High vacancy rates have created a renter’s market for Frederick office space.

In our last post, MacRo Report shared an overview of the 1Q 2012 performance of the U.S. commercial office market and broke out some statistics for Frederick. Although vacancy rates for Frederick area office spaces have begun to tick down, and small businesses are coming back into the market, commercial lease rates in this area continue on a downward trend. We spoke with Rusty McCabe, Assistant Vice President at McShea & Company, about the near-term outlook for Frederick’s office market.

MacRo: Costar reported this past quarter that small businesses are back in the commercial office market across the nation. Are you seeing that trend in Frederick as well?

McCabe: Definitely. Most lease deals we have done for the past couple of years are smaller deals, under 5,000 sq. ft. and in the $2000-3000 per month range of rent mostly. And during the past couple of months the little guys are really coming out, those in the 2,500-3,000 sq. ft. range.

Now that vacancy rates are starting to drop, are rents rising in this region?

Right now there is a lot of downward pressure on lease rates. You have got to be competitive if you want to make a deal. The only larger tenant deals we are seeing now in Frederick are lease renewals. In most of those cases, the tenant will tour the market, get leverage, and go back to the landlord asking for a better deal. Tenants are finding good deals now, spaces that were going for $26.50 a couple of years ago are now $20 and under.

What is putting so much pressure on lease rates in Frederick?

Frederick vacancy rates are still fairly high [nearly 16%].  A more healthy vacancy rate for Frederick is between 12-10%. Also, businesses are starting to look at flex space as an alternative to traditional office buildings, because flex is $2-3 sq. ft. cheaper in price. St. John Properties, which has about 200,000 sq. ft. of empty flex space sitting on the market in Frederick, has recently become a lot more aggressive and responsive in making deals. A number of tenants are getting quotes from St. John to use as leverage when they renegotiate leases with their current landlords.

Is shadow space still a drag on the Frederick market?

Definitely. We recently saw a large tenant in Frederick with a 3-year lease on nearly 10,000 square feet of Class A office space come to the landlord asking to downsize to the best half of that space, and asking that the $60,000 in retro-fit costs be covered by the landlord. Where lease renewals are concerned, tenants are in the driver’s seat right now. Many need to downsize because of the economy, and they are coming to landlords to ask “do you want to keep me?” Landlords need to renegotiate lease terms in this market to keep tenants; 90% of the time when they renegotiate they keep the tenant.

Costar also reported that there is currently a severe shortage of small office spaces under 10,000 sq. ft. in D.C. and Bethesda because so many smaller businesses have entered the market there. Will that trickle up to Frederick and impact the market here?

Increased activity in D.C.’s office market has been a rent driver for the Frederick in the past, and eventually we will see smaller tenants forced to come north to find office space.

And in terms of larger businesses, companies will start to look north to relocate to cheaper spaces located closer to where their employees are living—this seems to happen in cycles every five years or so. Frederick has very little Class A office space, really only five or six buildings, so it won’t take much activity to put upward pressure on Class A rents in Frederick.

However, office vacancies in Gaithersburg are at about 30%. I own a building near the Kentlands that had a law firm as the sole tenant. When the firm needed to move to expand, my partner and I eventually found five smaller tenants to replace it. Recently, some of our tenants renegotiated their monthly rents down 50%, because that is all the market will bear right now.

Until office lease rates start rising in northern Montgomery County, we won’t see much business migration from the D.C. region to Frederick. There isn’t a significant enough difference right now between prices per square foot in Frederick versus Montgomery County.

Rusty McCabe is Assistant Vice President of Leasing and Sales for McShea & Company, Inc.  McShea is a privately owned, full-service real estate services company founded in 1983 and operating throughout the Washington metropolitan area.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

Is Maryland’s Lend Local Act enough to loosen small business commercial credit?

Most people think of It’s a Wonderful Life as one of the greatest, if not the greatest, Christmas movies ever filmed.

It also happens to be just about the best P.R. that local community banking has ever received. If anyone, anywhere, has ever done a better job of highlighting the direct impact that actively engaged “relationship bankers” have on the economic well-being of the communities they serve, please share it.

Ben Bernanke himself asserts that not one of the “too big to fail” banking institutions has an algorithm sophisticated enough to match the “in-depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness.”

