Market Data

Washington, D.C.-Area Markets Capitalize on Stability

Throughout the Baltimore-Washington, D.C.-Richmond, Va., corridor, the economy has been clipping along at a brisk pace with most industries looking for employees. "Unemployment has mostly been holding in the record lows and there is demand for workers with no skills to high skills," says William C. Steffey, CCIM, of Miller Corporate Real Estate in Baltimore. Most commercial property types have remained stable or improved during this recent boom.

Exemplary Office The metropolitan Washington, D.C., office market is extremely strong with continued growth expected due to new high-tech businesses, says Frank Coppola, CCIM, of John Akridge Cos. in Washington, D.C. In addition, the increasing number of high-tech companies has spurred the growth of other industries such as law firms, he says. At the end of the first quarter, 19.8 million sf of office space were under construction.

Lease rates in the area also are rising, Coppola says. "At the close of 1999, rates averaged $39.40 psf with some rates surpassing $50 psf," he says. "Currently, some properties are listed for $60 psf for premier locations." The high prices haven't negatively affected vacancy rates for class A space. "At the close of first-quarter 2000, the overall vacancy rate for the region was 4.6 percent," he says.

Further north in Baltimore, the downtown office vacancy rate has fallen to about 9.2 percent, says Mary Ann Masur, CCIM, of Atapco Properties in Baltimore. "The rate is down from a high of nearly 25 percent eight years ago," she says. "Industries experiencing growth in this market include financial services and Internet providers, with tax incentives assisting growth and expansion." Brisk activity should bring the rate down to 8 percent by year-end, she says.

As the vacancy rate has dropped, annual lease rates have increased. Current rates range from $14 psf to $30 psf. While new construction is only in the planning stages, Masur predicts that the robust economy will fuel continued growth as well as new office product.

Tight Retail In the greater Baltimore area, "The [retail] market is built out," Steffey says. Many retailers are looking for spaces to expand, but few exist. "In a number of cases, tenants like Walgreens, Krispy Kreme, and convenience stores with gas [stations] are buying older properties and redeveloping them," he says.

The lack of available retail space has driven up lease rates. "As good supply has diminished, rates that were $14 psf to $15 psf per year are now $17.50 psf to $20 psf per year," Steffey says. "Better centers can get well into the low $20s psf per year range." Some construction is occurring, but a lack of developable land is prompting more redevelopment instead.

Central Virginia's retail market also is tight, with single-digit vacancy rates in the primary submarkets and a strong demand for new space, says Jeffrey D. Doxey, CCIM, of Dominion Commercial Realty LLC in Richmond, Va. "We are enjoying a substantial amount of new development in the primary submarkets," he says. "Typically, new development or expansion of an existing center is delivered at 90 percent to 95 percent occupancy."

Lease rates in the area are creeping up, but Doxey predicts that they will level off by the end of next year. "For new construction, lease rates are ranging from $9 psf to $14 psf for anchor tenants of 25,000 sf," he says. Rates for small tenants range between $18 psf and $30 psf.

In both Baltimore and Richmond, solid market conditions are causing owners to resist selling properties at higher than 10 percent capitalization rates.

Multifamily Moves The Richmond multifamily market is experiencing a great deal of activity, according to David M. Smith, CCIM, of Morton G. Thalhimer/Oncor International in Richmond. "[There is] much interest in apartment development, independent-living apartments, and continuous-care retirement communities," he says.

The current occupancy rate in the area is 94 percent, Smith says. Lease rates for class A product are rising, averaging about $1 psf for one-bedroom units, 95 cents psf for two-bedroom units, and 90 cents psf for three-bedroom units.

New class A product is expected to come on line soon, with 700 units being built in Chesterfield County and 800 being built in Henrico County, Smith says. Real estate investment trusts and pension funds are the major investors in class A multifamily product, while private investors prefer class B and C product, he says.

Not many multifamily sales transactions are occurring, Smith says. However, the most recent sale of a class A property netted $65,000 per unit. Financing for this market is provided by pension funds and insurance companies, he says.

