Frederick’s Commercial Real Estate’s Future
Frederick County’s Department of Economic Development recently hosted a round-table discussion about the health and future of Frederick’s commercial real estate market, and I was invited to be a panelist.
I was joined by several esteemed colleagues, including:
Our discussions covered the gamut of Frederick commercial real estate, from activity in the commercial real estate market past and present, to apartment housing, to Maryland’s failure to attract large employers.
Following is a snapshot of the main points of our debate.
The Big Picture
Karl Morris, of Matan, started the discussion by providing statistics that put activity in Frederick’s commercial market – before and after the recession hit – into stark relief:
Office Space Rentals 700,000 SF 75,000 SF
Flex Space Rentals 710,000 SF 624,000 SF*
Industrial Space Rentals 1,000,000 SF 149,000 SF
*600,000 square feet of that total was leased to Wells Fargo & The National Cancer Institute.
Apartments: The Next Big Thing is Already Yesterday’s News
Apartment (multifamily) projects have exploded in the U.S. as distressed and foreclosed homeowners, along with skittish young adults, seek rental housing in droves. Apartment vacancies are at a low 3.5% in Frederick.
According to Gary Large, of Ausherman Properties, there are three different apartment projects in the pipeline in Frederick County, which will bring a total of 1,000 new units. Walnut Ridge, with 250 units, will be the first new apartment project in Frederick in 10 years.
Ausherman is finding a surprising niche market for apartments in the Whittier development: divorcees. Projects on the south side of Frederick, however, are drawing a younger market segment.
Panelists agreed that anyone trying to start a multi-family project at this point will be too late to the game to enjoy any significant returns. The Frederick market will be saturated by the time the apartments hit the market.
Karl Morris noted that while housing appears to be recovering (at last), it’s important to remember that there are still a great many people in the U.S. who can’t finance a home or are afraid to invest in homeownership.
It’s the Jobs, Stupid
With Bechtel moving 625 employees from Frederick to Northern Virginia, the office market is left with an even bigger hole to fill. Frederick now has a total of 800,000 square feet of unoccupied office space in the southern end of town alone.
Mr. Large, of Ausherman Properties, noted that with office rents in Rockville so low now a significantly higher number of Frederick residents are driving south to work than were prior to the recession.
The panelists agreed that Maryland is becoming less and less attractive to large national tenants, who – more often than not – choose Virginia over Maryland. If there isn’t a significant effort by Gov. Martin O’Malley and his team to effectively recruit new employers, the office vacancy rates in Frederick will remain high. As Mr. Large noted: “We can’t fill three million square feet of unoccupied office space with companies from Frederick.”
It doesn’t help that office space use overall is evolving, as more and more employers are hiring employees who work from their homes.
Flex is the Future
A member of the audience asked a great question: “What happens to flex if we aren’t making stuff anymore?”
Danny Severn, a sales representative from St. John Properties, shared that about 50-60% of their flex shells are now ultimately fitted out as office space versus for industrial or warehouse use.
Flex shells are much cheaper to rent and to finish than traditional Class A office space, and many businesses feel compelled to choose this no-frills option in an uncertain economy.
Karl Morris shared that Matan is banking on the “build to suit” flex lots like those in Wedgewood on the south side of town. From an owner-user perspective, these properties are “shovel ready” – infrastructure is already in place to break ground, including water, sewer, traffic, and APFO. Riverside Research Park is another example of this.
Frederick is a Safe Bet
The panel cited several reasons to be very optimistic about the future of Frederick’s commercial real estate market:
Fort Detrick: While BRAC hasn’t brought as many jobs as hoped for, the improving economy may bring a resurgence of contractors and start-ups to the area related to Fort Detrick. The old buildings and labs there are very expensive to retro-fit, which means there is a very good chance employers will choose to build out spaces in nearby Riverside Research Park instead.
Health and Bio Tech: Frederick has wisely cultivated a niche of health and biotech companies. No one is arguing that growth in these industries has been – and should continue to be – explosive. (The trick will be keeping these companies here once they outgrow start-up phase and become substantial employers.)
Frederick is a Jewel: Mr. Large concluded the discussions with this thought: “Frederick still holds the quality of life card.” And he is right. Frederick is the complete package: tranquil countryside, excellent schools, and a beautiful, vibrant downtown with a thriving arts culture and world-class restaurants.
So, to sum it all up: if our governor will work in earnest to improve the balance between government and private employers in Maryland, Frederick’s commercial real estate market is poised to enter a sustained recovery.
Rocky Mackintosh is the owner of a land and commercial real estate firm based in Frederick. He is also the editor of the MacRo Report Blog.