Of the few Frederick-area businessmen and women who came to the Weinberg Center for last week’s town hall meeting of Maryland’s Small Business Commission, a significant number claimed “trouble getting loans” as their most pressing issue. This isn’t unique to Frederick. All over Maryland, businesses owners are frustrated by the lack of “affordable and reliable credit” needed to grow their businesses.

Large institutional banks have tightened credit so much since the recession they may well find themselves the subject of an upcoming episode of Hoarders. (This is a great show to watch if you need motivation to clean out your garage. Or anything else, for that matter.)

Early in April, along with co-sponsor Senator Ron Young, the Maryland Senate passed Senate Bill 792 – Lend Local Act of 2012, which was subsequently signed into law effective July 1, 2012.  Simply put, the State of Maryland promises to use local banks for $50 million worth of deposits in return for those deposits being lent to small businesses at below-market interest rates. A loosening of the credit supply would go a long way toward overcoming some of the regulatory hurdles that Maryland business owners face.

However, $50 million across the entire state of Maryland doesn’t go as far as it may seem.  Not only that, but in speaking with one local community bank executive, who stated that he is “intimately” familiar with the legislation, it seems there is not that much enthusiasm for programs that involve government deposits.  ”We struggle with enough government red tape as it is,” he said, “and frankly such deposits are just not that dependable” when one factors politics in to the equation.

No question that several of Frederick’s large and small banks have taken serious hits on commercial loans and real estate used as collateral. But while real estate values continue to be a drag on balance sheets throughout the banking industry, local banks have come through this crisis in much better shape than most of their large institutional competitors.

It shouldn’t take an act of legislature to encourage Maryland to use local banks for state deposits. It seems common sense to infuse local lenders with capital when they are in such a great position to jump start our business communities out of this recession. And now is the time many major businesses that survived the recession are reporting record profits, and are crying out for capital to expand.

Smaller businesses are beginning to see the trickle-down effect and face the same needs for capital, as the Small Business Commission representatives admitted they hear over and over.

MacRo Report noted in a previous post that some economists are predicting the recovery from this recession will be regional, with states and communities led by fiscally responsible governments seeing the strongest (and longest lasting) improvements.

Frederick is uniquely situated in Maryland, and is poised on the brink of some exciting new development projects that will provide growth opportunities for new and existing businesses alike. There are any number of Washington and Baltimore developers who are beside themselves at the potential they see in Frederick’s future, and are drooling over the opportunity to get involved somehow.

It would be better for Frederick on many levels if the capital to finance these projects is provided locally. This is an instance where Frederick County’s “small town” culture can be leveraged—it’s certainly easier for our local banks to weigh risks and rewards of commercial lending in a business community as intimate as Frederick County. And keeping the money in town means Frederick keeps some control of its own destiny.

But can Lend Local really make enough of a difference? While it’s always refreshing to see Maryland trying to be part of the solution, the best thing O’Malley can do is move quickly to untangle the mess of taxes and regulations that discourage business in this state. Otherwise Maryland communities are destined to play Potterville to Virginia’s Bedford Falls.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

This current issue of the MacRo Report is being distributed to more than 15,000 residents and others who are interested in Frederick County, Maryland land and commercial real estate news and information.

Reason for Optimism

The following MacRo Report entry is written by Rocky Mackintosh, President of MacRo, Ltd. regarding our current local real estate market
With this year’s early spring sunshine, the climate of the land and commercial real estate market in Frederick County, Maryland is also looking brighter.

As stated in our previous MacRo Report, it is the collective decision making of real estate buyers and sellers that ultimately creates economic swings. Part of the recovery process is a growing level of confidence by these participants that ignites a positive shift in the market.

After nearly 5 years of retooling, business and development interests are seeing growth opportunities. With the support of our local governments, many obsolete regulatory hurdles are being removed as well.

As in past recoveries, industry leaders are cautiously coming out of the shade with a willingness to take risks that just one year ago would have been judged as crazy. It then becomes a case of “follow the leader” as others hear that the weather is fine.

Sometimes the economic comeback is equivalent to an avalanche, but that is unlikely this time. Big lessons were learned by some of the best in their fields this last downturn; so the cautiousness found in the market is healthy and should clear a steady and sustainable path for growth.

