Office vacancies in downtown Baltimore expected to rise, but suburbs also at risk
By Lorraine Mirabella, Baltimore Sun,
2024-07-12
In Baltimore-area buildings once packed with workers, tenants are downsizing or moving out at faster rates than ever, often to newer buildings with more amenities, a trend that has accelerated since the pandemic. Vacancy rates are rising most dramatically in Baltimore’s traditional business district, but the phenomenon is looming in other parts of the city and the suburbs, reflecting national trends as work habits shift and aging buildings teeter on obsolescence.
“We have too much office space, and that’s the reality,” said Kate Paine, Baltimore-based research manager for JLL, a national real estate services firm. “Single-user large buildings are becoming vacant at a concerning rate right now … just multiplying in the inventory.”
A global consulting firm dubbed them “zombies” to refer to office buildings with high vacancy levels and low usage. Boston Consulting Group found many properties already in that living dead phase, which it defines as the point when vacancies and unused space grows to 50% or more.
Such zombies, many built in the 1980s or earlier, litter downtowns and suburban business parks across the country.
Boston Consulting’s 2023 survey blamed sudden shifts in the office market caused by the pandemic-driven popularity of hybrid work and tenants’ desire for shorter-term leases. Another analysis, by global investment firm Brookfield, argued in February that problems boiled down to supply — too many dated buildings that once stored paper files and hosted server rooms and too few that meet changing needs.
The amount of square footage needed per worker has decreased for years, even before the coronavirus pandemic, said Seydina Fall, academic program director for real estate and infrastructure at Johns Hopkins University’s Carey Business School.
“Just think about law firms; they used to have libraries in their buildings with physical books,” he said. “Everything has gone digital and you don’t need libraries. The footprint is going to shrink quite a bit.”
And office attendance policies continue to evolve, with the share of U.S. workers who worked from home at least part of the week jumping from just under 5% in 2019 to as much as 25% today, a JLL report said.
The void that will create at the prominent Pratt Street tower is expected to catapult the central business district’s vacancy rate from its current 22.5% to more than 30%, the highest on record and the biggest jump since just before the pandemic, according to JLL data.
But office markets throughout the region face similar struggles, and no end is in sight.
In Baltimore’s suburbs, that means older buildings that were occupied by a single tenant are becoming obsolete, Paine said, because “no whole building tenant at that large size is going to come in and backfill.”
Among recent moves, Element Fleet Management, an automotive fleet manager, downsized by 70% last year. It relocated from its more than 210,000-square-foot Maryland headquarters in Sparks in Baltimore County to a smaller footprint in a multitenant building in Owings Mills’ Metro Centre at Owings Mills.
In Nottingham in Baltimore County, Mariner Finance plans to leave its nearly 70,000-square-foot, 1980s-era building next year, where it is the sole tenant. It’s signed a lease to move its national headquarters to a vacant Xfinity call center nearby that went virtual during the pandemic. The lender said the newer building gives it additional space and the ability to build out to suit both hybrid and in-office jobs.
Paine said she knows of a potential upcoming deal in which a whole-building tenant, a technology company, is looking to downsize and vacate an entire 110,000-square-foot building in a suburban market. The firm likely will end up with one or two floors of a multitenant building sometime this year. Another upcoming deal involves a health care insurance group that’s planning to downsize and vacate multiple buildings.
Just blocks north of downtown Baltimore, all of the office space at 601 N. Calvert St. in Mount Vernon — more than 31,000 square feet — is vacant after the Maryland Transit Administration moved out.
In the past, large single tenants with long-term leases were highly sought after.
“But now you have re-leasing risks because they’re shrinking and the building may be … designed pretty much for that one tenant, so you’re less flexible,” Fall said.
Single tenants large enough to fill such spaces are in many cases simply no longer an option, or can be seen as risky as they’re not as sure a bet as in the past to renew a lease, experts say. On the other hand, it could take years to land a building’s worth of multiple tenants.
“With single office use buildings — unless you are willing to be creative and figure out how to carve out smaller spaces and multitenant a building, you are going to be waiting longer for a big fish … and that pool is limited,” said Terri Harrington, managing principal of Harrington Commercial Real Estate Services.
