With a combined 140 years of experience acquiring, developing, financing and leasing various commercial real estate asset classes, Scott Dorsey, Chairman and CEO, Merritt Properties; Nancy Ferrell, Executive Vice President, Northmarq; and Gary Gill, Chairman & CEO, MacKenzie Ventures have lived through both good and not-so-good periods of the local industry. In addition to the Industry Roundtable interview in September’s InSites, the trio offered other industry observations during their wide-ranging discussion.
Fewer local development opportunities
“There are scarcer opportunities to develop in the Maryland area and, as a result, and we are moving to new markets where we find things considerably easier,” stated Dorsey. “But we are careful to hire the right employees because, as Leroy Merritt always said, people are your most valuable resource. Even if we had land to develop right now, it would be hard with construction loans at 8 percent.”
Most Maryland properties, however, are performing well.
“Certain companies are either downsizing their office space or leaving entirely but, overall, our leasing team has experienced normal activity this year,” Dorsey continued. “Our suburban office product is holding up particularly well and we are not discouraged in most of those markets in any way. One trend we are seeing currently is in the small bay industrial sector with the availability of second- and even third-generation space. With multiple users, the spaces have been built out in a certain and unique way, and the challenge is to find the right space for the right user. Because space is so tight, we are motivated to move companies around and find some solutions.”
Dorsey is a bit troubled by the recent sale of One South Street in Baltimore City at $50 per square foot — which is only about 10 percent of its reconstruction cost.
“If this keeps happening, it will be problematic for the downtown area,” he said.
Fill buildings with multiple, smaller tenants
“Our nature is always preferring multiple, smaller tenants to lease a building, rather than filling it with just one or two companies because, over a period of time, you face the risk of them leaving for one reason or another,” said Gill. “This can be due to reasons beyond our control, including the company being sold or the request for additional space and our inability to accommodate them.”
MacKenzie’s brokerage activity is faring well, but property values are being eroded by high interest rates, he said.
“There have been reports about several national and regional broker firms not meeting their earnings projections but, as a locally focused group, we are considerably different,” Gill said. “Our brokerage group is having a good year and we are seeing some of our young brokers really taking off. It does not require a lot of grey hair to have success in this industry but, rather, a love and passion for what you do.
“There exists a hiccup here and there in leasing activity but, overall, it is not as bad as we have feared. The greater Baltimore metropolitan area is extremely well-positioned to deal with any potential slowdown in the economy but, what we cannot survive is the government-induced erosion of property values. Businesspeople talk about high interest rates, but many of us are accustomed to working in an interest rate environment much higher than it is currently. The good news is that rental rates have jumped considerably, but that is balanced by the approximate 150 percent increase in construction pricing.”
Save money for a downturn
“Technology has evolved considerably over recent years, and there is so much more loan and deal data available today than ever,” said Ferrell. “We use those databases to help our clients and source new business.”
She added that AI use is very sporadic in the commercial real estate sector currently, but predicts it will become more prevalent over the next two years. Crowdfunding and community investing in commercial real estate assets will continue to grow if these investing strategies can survive the downturn.
Ferrell’s best advice? “Save some of your money when times are good, because you may need that cash to help through the downtown,” she said. “Always look for new opportunities because down markets cause disruption of the status quo and can provide opportunities that were not evident when markets were favorable.”