Part of the process involves real estate owners continuing to review their inventory, as many are still undertaking the often painful process of “deleveraging.” Optimistic investors and buyers are finding some incredible opportunities. From this alone, the recent transaction activity in our market has increased significantly.

As a buyer or seller, if you have been in the shade for a while, we invite you to step into the sun light.

Let us know how the MacRo, Ltd. team can be of assistance.

Frederick Properties Are Moving!

Frederick County saw steady improvements in sales volume and prices throughout all sectors of the commercial real estate market during 2011. Washington, D.C. is thankfully one of the strongest markets for jobs and for commercial real estate, and no doubt Frederick County will continue to see a trickle effect from that. As we head into spring, MacRo is definitely seeing a trend of increased interest from both buyers and sellers looking to get into the market, although financing is still the primary obstacle for many looking to buy.

Whether you are looking for retail, office or general commercial space, check out some of our new or current listings or give us a call at 301-698-9696.

Click here to download the complete PDF version of this spring’s MacRo Report!

We’re headed in the right direction: this year’s Top 5 blows the big deals of 2010 out of the water!

Ah, 2011, we hardly knew ye. You came and went in a flash, failing to deliver the economic recovery and real estate rebound that we all hoped for.

Instead, you brought an economic meltdown of the European Union, a nuclear meltdown in Japan and a mental meltdown for Charlie Sheen. And then you took Steve Jobs from us. (But at least you sent Tebow.)

Like everyone else, we are anxiously waiting at MacRo for the final diagnosis of the 2011 economy. In the meantime, we thought a review of the top 2011 Frederick County commercial real estate deals would provide a snapshot of the trends we can expect to see regionally and nationwide.

We combed through the biggest local commercial real estate deals for 2011 in CoStar and compared notes with several highly regarded local real estate appraisers. We have “Top 5” lists compiled for land, industrial, multi-family, office, and everything in between that relates to commercial real estate deals in 2011.

We’ll be sharing them all this month.

This week’s post will highlight the top five largest commercial real estate deals overall in Frederick County. The good news? The top five largest deals of 2011 were significantly larger than the top deals of 2010–hopefully an indicator that the commercial real estate market in Frederick County is finally showing sustained improvement.

We compared notes with Michael Pugh to pull this list together. As co-owner of Pugh Real Estate Group, Michael specializes in appraisals of improved and unimproved commercial and industrial real estate in Maryland and Northern Virginia.

Land, warehouse, office buildings, multi-family—it’s all covered in the top five of 2011!

Frederick’s Top 5 Commercial Real Estate Deals of 2011

Number 5:  $8,500,000

Morgan-Keller sold 270 Interstate Court, a 103,250 SF industrial warehouse building, to Leo Rocca of 260 Interstate LLC in March. Colonial Sash and Door was the key tenant at time of sale, but Stulz Air Technology now leases a large portion of the building.

Number 4:  $14,731,019

Washington Real Estate Investment Trust, a Rockville-based REIT, sold five Spectrum Drive flex industrial properties to AREA Property Partners of New York. The five Spectrum Drive buildings were part of a 40-property portfolio purchase totaling $235.8 million and including properties throughout Maryland and Northern Virginia.  Total combined square footage of the buildings in the Frederick portion of the portfolio is 160,445.

Number 3:  $21,265,000

Natelli Communities sold 63 acres of land on Bennett Creek Avenue in Urbana to the Social Security Administration in August. Currently the site is zoned for mixed-use development.  The Social Security Administration purchased the site for a new national data facility, construction is planned to begin in early 2012 with an estimated completion date of 2015.

Number 2: $38,000,000

The clearly recession-proof Natelli Communities sold the Banner Life Building in Urbana to Cole Real Estate Investments, a Phoenix-based REIT, in June. Banner Life fully occupies the 115,000 square foot building.

Number 1: $50,000,000

Equity Residential, a Chicago-based REIT, sold Overlook Manor Apartments (290 units located on Alban Court) and the Brookside Apartments (432 units located on Willowdale Drive) to Federal Capital Partners, a privately-held REIT located in Washington, D.C.  The sale closed in March. Multi-family properties have been the shining star in commercial real estate nationally and Frederick was no exception during 2011.  There were a lot of apartment building sales in Frederick last year.  More on that later.