Harrington said it can be challenging, as well, to fill large vacancies with multiple users because of the high construction costs to build out offices.
“It is hard for a landlord to get a return if they put a lot of capital into a reconfiguration and are unable to get terms and a rental rate that reflects the costs of those improvements,” Harrington said.
Office vacancies throughout the region have risen sharply since before the pandemic. Vacancies in the city increased to 20.7% in the second quarter, from 17.8% in the same period five years ago, and to 19.1% from 14.2% in suburban Baltimore.
Over that five-year period, vacancies jumped substantially in the submarkets of Columbia and the Interstate 83 corridor, where rates now hover above 21%, not far behind downtown Baltimore, JLL data shows.
Paine believes suburban markets have the potential to approach or even surpass downtown Baltimore’s projected 30% rate, at least in the short term while owners decide whether to keep buildings ready for office use, convert them for other uses or tear them down. The city has managed to avoid excessive office vacancy jumps until now because of the flurry of office-to-housing conversions. It has benefitted, too, from tenants moving within the city rather than out, as well as those who’ve moved in from the suburbs.
Meanwhile, office tenants have shifted from the 100 International Drive tower in Harbor East, considered one of the city’s newer business districts, to move to an even newer one at Harbor Point.
“Not only are you seeing the flight to quality from north of Pratt Street down to Pratt Street and then from Pratt Street to Harbor East, you’re seeing Harbor East to Harbor Point now,” Paine said.
Office buildings that are doing well are those that are designed with the health of workers in mind or those that can afford to upgrade, Fall said.
“Vacancies are actually very low for buildings that are sustainable, buildings that have sustainable, green upgrades,” he said. “Office is hurting globally, but certain types of office is doing very well.”
The future of less desirable office properties remains to be seen, with some likely to be demolished and perhaps redeveloped. Owners will be faced with choices ranging from selling at depressed values, to transferring deeds to lenders or pursuing conversions to housing, medical needs or other uses where it makes sense for the building and the market, Paine said.
By the end of the decade, more than a billion square feet of U.S. office space is expected to be vacant, 55% more than before the pandemic and 330 million square feet more than what’s considered normal, according to a report issued last year by national real estate firm Cushman & Wakefield. The report showed an unprecedented imbalance in office supply and demand with high demand for space that can accommodate hybrid strategies and offer in-person experiences.
“Demand for mediocre, lower-quality, older commodity office product has shifted dramatically lower,” said the report, noting that more than 70% of the nation’s office inventory was built in the 1980s or earlier and “does not match the preferences of today’s occupiers.”
As leases expire, the report said, offices that have not adapted to changing demand will be “at risk of competitive obsolescence.”
A JLL report in April found that 2 million square feet of space has been converted in Baltimore’s central business district alone over the past decade. Citywide, the report found, 20 office buildings have been redeveloped over the 10 years, mostly for housing with a smaller amount for retail and hotel uses.
Despite such conversions, vacancies continue to rise. Not all properties are suitable for residential or other conversions because of the market, financing or physical considerations such as how the floors are laid out and utilities.
“Some markets have residential potential, but you are going to be restricted by how much you can charge in rent and how much you will be able to recapture the cost it takes to convert a building,” particularly with the high financing costs brought on by higher interest rates, Paine said.
Of the city’s 6 million square feet of downtown and midtown district office space in buildings with 30% or higher vacancy rates, only 1.7 million square feet can potentially be converted, the the JLL report found.
While the need for office space has shifted, it has not gone away. Many employers now expect workers to come in to the office two to four days per week, a July 1 report from CBRE Americas Consulting showed. And even those that do not require in-office work have maintained some form of a real estate footprint.
Cushman Wakefield’s researchers suggest that owners unable to convert office buildings to other uses look to reposition those properties. That can mean upgrades or additions to common spaces, such as outdoor patio and rooftop space, alternative working areas, fitness centers, lounges and state-of-the-art conference centers.
Researchers at Brookfield said that employees who’ve returned to offices “found it wasn’t the same office they left and expect more after years of work-from-home.”
That's what crime will do! Blame our local government!
William Stokes
07-13
Fewer workers needed because of technology as well. Just wait until telework is the norm and the businesses are hiring in Mumbai for those formerly local jobs...
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