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An Appraiser’s Assessment of Frederick’s Commercial Real Estate Market

The Panama Canal could save Hagerstown, but will it boost Frederick’s industrial real estate values?

An Appraiser's Assessment of Frederick's Commercial Real Estate MarketMichael Pugh of Pugh Real Estate Group is one of Frederick County’s leading commercial real estate appraisers, and he recently shared his perspective of Frederick’s CRE market with a group of commercial agents and brokers at the Frederick County Association of Realtors (FCAR).

Appraisers are on the front lines of the commercial real estate market, so we were very interested to hear his impressions of recent activity in Frederick’s market.  Following is an overview of Michael’s presentation to FCAR’s commercial Realtors on March 27, 2013.

Overview of Frederick’s Commercial Real Estate Sectors

Housing:  Local homebuilding activity has a significant impact on Frederick’s commercial real estate, so it makes sense to begin there.  Housing starts this past September were up 25% from August.  Big national homebuilders have not been this optimistic since 2004.  Lot sales to builders for homes in the $350,000 – $400,000 range have increased from last year as a result.

Unsold homes and foreclosures may throttle the housing recovery, however.  Home prices have fallen 24% from their peak during the second quarter of 2007, so there are still many homeowners underwater on their mortgages.

Flex:  There is good reason that the next Matan project planned for Frederick is apartments, not flex.  Frederick County still has about 800,000 square feet of flex space available for sale.  A significant amount of that inventory is sitting on the market today because the owners either don’t seem to understand that there has been a recession, or believe that somehow their property values alone were unaffected by it.

Office condominiums:  During the recession, office condos held their value longer than any other commercial real estate in Frederick—the rate of sales slowed considerably, but the values held, mainly due to medical owner/users.  Prices for office condos in Frederick have remained relatively flat as a result.  There is currently only about 60,000 square feet of office condominium space on the market.

Office buildings:  Frederick has seen a decline in the value of office buildings, and marketing times have lengthened as well.  (MacRo Report has covered the reasons behind that decline extensively.  Office use in general is in transition, and large employers like Bechtel are leaving for more favorable business climates like northern Virginia.)

Retail:  Retail property values for lower quality assets (i.e. strip malls) in Frederick and Washington counties both took a huge hit during the recession.  There is a big price differential between lease rates in Frederick’s high quality retail assets—like Market Square and Clemson Corner—and lower quality assets—like older, dated retail properties on the Golden Mile.  The difference is as much as $40/square foot in the most extreme cases.

Retail development projects at Clemson Corner and Market Square on Route 26 have been a resounding success.  Look to Brunswick Crossing for the next big retail venture:  the town has approval for 300,000 square feet of commercial development, and an economic development team that is doing everything right to change the culture there and revolutionize the town.

Proposed retail development at the hotly-disputed Monrovia Town Center could also do very well, as the population in Urbana has exploded but there is relatively limited retail there.

Industrial:  A vacant industrial lot is the poorest-performing commercial real estate asset in Frederick County right now.  Manufacturing jobs, the life-blood of industrial real estate values, declined in Frederick during the recession and they don’t appear to be making a comeback any time soon.  Maryland is not high on the list of places for manufacturing businesses to locate.

However, the Panama Canal may succeed where Annapolis has failed—and save Hagerstown in the bargain.

The Panama Canal is undergoing a large expansion and will soon be able to accommodate super tankers for the first time.  There are only three deep water ports on the entire east coast that can also accommodate massive transport ships, and Baltimore is one of them.  That means Baltimore, and by extension, Hagerstown, is very well positioned to experience significant growth as a distribution hub.  Sites at the intersection of Interstates 70 and 81 would make great locations for warehouses.

Frederick County sits right on the path leading there.

Frederick’s Commercial Real Estate Market: 2013 1st Quarter Impressions

Leasing activity for quality commercial assets picked up, and sales activity during the first quarter of 2013 increased over the 1st Q of 2012.  For the first time in years, commercial appraisers in Frederick have comps that are less than one year old.

Cap rates are moving down—the better the asset quality, and the better the tenant, the steeper the slope.  Banks have been holding caps rates up a bit.  Two years ago, no commercial bank would finance above a 70-75% loan-to-value ratio; today, commercial banks are getting comfortable again with 80% LTVs.  As a result, cap rates are coming down to 4-4.5% for good quality assets in Frederick.

Commercial banks are chasing loans for medical offices and apartment buildings.  Most commercial bankers will tell you that there are not a whole lot of people (or businesses) in Frederick County with the capacity to qualify for a commercial loan right now.  If you want a good client, your best bet is to find a doctor.

Michael P. Pugh is a Certified General Real Estate Appraiser with the Pugh Real Estate Group, LLC., in Frederick, Maryland.  He specializes in the appraisal of improved and unimproved commercial and industrial real estate.  He is an Associate Member of the Appraisal Institute and has nearly completed work on his MAI certification. 

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

 

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