Stayed tuned next week when we compare notes with Wayne Six for Frederick’s top 5 land deals of 2011!

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for TheTentacle.com and Want2Dish.com

Frederick Industrial Real Estate Vacancy Rates Outpace U.S. Average

During the past year, industrial warehouse and flex space has become one of the few bright spots in the nation’s real estate market.  According to CoStar Group’s third-quarter industrial review and outlook, the U.S. industrial real estate market has gained back 72% of demand lost during the previous economic downturn, and is on track to be back at its historical peak by the first quarter of 2012.

Nationwide demand for industrial space is being driven primarily by higher retail sales and higher-than-expected growth in the manufacturing sector.

According to CoStar, manufacturing growth is expected to continue even in the face of the melt-down of European credit markets.  Per-employee corporate profits are at historical highs, and U.S. corporations are holding quite a bit of cash.  Also, there is significant pent-up consumer demand for durables such as cars.

The result of all of this good news is that the national average vacancy rate for industrial commercial space seems to be stabilizing at around 10%.

Unfortunately, Frederick County vacancy rates in those segments continue to climb.  Depending the data one uses, that figure is close to 50%, as shown in the above graph using information from the CoStar database.

Frederick based MAI appraiser Terrence “Bud” McPherson believes that when looking at all improved industrial properties in the county, the vacancy factor hovers around 47%.

In speaking with local commercial/industrial appraiser Michael Pugh, he states that after extracting any number of vacant buildings that are in his opinion functionally obsolete or just not leasable, that figure could be as low as 20%.

Functional or not, the fact remains that vacancies are very high in these sectors of the industrial real estate market in central and western Maryland.

Why is the industrial real estate segment in Frederick (and Maryland) under so much more pressure than the country as a whole?

A significant factor is the amount of commercial new-build projects completed (deliveries) in Frederick during 2004-2006, when vacancy rates hovered around 10-15% and the economic forecast was positive.  These projects flooded the market with about 1.5 million square feet of additional warehouse and flex space…just in time for a recession.

Not only have local businesses failed to absorb the new-build space, they have given up leases on over 1 million of pre-existing square footage since 2006.

According to Matt Holbrook, Regional Partner at St. John Properties, Maryland’s business climate plays a part.  “In times when cost is king, taxes and incentives mean much more than in go-go times.  Maryland isn’t as business-friendly as Virginia and other nearby states.  This economy has tenants shrinking in size and moving for cheaper rates, even if that means moving to cheaper districts.”

According to an article in today’s Forbes Online, Virginia has been recognized as the second best place to do business in the nation.

What will it take for Frederick’s industrial real estate segment to recover?

A 2003 NAIOP study stated that the average industrial space ran close to 900 square per square feet per employee.

Therefore, using a factor of 900 SF/employee divided into about 3,000,000 of vacant space, the market will need about 3,000 new jobs to be created or transferred from elsewhere to fill these vacancies.

Combine this with the estimated 7,000 plus jobs needed to fill Frederick County’s office vacancies, and it will take around 10,000 new jobs to fill the amount of office and industrial space sitting empty in Frederick.

A bit frightening when one considers that in all of Maryland last year, the state ranked 44th out of 50 in net job growth with the addition of just 1,300 new jobs created in all business sectors, according to a June 2011 report by Maryland economist Anirban Basu.

This of course does not include the very likely high amount of existing occupied space that is under utilized–shadow space.

The combined vacant square footage of these two sectors is causing property owners and developers to offer significant lease concessions.  Figures are so low that such rates do not support new speculative construction in this market, likely stalling commercial development in Frederick for years to come.

“Businesses crave certainty,” said Holbrook.  “They only grow when environs are predictable.  The current local, state, national, and international politics are killing near-term hopes for growth.”

This begs the question of how long will it take to fill all this space?

What do you think? Is it likely that Frederick County will be able to attract nearly 10,000 new jobs to fill its vacant industrial properties over the next 3 to 5 years?

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

The office vacancy rates in Frederick County are strongly influenced by employment, but things are starting to improve.

The Washington, DC market (including Frederick County) was somewhat insulated at first from the real estate collapse that resulted from the pop heard around the world.  The local office market, which had already reached a vacancy rate of over 12% in 2004, dipped to under 9% a year before emergency legislation was working its way through Congress to save big banks and Wall Street.

