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Over the past decade, Baltimore City has seen a gradual shift in office market activity. Demand for office space has become increasingly focused on the waterfront properties of the Pratt Street Corridor and Harbor East. Many older buildings in the traditional Central Business District (CBD) with smaller footprints have become less attractive for office use. The CBD has also experienced a surge in both population and apartment demand that has pushed the residential supply to its occupancy limit. This balance between vacant office space and demand for residential space in the CBD has created a prime opportunity for redevelopment.
The CBD has struggled to recover from the economic recession, when office vacancy rates spiked to almost 23 percent. It has, however, experienced small amounts of positive absorption over the past few years. Demand for space has been focused on Class A inventory as a “flight to quality” trend has emerged in the CBD. Net absorption for Class A inventory in the CBD has increased each year since 2008 and has been a primary factor in stabilizing the overall Baltimore City vacancy rate. Mid-year 2013 numbers suggest that this trend of increasing demand for Class A office space will continue for a fifth straight year as more than 125,000 square feet of positive absorption has already occurred this year.
The Class B sector of the CBD has experienced negative absorption of almost 400,000 square feet since 2008. This lack of demand has led to lender takeovers of several Class B office buildings in the CBD. Ultimately, investors have reevaluated the best use of these buildings and decided on a residential strategy.
The CBD has grown from 1,739 to 4,006 residents since 2000, an increase of 130 percent. The number of 18- to 34-year-olds — a prime demographic for urban apartment demand — has grown from 793 to roughly 2,671 residents, a 237 percent increase during that same time frame.
Almost 785,000 square feet of Class B office space in the CBD is currently slated for mixed-use, residential or hospitality conversion. In total, these conversion projects will deliver more than 850 new apartments to the market, as well as more than 40,000 square feet of new retail space.
Perhaps the most prominent project is the conversion of 10 Light Street, which will feature 445 new apartment units when completed.
Another CBD high-rise, 114 East Lexington Street, will be converted into The Lenore, a 102-unit luxury apartment building with 10,500 square feet of ground-level retail.
The conversion of the long-vacant Morris Mechanic Theatre will deliver 476 apartments and 111,000 square feet of retail and office space to the CBD.
The conversion of these Class B office buildings will have a significant impact on the CBD vacancy rate. As a result of these conversions, four buildings at the bottom of the Class A tier have been reclassified as Class B. These reclassifications serve to balance the size of the Class A and Class B inventories and create more of an apples-to-apples comparison for tenants touring Class A buildings. A prime example is the reclassification of 2 Hopkins Plaza, a 378,798-square-foot building that remained 91.6 percent vacant after PNC Bank moved out in 2012. The buildings chosen for reclassification have higher than average vacancy rates, meaning that as of the end of 2012, the resulting Class A CBD vacancy rate was significantly lower without these buildings (17.5 percent) than it was with them (21.4 percent). This vacancy rate has been further reduced to 15.8 percent through midyear 2013, primarily due to the relocation of law firm Miles & Stockbridge into more than 100,000 square feet at the high-profile Transamerica Tower at 100 Light St.
The success of the ongoing conversion projects could lead to additional mixed-use or apartment conversions involving Class B office buildings.
Landlords of Class A office buildings in the CBD will have more retail and residential amenities to market toward prospective tenants.
Companies considering moving to the city will have a larger, younger labor force from which to draw talent and could view the CBD as an increasingly desirable place to open operations. Ultimately, the current shakeup of the office inventory in the Baltimore CBD should lead to an exciting and dynamic office market in the coming years.
— David Downey, managing director, Matthew Myers, research analyst, Cassidy Turley's Baltimore office