Leonard Rosen Acquisition .com

The economic recession has had its impact on all forms of real estate, and commercial property could be next to bog down.

According to Costar, a firm that tracks commercial properties, the current report — into the third quarter of this year — shows a 42 percent vacancy rate in industrial properties in Frederick County. That is followed by a 37 percent in flex space, which could be used for office, light industrial or other uses depending on the zoning at the location; and 36 percent vacancy for office space.

“The bottom line: It’s a soft market right now, and we expect that things may worsen before they improve,” said Marty Lapera, president and CEO of Frederick County Bank. “From our perspective, the commercial real estate market is very weak with the continued likelihood of declining values.”

Frederick County has 25.2 million square feet of office, flex and industrial space, said Laurie Boyer, executive director of the county’s economic development office. The City of Frederick has about 7.6 million square feet of OFI space, said Richard Griffin, director of the city’s economic department.

Like many community banks, Frederick County Bank turned to commercial real estate lending as consumer and residential loan opportunities diminished. Frederick County Bank’s loan portfolio is 60 percent commercial real estate. Lapera said most of that is in owner-occupied properties.

“Traditionally, this has been the highest quality of commercial real estate lending and in the eyes of banking regulators is less risky than non-owner-occupied real estate loans,” Lapera said. “During a good economy, until three years ago, real estate lending was very profitable. As the economy deteriorated, so has commercial real estate portfolio quality.”

Retail vacancy low

On the surface, the one area that shows a low vacancy rate is retail space, at only 15 percent. That’s because landlords are reducing rents or adding amenities for retail tenants to keep them in place, said Earl “Rocky” Mackintosh, president of MacRo Ltd., a commercial real estate firm.

Some developers are offering free build-outs — finishing off offices or industrial space inside the buildings — a cost usually borne by the tenant. That is something that is usually done “for a quality tenant,” said Jim Mackintosh, Rocky’s brother and a partner in Mackintosh Inc. Realtors. Another incentive is free rent for six months.

“The value is down on the property itself,” Rocky Mackintosh said. “And the landlord is lowering the rent, which puts pressure downward.”

Investors, Mackintosh said, look at the return on investment, what they can get out of the property in leases or, if the market ever turns around, a higher worth of the property.

During “zoom times,” as Mackintosh calls them, investors were willing to buy commercial properties, even with a smaller return on investment over the long run. Mackintosh said there are still some strong commercial property areas, such as downtown Frederick , where many of the sites can include retail at the ground level and residential renters upstairs.

Lenders are either not lending at all or requiring a higher equity from the borrower — in many cases more than 20 percent — for a commercial real estate loan. Mackintosh said government regulations on zoning, construction and fees are obstacles to some potential commercial growth in the county.

Jim Mackintosh said job growth will lead to economic growth that in turn could lead to a turnaround in the commercial property market. Many companies are downsizing or moving out, leaving vacant space around the county.

“I don’t really see a turnaround until the fall of 2012,” Mackintosh said of the commercial market. But “it is not all gloom and doom. There are some new buildings going up,” he said.

Even those could have extra space vacant, depending on the user’s needs.

“Big banks are getting out of the real estate market,” he said. “We have an oversupply and no or little demand. Jobs and consumer confidence will be keys to a turnaround.”

Peak and flux

The commercial market peaked in late 2007 and early 2008, said Steve O’Farrell, an appraiser with William G. Bowen Inc. in Hagerstown. “The market now is in a good bit of a flux.”

O’Farrell said that while things may look bad, this region has been insulated from even worse economic effects because the federal government is located locally or in nearby counties and the District of Columbia.

“Frederick has fared better than most. Washington County has a 10 percent (jobless) rate, Frederick County 7 percent. But there is not a lot of new employment going on.” O’Farrell said the commercial market could begin to stabilize, depending on whether debt is paid off to lenders, in 2011 and 2012.

“There is a lack of real good quality properties on the market. It is not the time to sell off,” O’Farrell said. He tells his clients that there is no reason to sell the properties at prices in the bottom of a market.

Boyer said the county’s economic office has seen a definite increase in calls about available space over the last six months. The calls ranged from users needing anywhere from 3,000 to 150,000 square feet.

“We’re hopeful that things are picking back up in the business community,” she said.

“Construction of new commercial space has slowed during current market conditions because financing for those facilities is tight,” said Griffin, the city economic development director. Lenders are asking for as much as 50 percent of pre-sales or pre-leases before negotiating a mortgage.

“Absorption of vacant space has been slow during this current market,” he said.

Some commercial projects are under way, such as Clemson Corner, which will include Wegmans supermarket; NCI at Riverside, for SAIC and the National Cancer Institute, and the Monocacy Valley Canning Co., a former vacant building under renovation.

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