With hope that the well-defined recession was just another two-year cyclical swing, business held on for a while.  Gradually, however, realization dawned that the cavalry was not going to save the day and more and more businesses either shut down or cut staff.

Eventually office vacancy rates in this extended DC submarket grew (despite some encouraging dips) to nearly 16% … and that is with very little new product being introduced to the market over the last 5 years.

Encouraging signs?

In many camps, there seems to be a bit more hope that the economy is showing faint, but reasonable signs of an upward turn.  For many sectors of the real estate market anything that offers a glimmer of promise is exciting.

According to data gathered by the CoStar Group, profits of many major corporations have risen from a low of about $650 per employee in early 2009 to a 15 year high of nearly $1,500 at the end of the 2^nd quarter of 2011.

During this same period, however, job growth has only crept along at very sluggish levels.  Clearly, through the use of new technologies and outsourcing, businesses have learned to do more with less.

The global markets continue to struggle with finding ways to restructure government spending, revenues and most importantly high levels of debt; so business remains very cautious to the idea of any significant expansion.  CoStar real estate economist Adrian Ponsen recently projected “weaker near-term office demand growth. With our weaker near-term expectations of office-using employment growth, we are expecting about 13% less office demand growth than previously forecast through 2015 and higher vacancies in the near term.”

After major cutbacks, many businesses left the desks and offices of downsized employees empty rather than tackle relocating to a smaller space.  As a result, the ratio of office space per employee has risen, creating what is known as shadow office space – meaning while it is leased, it is under-utilized.  Such space will typically be the first corporate America will fill before relocating to larger quarters or expanding into the vacant space next door.

CoStar estimates that this Shadow Space may add as much as 5.4% to vacancy rates nationally, while only 2.2% in the Washington, DC real estate market.  On top of that, with minimal new construction in the pipeline and a rise in telecommuting, the modest gains in the local and national employment picture do not mean that vacancies will fall in any significant way.

But the good news is that despite the fact that office building owners are making deals throughout the market to fill vacancies, rents are still projected to increase at very modest rates of around 2.1% during that term.

How many jobs will it take to fill over 1.3m square feet of office space?

In the 2^nd quarter of this year vacancy rates in the Frederick office market peaked at over 16% and dipped a bit in the 3^rd.  This equates to nearly 1,350,000 square feet of empty space, not counting shadow space … and before we factor in the decision by Bechtel to transfer over 600 employees to Virginia.

If we use a factor of 190 square feet per employee, that comes out to over 7,000 jobs needed to fill those buildings … before we consider the 1,220,000 square feet of vacant flex industrial space.

That’s a lot of jobs!

The population and job growth in Frederick County typically outpaces that of Maryland, and the unemployment rate in Frederick tracks lower.  Strong employers like MedImmune and NCI/SAIC are growing and bringing new jobs, and Ft. Detrick continues to be an attractor and incubator of new biomedical technology and business for Frederick County.

Among many other positives that Frederick County has to offer are proximity to the Washington, DC and Baltimore markets and the fabulous community that has been created here.  Combined with aggressive landlords, we are sure to beat the national odds of staying ahead of the sluggish national projections.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

To capitalize or to deduct property development costs?

Land and real estate developers, regardless of size, are faced with tax issues that can have a significant impact on their resources and profits. Some of these issues relate to tracking and capitalizing property development costs. It is important for any real estate developer to be familiar with basic tax concepts regarding capitalization, in order to ensure they are following the required tax rules and are not taking deductions for costs that should be capitalized.

Brokers that acquire real estate with the intent to resell it in a short period of time as well as developers that acquire real estate with the intent to build, improve or develop the property can incur costs that may not be deductible in the current period. Such costs will be recouped either through depreciation deductions over time or recovered upon sale by increasing the cost basis of the property.

What types of costs are subject to capitalization?

Costs incurred to produce the property are not currently deductible. Taxpayers must capitalize all the direct costs of producing the property and the real property’s allocatable share of indirect costs. “Production costs” include the cost to construct, build, develop or improve real property. Processes such as grading and clearing of land, excavating for the purpose of roads, laying foundation or lines for utilities, plumbing and/or electrical work, qualify as production costs. Labor costs such as standard wages, overtime, employee benefits or payroll taxes are also included in direct costs. All indirect costs allocatable to the construction activities, such as rent, repairs and maintenance, insurance utilities and depreciation, should be capitalized as well.

