Commercial Real Estate: Commercial market still struggling in suburbs
by Sonny Goldreich
The weak commercial real estate market nationwide continues to dampen sales activity in the Maryland suburbs of Washington and the few deals taking place reflect a sharp fall in property values, according to the third-quarter findings of PricewaterhouseCoopers' national Korpacz Real Estate Investor Survey.
The report said that there are so few high-quality building deals that it is difficult to gauge where the suburban market stands in terms of pricing and property value. But it noted that during the first eight months of 2010, sales volume totaled only $247.6 million and involved the transfer of 10 assets at an average price of $170 per square foot, according to Real Capital Analytics. This marks an average sale decline of about 39 percent from the same period in 2008, which was just before the national financial market's collapse.
That has left landlords vulnerable to tenants looking to strike better deals, as shown by a second-quarter overall vacancy rate of 14.3 percent in Montgomery County and 21.6 percent in Prince George's County.
With landlord concessions increasing, investors have adjusted their expected returns downward, which the report said has brought some stability to property values. The expected capitalization rate, which is the net operating income divided by sales price, has fallen to 7.775 percent. That has dropped for the third consecutive quarter, slipping 41 basis points since year-end 2009.
The investment outlook remains cloudy with 43 percent of survey respondents saying that they expect cap rates to rise over the next six months and the same percentage anticipating further erosion.
The report concluded that "until the economic recovery gains traction and job growth spurs demand for office space, tenants will continue to hold the upper hand with regard to lease negotiations. This quarter, all surveyed investors state that free rent is commonplace in this market, ranging from one to 12 months on a 10-year lease and averaging six months."
Property refinancing picks up steam
One area that definitely looks better for real estate investors is the improved availability of credit, as reflected in an increase of refinancing locally reported by Cassidy Turley.
The company announced that it secured a long-term, fixed-rate loan of $45 million for Bethesda Place I, which is a block from the Bethesda Metro station.
"The property offered an impressive mix of income sources — from investment grade office and retail tenants, plus the diversification of multi-family tenants," said Christian Miles, a Cassidy senior managing director, in a statement. "Only the lenders which recognized this and priced accordingly were in the running for this financing."
Bethesda Place is a mixed-use property consisting of an 11-story, 326,445-square-foot office building with retail on the ground floor and an adjacent 11-story, 100-unit Class A high-rise apartment building. The office tower is 95 percent leased and is near the Bethesda Row retail and restaurant complex.
Separately, Ross Development and Investment of Bethesda reported that it lined up extended financing for its Seven Springs Village Apartments in College Park, which Fitch Ratings reported in March faced possible default on a $93 million loan.
The fully performing mortgage debt was set to mature on Sept. 1 for the 982-unit complex.
"The financing extension and modification [Ross] was able to negotiate and execute is proof positive we are committed to the continued ownership and operation of one of the largest and most important performing assets in our portfolio," CFO David Miskovich said in a statement.
CB Richard Ellis also reported that it has seen an increase in its financing activity in the broader Washington area of more than 124 percent from this time last year, with $600 million in financing year-to-date.
"Lender demand has increased dramatically since this time last year," Miles said. "Many of our clients are taking advantage of the low interest rate environment by refinancing their properties. Some clients are even refinancing early to lock in a favorable interest rate on a long-term basis."
Among notable finance closings this year, CBRE also arranged a $169 million permanent debt loan for the Kay family portfolio of 5,007 apartment units in Maryland and Northern Virginia.
CBRE even reported a strong return of lender interest in writing equity, senior debt and mezzanine loans for ground-up construction and repositioning residential projects. That even includes condominiums, a market that has languished since 2007, before the general financial sector and commercial real estate collapse.
At the end of August, the company said it had lined up financing during the previous two months for 1,900 apartment and condominium units and 700,000 square feet of office, most of which has either closed or will close this year.
Dundalk warehouse complex sells for $13.8 million
DCT Industrial Trust of Denver announced that it bought a two-building warehouse and distribution center in southeast Baltimore city for $13.8 million.
The 323,000-square-foot complex, which is fully occupied, is part of the Holabird Business Park, a former Army base that the city's Baltimore Development Corp. acquired for $1 in 2001. The sale by the Beckley Business Trust reflects DCT's growing interest in the area.
"Baltimore is an important and growing market for DCT Industrial and our local team is excited to welcome three new customers to our portfolio in the market," Tom Meehan, DCT's vice president and regional market representative, said in a statement. "The acquisition of the Beckley Street facility further enhances our presence in the region, bringing two highly desirable buildings to our portfolio."
The buildings at 6200-6300 Beckley St. are occupied by Graham Packaging, the Pasha Group and Cowan Systems. The center is a mile east of the Port of Baltimore and a few minutes' drive to I-95.
