Thursday, July 14, 2016

Why the real estate market isn't always like musical chairs

Sometimes the chain of vacated and occupied offices is not like the proverbial musical chairs when it comes to Baltimore's urban office market.
Current RKK headquarters: Roads, rails and bridges (Google streetview)

Contrary to the permanent fear of the static thinkers, real estate is not a zero sum game, not even in Baltimore. While the children's game has a fixed amount of players and a fixed amount of chairs in which inevitably one would be left standing once the music stops, development in a city is more complex.

Not being a zero some game requires that there is a dynamic element of growth in demand, but that demand doesn't have to be in the same field.

Here is an example: The engineering firm RKK, a longstanding Baltimore stalwart, never tried to locate in the suburbs as so many other engineering firms did ("hey, we design roads and bridges, so let's go where the roads and bridges lead us!") and instead owns a building right adjacent to historic Bolton Hill. More widely known, the building is also adjacent to the JFX, so close, in fact, that expressway drivers know the feeling of  almost clipping the corner conference rooms of the office building. I suppose the headquarters is where the roads and bridges are, after all.

RKK has been growing steadily and even though they just recently redecorated their headquarters, they have now outgrown the Mosher Street facility and want to move where it is more urban. A step that other engineering firms such as Whitman Requardt, AECOM, Jacobs, Kittelson and Parsons Brinckerhoff have also taken.

The chain of vacating and occupying goes like this: Exelon builds a shiny tower on Harbor Point, as is widely known, Constellation is now Exelon and it will vacate its former shiny new tower on Pratt Street along with associated various other nearby office spaces in the historic Candler Building. The typical Baltimore pessimist would despair, "OMG, what will happen to all the empty space on Pratt Street?" (I must admit, I wondered that same thing).

And here is where RKK comes to the rescue, or at least to a partial rescue, since they are not yet as as big as Constellation; but renting 116,000 sf is a good chunk. Now the RKK building at the JFX would stand empty, right? Not so: Here MICA comes to the rescue. The Baltimore based art college has also been growing by leaps and bounds and has been expanding its campus in all directions, most fruitfully along North Avenue. According the BBJ the art college has bought the RKK building on Mosher Street which sits fully surrounded by MICA buildings.
Candler Building and Constellation tower (JLL Properties)

The end result? No new vacancy! A better Baltimore! Clearly, the real estate market doesn't always works so nicely and there is never a guarantee that something will not remain vacant in the end. Often times that means adaptive re-use. Lots of tired old office space has been converted to housing, occupied by new tax payers that often come from out of town.

In the corporate buy-out saga of BGE turning into Constellation and finally Exelon, the beautiful old historic BGE headquarters, for example, have become apartments in Baltimore's burgeoning downtown 401 district.

If a city can't stay dynamic like this and respond to new demands, it will wither away and fail. There is always risk associated with building new stuff and nothing can grow perpetually. But as it is, Baltimore cannot afford to shut its doors and freeze the status quo into permanence. Why would anybody want to do this anyway, as big as the needs for improvement are?
Exelon Tower now complete

I like trickle-down economy as little as any progressive. But one has to recognize that the ripple effects in the real estate market can work such that there doesn't have to be someone losing in the end only because someone else is winning. This is true even though HarborPoint got a large TIF which is about to be made even larger.

Klaus Philipsen, FAIA

BBJ article