There are costs a developer may incur in the pre-production phase that are also subject to capitalization, if it is more than likely the property will be subsequently developed. Some of these costs include property taxes, government permits, zoning variances or engineering and feasibility studies.

Marketing, selling and advertising costs, although very important to the sale of the property, are not considered construction related costs and can be expensed in the year incurred.

Internal Revenue Service (IRS) regulations may also require the capitalization of interest on debt incurred with respect to a property during the production period. The production period is considered to begin on the first day that any physical production activity is performed (i.e. clearing, grading, demolition, etc.). Production ends when the property is ready to be placed in service or is ready for sale. Completion date can be a problematic subject for those involved in the construction of multi-unit buildings. From a tax perspective, each unit is considered to be independent of others as long as each unit is not contingent on another in order to be sold or placed in service. Capitalized costs, in this case, must be allocated to particular units using some reasonable method accepted by the IRS.

There are other considerations that brokers or real estate developers should take into account before investing.  Knowledge of the capitalization rules and regulations should be a priority for companies as these rules affect the timing of deductions with regards to income taxation.

Article provided by Anca Stradley, MKS&H.

About: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick, Maryland.  MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and management needs. Please visit www.MKSH.com for more information.

The Reis Observer foresees stabilization in Office, Shopping Centers and Industrial leasing with Multifamily real estate vacancies remaining low.

REIS.com, in its mid summer analysis of the Suburban Maryland real estate market, offered a reasonably promising outlook for the remainder of 2011.

The Maryland counties that are included in this study are all those that are part of the Washington DC Metropolitan Statistical Area, being: Calvert, Charles, Frederick, Montgomery and Prince George’s Counties.

While most of the strongest positive growth in the multifamily and commercial/industry market is found in Montgomery, other counties such as Frederick, although not as strong in the office and industrial real estate sectors, has shown surprising strength in new as well as  quality in the retail shopping center and apartment sectors.

The following information is excerpted from the Reis report (linked below) giving collective insight on the five Maryland counties noted above:

Office Leasing

Expect positive ne absorption in excess of 300,000 square feet over the last seven months of the year to result in a year-end count of plus 577,000 square feet.  With most of year’s new supply [just] coming on line … vacancy should close the year at 15.1%, unchanged from May.  Rent growth for the year is projected at about 1.0%.  Progress should continue in 2012.

Retail Shopping Centers

Net absorption will trail new community and neighborhood center supply this year, but only by about 100,000 square feet.  Vacancy should close the year at 9.0% before beginning and extended descent in 2012.  Growth rates of negative 0.9% and negative 1.3% are projected for asking and effective average rents for 2011.  Next year’s rents should run essentially flat; growth should follow slowly thereafter.

The largest of the year’s … projects [has been] Faison Enterprises’ $29.5 million, 375,000-square-foot Clemson Corner community center at routes 15 and 355 in Frederick City, will complete in July.  Marcus & Millichap notes that Clemson Corner “will not adversely affect vacancy this year, as the property is fully pre-leased.” Anchor tenant Marshall’s, meanwhile, opened for business in March.

Industrial Real Estate

Minimal construction along with modest positive demand should help advance the market’s recovery.  Rent growth at about 2.0% is anticipated for 2011.  Both new supply and net absorption totals should increase annually in the years ahead with absorption maintai9ning the lead.

Apartment Buildings

Expect 2011 to produce gains of 4.7% and 5.5% in the asking and effective average rents.  Vacancy is projected to end the year at 4.3% and remain low thereafter.

Read the full REIS mid summer 2011 report along with a supplemental analysis by Cassidy Turley entitled Insights: How Will Federal Spending Impact the DC Region?

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

It has never been accomplished before in modern times, but could the economy come back to nearly full strength without a real estate comeback in housing?

While MacRo, Ltd. is a land and commercial real estate firm, it is our opinion that the fate of a real estate recovery is very connected to that of residential real estate, which has not fared all that well over the last 5 plus years.

