As Realtors reported an increased number of inquiries about redeveloped commercial properties, actual sales will depend on many fluctuating factors, cautioned developers and economists.
Many developers are eyeing distressed properties to decide whether to rehabilitate them and make them market-ready again. As the economy begins to climb out of recession, such real estate holdings in areas that have received consistent public investment in schools, roads, parks and other amenities will be more likely to attract developers’ attention, said Anirban Basu, chairman and CEO of the Sage Policy Group in Baltimore.
“These public investments often render communities more attractive and functional than other potential locations,” said Basu. “Not surprisingly, communities that fail to invest in themselves tend to suffer decline, while communities that maintain high levels of ongoing investment tend to flourish.”
During the recession, some communities — or certain areas within communities — lost their ability to invest in themselves, he said.
But in the Baltimore-Washington Corridor, many areas continued to maintain an aggressive public investment posture, which means properties that fell into a distressed state have surroundings that might make them more attractive for rehab.
“Two communities that come to mind in this regard are Annapolis and Ellicott City,” Basu said.
Keep the Market Warm
The increased interest in rehabbed commercial property is happening slowly and unevenly statewide, said Janice Kirkner, a residential and commercial Realtor with Long & Foster in Eldersburg, who serves as chair of the Commercial Alliance Committee for the Maryland Association of Realtors.
“The trend has been a little slow, although recently there has been a huge jump in inquiries,” she said. “Sometimes, a run-down property attracts the eye of a developer who then can’t obtain a bank loan. But I believe the Base Alignment and Closure (BRAC) and the establishment of the Cyber Command have definitely led to inquiries.”
Analysts hope that the positive pull of BRAC and the Cyber Command will reverse a statewide downward trend in the commercial real estate development industry. According to a December 2010 report from the Commercial Real Estate Development Association’s Research Foundation, from 2007 to 2009, Maryland’s commercial construction spending, employment and personal earnings fell from $5.8 billion in 2007 to $5.1 billon in 2009.
Similarly, in 2007, the industry supported 48,875 jobs in Maryland, a figure which fell to 40,026 in 2009. Nationally, in 2010, the office vacancy rate hovered around 16%, levels not experienced since the tech bust of 2001.
What Gets Redeveloped?
Whether a distressed property gets developed is ultimately a decision that is unique to the potential buyer of each property, said Peter Framson, owner of Green Light Retail Real Estate Services in Bethesda.
“[What I do is] make a subjective decision about whether the property is in an up-and-coming neighborhood,” he said. “I also look at the local rental market and then compare potential revenue there to how much it will cost to upgrade it. Is it so beat up or worn down that it’s not worth it? Is it really an area people want to live in?”
Although weighing these factors is often subjective, Framson said it’s important for commercial developers to do their homework with regard to rental rates and attributes of the community.
Rob Bavar, vice president of the Bavar Properties Group in Timonium, said he had observed more of a level of interest in redeveloped properties, but also acknowledged that rehabbing a distressed property might attract developers less willing to spend money on building from scratch.
“Commercial redevelopment would be attractive,” he said, “if they could renovate at a lower basis than new construction.”
‘Choppy and Uneven’
Within a single community, there are many different submarkets when it comes to redeveloping older or distressed properties, said Bill Badger, vice president of business development at Annapolis-based TVM Real Estate Solutions.
While serving as an independent adviser to the real estate industry, TVM uses its proprietary analytics to pinpoint the hidden potential in properties, using a system dubbed Styra as an analysis engine.
Styra enables TVM to gather as many as 700 data points on a single piece of property. “Even the person who previously owned the property learns from us. Our proprietary data collection system is so useful to clients,” Badger said. “It’s a different mindset.”
As for the performance of the regional market, “The Washington metro area has been somewhat insulated from the recession because of economic factors related to the federal government,” he said. “Still, in the local region, the market has been choppy and uneven. It has been a bit of a roller coaster.”
Badger echoed Basu’s observation concerning contemplating the activity around a certain property to get a better read on its potential.
“With regard to a distressed property, developers should analyze what’s happening around the property and track its history,” he said, adding, “It’s not a snap decision.”