Mini-Market Report: Columbia/Ellicott City

Resilient but not immune to market challenges

Buoyed by a prime location, a highly educated and high-earning workforce, good schools, a diverse population, and modern, attractive office buildings, the commercial real estate sector in Columbia and Ellicott City has weathered recent challenges better than most submarkets.

“All that said, Columbia-Ellicott City isn’t without its warts,” said Christopher Bennett, Executive Vice President and Principal at MacKenzie Commercial Real Estate Services.

While trophy and modernized Class A office buildings have maintained relatively good occupancy and rental rates, other office buildings are struggling with high vacancy and sublet levels. Retail is strong, except in some older village centers. Demand for industrial and flex space is high, yet some flex space is proving to be nearly unleasable.

Office market uncertainties

The redevelopment of Downtown Columbia by Hughes Holdings has demonstrated the attractiveness of live-work-play environments and the current flight to quality by office tenants.

Howard Hughes’s trophy office towers in the Merriweather District are currently 98 percent leased while commanding rents over $40 per square foot. In addition to creating an environment that is “critically important to attracting and retaining talent,” the district has also fostered an ecosystem that helps companies grow, said Kristi Smith, President of Howard Hughes’s Maryland region.

In November, Howard Hughes announced that TEDCO had signed a lease in 2 Merriweather.

“We are focused on creating an ecosystem with our tenants and we see that pushed forward with TEDCO moving in,” Smith said. “TEDCO sits at the intersection of healthcare and technology, and we see a lot of tenants coming from those two fields. It creates an interesting dynamic where tenants know each other, work together, do deals together, and sit on boards together.”

Substantial investments by landlords in some older and non-trophy buildings have also created environments that can entice workers back to offices, support employer growth, and improve CRE performance, said Abby Glassberg, Principal with KLNB.

COPT Defense Properties, she noted, created Wayline and other distinctly themed and highly amenitized office communities in Columbia Gateway. Earlier this year, Howard Hughes completed a $10-million renovation of seven buildings along Little Patuxent Parkway – now called Merriweather Row. The project created modern, shared amenities and boosted leasing.

Along Broken Land Parkway, owners of three office buildings – Woodmere I and II, and Lakeview Office Park – invested in significant upgrades, Glassberg said. The Woodmere owner added new conference rooms, lobbies, restrooms, and other amenities and infrastructure upgrades. Meanwhile, a new strip retail center which includes multiple fast-casual restaurants, is under development on the Lakeview property.

“Those upgrades really attracted a lot of attention,” Glassberg added. “If landlords can put that kind of money into A-minus and B buildings, they will be fine.”

Yet Columbia and Ellicott City buildings are still contending with the overall soft market for office space.

In mid-November, the direct vacancy rate for Class A and B offices across Ellicott City, downtown Columbia, and north and south Columbia was 22 percent, Bennett said. “In addition, there is 600,000 square feet of sublet space available in that submarket which represents a six percent rate which is very high.”

Tenants are still sorting out hybrid work arrangements, tracking uncertain economic conditions, and waiting for many office leases to expire, Bennet said.

“I think 2024 is going to be very telling for the office market,” he said. “Some leases that were signed before the pandemic will roll over in 2024. I think there is a lot of ghost space out there. People aren’t subletting it, but they’re not using it either. So, we might not have seen the end of the high vacancy rate. It might go up a little more yet before we see the upswing side of the economic cycle.”

Shifting flex demands

The flex market in Columbia-Ellicott City is very strong but with a caveat.

“Flex vacancy in Howard County is about 4.3 percent and has been below 5 percent every quarter since the beginning of 2021. That is below historical norms,” Glassberg said. “Flex development has been scarce in Howard County too. In fact, more flex space has either been demolished or converted to other uses over the past five years than has been delivered.”

Meanwhile, demand for flex space has expanded beyond the traditional array of small companies and light industrial users to include a range of non-traditional tenants — indoor trampoline parks, pickleball courts, axe-throwing facilities, auto parts dealers, granite showrooms and other quasi-retail uses, said Kate Jordan, Principal at Lee & Associates|Maryland.

“The challenge is zoning in a lot of places does not really include putting something like a pickleball facility into an industrial building so you have to do a redline with the county to make sure they will be okay with it,” she said.

Those nontraditional tenants can also run into challenges with parking requirements.

In the face of that demand, however, some flex spaces are struggling to attract tenants. The problem stems from a past trend of building out flex space as offices to provide space that was less expensive than a Class B office.

“But a lot of these buildings are long, skinny spaces – 100 to 120 feet deep. They have a couple of windows in the front and a loading door in the back,” Jordan said. “If they are overbuilt with offices, you have a string of offices in the middle that don’t have any windows. It’s hard enough to get people to come back to work. They definitely don’t want to come back to a windowless office.”

Demolishing those offices and opening up the space can cost $25-$30 per square foot – a costly venture on property that might lease for $14 a foot, Jordan said.

However, securing a tenant for those spaces can be extremely difficult. Bennett points to the example of an available, 6,000-square-foot flex space that had been fully built out as a call center. “We can’t pay anybody to look at it because it is a full buildout.”

Robust retail

Among the wealthy and diverse population of Columbia and Ellicott City, retail is thriving despite inflation.

“I don’t think Columbia and Ellicott City have been broadly impacted by macro-economic conditions,” said Gordon Ashby, Vice President, Mid-Atlantic Region for Kimco Realty Corporation. “As a matter of fact, I think they are particularly resistant because you have density, you have affluence, you have high education levels. These are markets that retailers want to be located within.”

Shopping centers — such as Kimco’s Columbia Crossing on MD 175 and Enchanted Forest on MD Route 40 — have experienced strong leasing with a mix of solid anchors, junior box stores, smaller retailers, and restaurants, Ashby said. Significant reinvestment and redevelopment at properties along Route 40 have created “a very desirable retail market” in Ellicott City. And the diversity of the Columbia and Ellicott City populations has driven demand for an array of authentic retail and restaurant offerings.

Howard Hughes’s Merriweather District signed 10 retailers last year alone, adding to the area’s restaurant and retail scene.

The one challenge facing Columbia’s retail market is some of its older village centers. Retail development along 175, Snowden River Parkway, and other corridors created competition for village centers which were originally designed to be Columbia’s main retail hubs.

“Some of the centers still do really well,” Ashby said. “For example, River Hill has done very well because it is located along a main road and has a prototypical parking field and signage. The older village centers – that tend to have less traditional layouts, more courtyards, and more restrictions on how they can redevelop – have more challenges.”

In addition, some village center buildings have second-story offices which are contending with a soft office market, he said. “We are actively seeking opportunities to bring retail-type tenants, such as salons, into those office spaces.”