Here are a few facts to consider:

Within the total of all housing units on the market for sale, over 2.2 million are vacant properties, plus another 7.5 million liquidations from mortgage delinquencies, according to an August 8, 2011 newsletter entitled “REBUILD – What to Do About US Housing” made available through Kate Costlow with the Frederick, Maryland Office of Morgan Stanley.

There is a growing decline in the home ownership rate which has caused rental vacancies to drop significantly and rents to jump. “This trend can only continue for a limited time before rents become unaffordable and larger problems arise” according to the newsletter’s authors.

Nationally 31% of actual closed housing sales in the US are from foreclosures and short sales.  In Frederick County, Maryland the figure is closer to 35%, according to A. Wayne Six a local real estate appraiser.

About 27% of all homes in America have negative equity… the debt is greater than the value of the home. This according to a February 9, 2011 article in Bloomberg News By John Gittelsohn.  While nearly nine months have passed since the article was written, it is likely that the figures have not changed substantially.

Home values across the country have continued to fall year after year since October 1, 2006 by a net annual average of 6.8%. The Las Vegas, Nevada market is close to leading the country with a steep annual decline of 26.2% in home values with a June 2011 median price of $118,600 … that’s a 250% drop in 5.75 years!

On the other hand the Pittsburg, Pennsylvania metro area has actually experienced a 1.2% increase in values to $110,000 since 2006!  This information was gathered from Zillow.com.

The website also reports that the Washington DC Metro area has experienced an overall decrease in values since 2006 of 35%, while one of its submarkets: Frederick County, Maryland has seen values fall by 56% in the 69 months up to June 2011.

There was an average of 1.56 million annual housing starts in the US between 1996 and 2006.  As of July 2011, the seasonally adjusted annual rate was 604,000, displaying fall of 61% in activity gathered from data compiled from the U.S. Department of Housing and Urban Development.

Historically the premium of new home price above existing home price has been about 15%, but  data shows a rise in that gap to an average of 45% among median home prices, according to a March 21, 2011 article written by  Lawrence Yun, Chief Economist & Senior Vice President, Research with the National Association of Realtors.

Mr. Yun states that this “exceptionally large price differential between new and existing homes may imply that either new home prices have to fall or that there is good growth potential for existing home prices.”

“The price of newly constructed homes refuses to budge downwards … Though construction workers’ wages have not changed in the past four years (stuck at $38 per hour on average), the costs of construction materials have been rising.” Yu said in a subsequent post dated September 1, 2011. “As a result, homebuilders simply cannot lower the price without suffering a financial loss.  That is, it is better not to build than to build and then have to slash the price.”

The price gap between existing and new homes can’t get much wider before more consumers gravitate more toward the better deals in the existing home market, putting even greater pressure on the struggling new home sector.

Clearly the elephant in the room is the sector of the housing market that represents negative equity generated sales.  With figures ranging higher than 50% in some markets, until this is burned off the home building industry will continue to struggle.

It is estimated that between 15 to 20% of the all jobs within the US economy are related to the construction industry, according to Dr. Edmond Seifried, Co-Chairman of Seifried & Brew a community banking consulting firm based in Allentown, Pennsylvania.

The New York Times recently published a graph showing the length and depth of all US recessions and jobless rates since 1974.  The stirring chart graphically “Comparing Recessions and Recoveries” (above) displays how far the economy has to go in order to reach something close to what we have considered normal.

Mr. Seifried authored a June 1, 2011 white paper entitled “Can the US Economy Sustain the Current Recover Without a Healthy Housing Sector?”

The author shows that the percentage of the US Gross Domestic Product (GDP) of major product expenditures has changed since 1960.  At that time goods represented 33.6% and services were 29.4% of GDP.  Today a major reversal is seen with goods at 24.2% and services at 47%.  Housing has experienced one of the most significant drops from an average of 4% to 5% of GDP in the last 50 years to today’s figure of just over 2%.

“It is difficult to imagine an overall economic recovery that will generate sufficient jobs to return the US economy to full employment without a return of housing to its historical share of GDP,” states Seifried.

Many solutions have been discussed by economists and politicians among others on what the government and the private sector can do to stimulate the housing sector.

Meanwhile, as long as 27% of American homeowners live in homes that are valued less than the what they owe their lender, it is unlikely that consumer confidence will gain enough steam to bring about anything other than very modest gains over the next few years.

