MacRo LTD Blog

Seeking Tenants in a Shrinking Commercial Market

Posted by Kathy Krach on October 20, 2015 Leave a comment

After several years of growth, Frederick’s commercial leasing market contracts during first three quarters of 2015.

landlord_seeks_tenants_google102115_blog_pic-1We’ve been closely tracking Frederick County’s commercial real estate market for almost four years now, and each year the news has gotten a little better.   The market here has been improving—albeit with fits and starts—up and out of the trough of the longest recession on record. 

Over the last several years, MacRo’s annual results have more or less paralleled the market.  So with 2015 being the best year MacRo has seen in years, we assumed Frederick’s market was experiencing similar growth.  However, the number of first-quarter Frederick all commercial sectors leasing deals (retail, office, flex and industrial) were down a bit from last year—not by a lot, just about 13%.

It appeared to be a temporary blip.

After all, even commercial land sales at MacRo have been strong this year, a nice recovery as commercial and farm land took the biggest hit when the bubble burst.  And, we’ve kept busy writing lease deals, more this spring than in all of my previous years combined (office was the second-hardest hit of the commercial segments).

But no—second quarter over all commercial sectors lease deals throughout Frederick posted an even greater loss during the second quarter—a significant 23% drop in the number of deals from the second quarter of the prior year. 

The later weeks of this summer were pretty quiet, which is very typical for this market … but when we crunched the data, the entire third quarter as a whole didn’t shape up well either.

Now here we are, heading into the holiday season, and with three quarters of 2015 data under our belts it’s pretty clear that Frederick’s commercial real estate leasing market has not had a good year, thus far (Hint: the word on the street among other Frederick CRE hangouts is that there are a number exciting large transactions in the works for the fourth quarter … so stay tuned!).

Seeking_Tenants_in_a_Shrinking_Commerical

For the first three quarters of 2015, total square feet of commercial space leased is down by over 60%, the average size of the spaces being leased is down by nearly 50%, and the total number of transactions is down by 25%. 

The high volume of office deals we were experiencing at MacRo was a red herring of sorts, as the office segment is the only commercial real estate segment in Frederick that saw an increase in the number of deals during the first three quarters of 2015 vs. 2014. However, the total square footage of office space leased, as well as the average size of the spaces, decreased during that time.

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There doesn’t seem to be any one reason for why the Frederick CRE market as a whole has declined this dramatically. The national economy certainly doesn’t appear to be off by that much.  It can be hard to pin down local economic pressures when brokering in a tertiary market like Frederick, where commercial brokers are doing deals in every segment and representing owners, landlords, and tenants.  The economic factors influencing office, flex, industrial, and retail properties are often quite different.

During the coming weeks, we’ll be sharing a segment-by-segment analysis of Frederick’s commercial property sales and leasing results to date to try and identify what—if any—local and state-wide economic issues are influencing the decline in Frederick’s CRE market.

In the meantime, what does a shrinking tenant pool mean for MacRo’s landlords?

1)     It’s going to be a little harder to “find the market” for a property.  In a market this shallow it’s going to be tricky setting lease rates, particularly if the property is unique in any way—good or bad. Overpricing in this market is a fatal mistake.  This is not a time to set the price high to “test the market.”  The market won’t even give you the time of day.

2)     It’s time for creative deal structuring. Rock bottom lease rates aren’t the only way to stand out from the competition, and frankly, sometimes they scare off potential tenants.  Lease agreements can be structured with attractive incentives such as free rent up front, allowances for tenant improvements, and buyout options, which can be more valuable to a prospective tenant than the lowest lease rate on the market. It’s important to hire a commercial broker who is experienced in teasing out the hidden motives of potential tenants, because therein lies the way to craft a win-win deal for both parties.

3)     It’s important to maintain a sense of urgency when negotiating deals.  Potential tenants are continuing to shop right up until the point they sign a lease.  Competing brokers are fighting hard for their landlords.  Stretching out negotiations over trivial matters or taking too long to draft leases is more and more frequently costing landlords the entire deal.

Do you have any insights into what is causing the contraction in Frederick’s commercial real estate market, and how long it will last?  We’d love to hear from you!

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The author:  Kathy Krach has served as a Vice President at MacRo and specialized in commercial sales and leasing. She is currently taking a sabbatical from brokerage activity, but continues to research and analyze Frederick’s commercial real estate market for MacRo, Ltd.

 

*Data used for this article and graph was gathered from Frederick County tax and land records. The information is deemed to be accurate, although MacRo has not independently verified it and does not guarantee that it is correct.

Topics: Frederick Office Market Ashleigh's Fields Notes