Excess Industrial "For the first time in several years, there was a negative absorption of industrial space [in Richmond]," says Jane C. Ferrara, CCIM, of Advantis Real Estate Services in Richmond. "This phenomenon can be attributed to an overbuilding of industrial creating a supply of product that outpaced demand." Little new speculative construction is occurring, but there is significant build-to-suit activity.

Richmond's industrial vacancy rate is 14.5 percent, which is up from recent years, says Evan Magrill, CCIM, of Morton G. Thalhimer/Oncor International. "Most of this space recently came available when a logistics provider for Hewlett-Packard relocated to a build-to-suit facility and vacated 438,000 sf," he says.

Typical annual lease rates for class A industrial space range from $3.95 psf to $4.50 psf triple net, Magrill says. While these rates are stable, "With the high vacancy rates, we expect some downward pressure on [lease] rates," he says. Sales of industrial properties are down, but prices are stable, Ferrara says. Class A space averages $35 psf to $50 psf.

Both Baltimore and Washington, D.C., rank in the top five markets nationwide for highest industrial vacancy rates, according to CB Richard Ellis' Industrial Vacancy Index. For industrial buildings 100,000 sf or larger, Baltimore's first-quarter 2000 industrial vacancy rate was 18.1 percent, while Washington, D.C.'s industrial vacancy rate was 15.3 percent. Both percentages were unchanged from year-end 1999, the report states.

Market Glance Boston Real Estate Pops

Tight vacancy rates and a limited supply of developable land are causing Boston's commercial real estate markets to heat up.

Office. "Due to a lack of development sites and the length of the permitting process, [central business district] office and ... suburban office [are] very hot," says Douglas Jacoby, CCIM, of Grubb & Ellis in Boston. The vacancy rate for class A space is 2 percent in Boston and less than 1 percent in Cambridge.

As vacancy rates drop, lease rates have increased. "[Lease] rates are up 15 percent to 20 percent in the past year," Jacoby says. Class A space in Boston averages between $50 psf and $70 psf annually, while the same space in Cambridge averages between $50 psf and $60 psf.

Industrial. Boston's three main industrial submarkets all are experiencing very tight supply with less than 5 percent vacancy rates, says Dennis Davis, CCIM, of the Boston Redevelopment Authority. "The industrial market in Boston is most affected by straightforward highest-and-best-use factors," he says. A demand for housing and office space has led to the recent conversion of many industrial properties.

Annual lease rates for industrial space range from $6 psf to $8 psf triple net, while industrial land leases for between $1.25 psf and $2.50 psf, Davis says. In the next few years, lease rates will continue to rise as more conversions occur and little new industrial product is added to two of the submarkets, he predicts.

Retail. The retail market in Boston and throughout New England is healthy, "However, the steady uptick in interest rates has naturally affected pricing, forcing [it] down, cap rates up, and slowing down the market to some extent," says Thomas H. Blakely, CCIM, of Finard & Co. LLC in Burlington, Mass., a suburb of Boston. Sales still are occurring, with grocery-anchored shopping centers most in demand and costing between $120 psf and $240 psf.

"Fewer and fewer dominant retail locations remain, putting pressure on all retailers jockeying for sites," Blakely says. "It is very difficult getting new projects approved in today's environment, which adds value to existing facilities of quality and good redevelopment sites."

Multifamily. "The demand for housing remains strong from Boston proper to the surrounding suburban markets, with the demand highest in Boston but the activity higher in suburban markets due to the availability of potential sites," says Kevin Malloy, CCIM, of Peter Elliot LLC in Boston. The multifamily occupancy rate in Boston is about 98 percent, while the rate in suburban markets ranges from 93 percent to 98 percent.

In Boston, average monthly lease rates range from $1.75 psf to $4 psf. "The higher end rates are significantly up over recent years due to the increasing incomes of potential occupants and lack of new supply," Malloy says.


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