Such gains are not likely to improve the employment picture, which in turn holds back a rebound in the  office, commercial and industrial real estate sectors of the economy.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.

Catching up on the residential housing market with renowned Frederick County real estate appraiser A. Wayne Six, President of Six & Associates, Inc.

Rocky Mackintosh spoke with Wayne on Tuesday, August 23, 2011 to discuss recent local housing statistics published on the real estate website Zillow.com.

Rocky: Local stats in housing sales show the average house resale price in Maryland is $235,000.  In Frederick County, it is $231,000; Montgomery is $371,000, and Washington County is showing $143,000.

Wayne: That sounds about right.  What was it last year – about 7% higher?

Rocky: That’s right – 7.4% drop over one year ago.  Last year in August the average price in Frederick County was $241,000.

Wayne: There you go.

Rocky:  Charted statistics show a bit of a downward slope in 2006/2007…then a deep steady diagonal drop.

Wayne: Prices are dropping for sure, but also, more of the low priced stuff is selling than the higher prices. Before you had 50% high priced houses and 50% low priced houses. Now it’s 70% low priced houses and only 30% high priced houses.  So that pulls the average number down even more.

Rocky:  What do you see in the foreclosure market?  How is that impacting values?

Wayne:  The percentage of foreclosures is not nearly as high as it had been.  There for a while, foreclosures were making up almost 50% of the market.  Right now, I would say that 35% of closed transactions are from foreclosures and short sales.

Rocky:  Are the lenders moving away from foreclosures as a means of ridding themselves of nonperforming loans?

Wayne:  Yes, instead of foreclosing, they tend to be doing more short sales.  Apparently, banks are learning they are better off with a short sale than actually taking the property foreclose.  It’s cheaper – it ends up costing less to do a short sale than taking a property through foreclosure.  I am doing a lot of short sale appraisals.

Rocky:  I’ll bet.  But you know 35 % is still a big chunk of the market.

Wayne:  Yes, 35%, but it was 50%

Rocky:  With a continuation of falling prices, is the volume of sales strong?

Wayne:  It’s been pretty descent compared to previous years, yes.

Rocky:  From what I see, it looks like the average prices are starting to level off a little.  If you go back to March of this year, the average price was $233,000, and now the average price is $231,000.  So it looks like that as percentage of foreclosures and short sales have dropped from 50% down to 35% in the earlier part of this year, the market is leveling off a bit.

Wayne:   There’s not doubt about it.

Rocky:  While the percentages are dropping, I imagine that some projects have been hit really hard.

Wayne:  Well, yes, the foreclosures and short sales in some neighborhoods are so bad that prices have really fallen down.  Because the banks are faced with so many foreclosures and short sales, they just want to unload, so they price cheaply.  That pulls everyone else’s price down, too.  Look at a neighborhood like Adamstown Commons.  Down there, that neighborhood has a ton of foreclosures.  Many neighborhoods that that one opened at the peak of the market in 2005/2006.  For example in Clover Ridge people paid like $600,000, now they’re selling for $375,000; so the whole neighborhood is upside down.  Neighborhoods like that are really getting crushed.

Rocky:  So when do you see things sort of leveling out?

Wayne:  I think the lower end of the market has almost leveled out.  We’ve entered what I call a “split market.” This is where houses under like $200,000 and under are flat; $200,000 – $400,000 has flatted down just a little bit; and houses over $400,000, prices are dropping at a faster percentage   We’ve seen split markets before…this is the third cycle I’ve seen.

Rocky:  Can a split market be an indicator of sorts?

Wayne: Yes, a split market is good,  as it indicates a near end of a down market.   One thing that people fail to realize is that there are three types of markets:  a down market, a flat market, and then an up market … Then it goes flat again before it falls.

Rocky:  So between the ups and downs, the flat market sets the stage?

Wayne:  Yep!  It’s convenient for people to forget the flat market.  Our last flat market was 1992 to 1997.  That market was 5 years of flat before things gradually began to come back.  There’s nothing you can do.  At least with the flat market, things are not going down.  And prices have been going down since June ‘05, so it’s been 6 years.

Rocky:  I really appreciate your time.  It appears that we should all look forward to flatness as an indicator of better days ahead.

Wayne:  Okay, great! Well, thank you, Rocky

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com and Want2Dish.com.