art Carson, director of NM Commercial Real Estate in Lexington Park, said it seems local banks are still lending but large ones are holding on to their money.
"I think that Community Bank and County First bank are probably … doing what they traditionally do, but the larger banks are just not doing much at all and its really been a hindrance because people that want to get up and running just aren't able to get through the quagmire of the banking system," he said.
Fred Solomon, spokesman for PNC Bank, said the bank would be "reticent" to divulge any information about its practices.
"We would not typically provide very geography-specific information," he said.
Johnston has seen new real estate agents, who started working when the market was booming, driven out of the field, but old hands know how to hang on.
"The basic thing, I think, I see in the market is the agents that have been in for a long time tend to be OK because they've gone through it before, but the agents that came in when the market was good, a lot of them are gone now. They didn't go through the hard times. I know a lot of agents — right now I keep saying, ‘You need go back to basics.'"
