Annapolis office vacancies jump in 3rd quarter

Annapolis office vacancies shot up in the third quarter, as tenants shopped for the best deal and landlords continued to offer incentives in attempts to fill their space.

Vacancy rates rose to 15 percent in the third quarter, compared with 7.57 percent a year ago and 6.62 percent in 2007, according to reports from MacKenzie Commercial Real Estate Services.

It's the most recent evidence of a commercial real estate market that has softened throughout the year.

Local vacancy rates hit 12.52 percent during the first quarter, the highest point in six years. The rates rose again to 12.82 percent in the second quarter.

The rising rates are causing landlords once adamant on maintaining their price to offer breaks on everything from rent to tenant improvement.

"The more that they hear the market is bad, the tougher they are to negotiate with," said Lou Hyatt, owner of Hyatt Commercial in Annapolis. "There's more space than we'd like to see available."

As vacancies in Annapolis spiked, the rental rates rose.

The asking rental rate per square foot in Annapolis was $29.74 in the third quarter, up from $28.24 during that period a year ago. Even so, real estate experts said landlords are offering significant reductions.

"Now they are saying, 'What do I have to do to keep them in my building?' " said Todd Eckert, a leasing associate with Coldwell Banker Commercial.

He said tenants looking for less expensive space are finding rent abatements and other perks. That said, deals are coming through the pipeline, he said. It seems interest is still strong for newer developments and prime locations - even ones that aren't built yet.

"People still want to come here," Eckert said.

He said he has received three requests for proposal from businesses that want to occupy a new retail and office condominium project on Main Street. The developer is set to begin building at the former home to Christmas Spirit and a music shop next month, he said.

Meanwhile, Annapolis Exchange, a 120,000-square-foot building where rents are going for $32 a square foot plus utilities, is offering tenant-improvement incentives for credit-worthy tenants, said Jack Kelly, an associate broker with Hyatt Commercial.

"The risk is lower," he said.

Kelly said Annapolis Exchange should be 98 percent leased by next month.

He has leased the building to several companies including Howard Bank, Merchant Lynx, and Office Suites Plus.

Additionally, he has sold several buildings and has two offers on another property on West Street, Kelly said.

"I think people are just ready to do something," he said. "They're tired of waiting."

Although Annapolis' vacancy rate is rising, it's still one of the lowest in the state, said Chris Bennett, vice president with MacKenzie Commercial Real Estate Services.

Comparatively, the rate in Columbia was 12.7 percent during the third quarter, while the rate at BWI Thurgood Marshall airport was 20.8 percent.

Included in the vacancy report are two properties at 2510 Riva Road and 185 Admiral Cochrane Drive that have been "difficult to fill," Bennett said. Taking those buildings out of the equation would reduce the vacancy rate in Annapolis to 9 percent, he said.

"Annapolis is still far better off than the majority of other sub-markets in the region," he said.