First Potomac renews 130,000 square feet
Home Depot USA renewed its lease of about 130,000 square feet at an office park in Glenn Dale, according to landlord First Potomac Realty Trust.
First Potomac also signed a new 10-year, 21,350-square-foot lease with The Tile Shop, a do-it-yourself retailer, at its Snowden Center property in Columbia. The Tile Shop is expected to open in the second quarter of 2011.
"We have been extremely focused on reducing our rollover risk and increasing our occupancy and these transactions provide meaningful steps toward those goals," said Matt Wilson, First Potomac's regional vice president for Maryland, in a statement. "We hope to continue to build on this momentum."
Glenn Dale Business Center is a single building totaling 315,191 square feet. Snowden Business Center comprises five, single-story buildings totaling 144,684 square feet.
Oddfellows plan move to drive-in movie site
St. John Properties announced the $1 million sale of a free-standing, 25,500-square-foot building on a former Dundalk drive-in movie site to the Grand Lodge of Maryland Independent Order of Oddfellows, which plans to relocate from Baltimore.
The group intends to renovate the structure of St. John's North Point building — which has been utilized most recently as a roller rink, bingo hall and flea market — and move its headquarters from 320 S. Highland Ave., Baltimore. The North Point project consists of a 160,000-square-foot retail center with four pad sites fronting North Point Boulevard in Baltimore County. A Burger King restaurant is on one of the pad sites. The Grand Lodge anticipates taking occupancy of the building by the first quarter of 2011.
St. John Properties acquired the 17.5-acre North Point site more than three years ago with intentions to redevelop the project into a mixed-use configuration of soft goods, hard goods and apparel retailers, with a grocery store or pharmacy to anchor the project.
"We initiated conversations with many different end-users over the past several years and contemplated a variety of re-use models to achieve a solution that would best serve the needs of the local Dundalk community," said Jerry Wit, St. John's senior vice president for marketing, in a statement. "St. John Properties is extremely sensitive to the site's iconic history in the local community, as it was one of the last remaining drive-in theatres operating in the state."
Architectural Design Works is overseeing the planning for the new Oddfellows headquarters, which will get a $1 million renovation.
"The building is undergoing an extreme makeover and, upon completion, will contain multiple design elements that will approximate the original design of the lodge," said the company's president, Paul Thompson.
The Grand Lodge of Maryland Independent Order of Oddfellows was established in 1819 by five original members from England, and has remained in a downtown location. The organization is looking to increase membership and participation with a move to this Baltimore County address.
Andrews Federal Campus begins construction, gets first tenant
Jackson-Shaw, developer of the Andrews Federal Campus, announced that it has begun construction of the 80-acre business park across from Joint Base Andrews in Camp Springs and has signed up its first tenant.
The Dallas company struck an equity financing deal with Phoenix Capital Partners of New York and sold a 12-acre parcel to an unnamed federal agency.
While initial capitalization for the development is $15 million, the company anticipates its total investment will be about $100 million.
"Andrews Federal Campus is ideally located for contractors who want to be closer to the work they are doing with the Department of Defense and the Department of Homeland Security — two sectors that will continue to significantly drive the economy in this region," said Chase Galbraith, vice president of development for Jackson-Shaw, in a statement. "Our proximity to Joint Base Andrews, Air Force District Washington and the new Homeland Security headquarters place this development at the forefront of serving the anticipated growth these industries are bringing to the region."
Upon completion of the development at the end of 2011, the site is to accommodate 1 million square feet of commercial space intended to be used for more than conventional offices. The site is suited for companies that are supporting industry, jobs or creating products and technology that require a nonconventional warehouse setting.
The campus is designed to provide a sense of security, featuring landscaping and berms to create large buffers and setbacks that separate businesses, limit access to key locations and support the establishment of a secure perimeter, according to Jackson-Shaw information.
The project is an official site designated by the state as a Base Realignment and Closure Zone. That allows local governments to receive financial assistance for infrastructure improvements within the zone. In addition, Andrews Federal Campus is in an enterprise zone, which offers tax credits to local businesses.
COPT pays $115M for data center, forms venture
Corporate Office Properties Trust of Columbia announced the acquisition of a 233,000-square-foot data center known as Power Loft @ Innovation in Manassas, Va., and the acquisition of the assets of Power Loft LLC, which provided management and leasing services for the data center, for about $115 million.
COPT also reported that it formed a joint venture with James F. Coakley called Powerloft Services, which will assume the management and leasing responsibilities for the data center.
"We are pleased to announce this acquisition and joint venture to accelerate the growth of our data center business," said Randall M. Griffin, COPT president and CEO, in a statement. "The Northern Virginia data center market is among the strongest and most stable in the U.S., with demand expected to significantly outpace supply for the next several years."
