Sofia: So I am sitting here with one of TD&A’s senior associates, Leo McDermott. Leo has over three decades of commercial real estate brokerage and appraisal experience in the Mid-Atlantic region, specializing in the sale and leasing of small-cap commercial real estate on behalf of private investors, associations, and nonprofits. As a generalist, Leo has enjoyed a wide variety of assignments involving office, flex, industrial, retail, office, and mixed use properties ranging from 2.0 to $25 million. Leo’s approach to meeting client objectives relies on the foundation of trust, integrity, competence, market knowledge, and state-of-the-art resources and today we have the opportunity for Leo to speak about the current state of the office sector of commercial real estate. Welcome.
Leo: Well, thank you, Sofia. Good to be here on such a lovely, great day. You know, I’ve been in Baltimore working the downtown office market for about 23 years now. And I was prior to that time working in DC with one of our competitors. But what brought me to Baltimore was just the fact that there were so many clients looking for value-add properties. And the pricing in Baltimore was just too good to turn down.
So, I got to pick up speed and eventually sold the box of a portfolio of over half a million square feet, I decided to stick around Baltimore.
Sofia: It’s incredible. Well, we’re happy to have you on board here at TD&A. I’m excited to be interviewing you, you know, to get started. Have you noticed a significant drop in office space usage since the pandemic?
Leo: I have. You know, working from home is a national phenomenon now, since the pandemic and it is going to be sticking around. I think people are going to be working from home 2-3 days a week. And as a result of that, it means that companies are cutting back. They’re downsizing and it’s going to affect the office market for the next two or three years.
Sofia: Yeah. I know that you’ve worked with a wide variety of clients across, you know, the Baltimore region to help them find the perfect office space over the course of your career. And obviously, things have changed a lot in the last couple of years. In fact, the BBJ, Baltimore Business Journal, recently posted an article postulating that nearly a billion square feet of office space across the country is obsolete. What are your thoughts on that?
Leo: Well, there’s there’s an oversupply of offices as a result of the pandemic. And as a result of that, you’re going to find that a lot of buildings, and you’re reading it across the country, that a lot of national investors are giving their buildings back to the lenders realizing that it’s going to be tough to lease up vacant space in the buildings.
What that means for Baltimore is that you’re going to see a lot of classy office buildings that are going to either be foreclosed on and then resold to users or they’re going to be converted into medical office lab space or just another mixed-use property with incorporating a mixture of uses – office, retail and departments.
We’ve seen that for the past decade in Baltimore and it continues to happen with the properties like the F&D building that’s being converted to apartments, The One Calvert Plaza building being converted, the City House in Mount Vernon, Six South Calvert Street, and 19 West Fayette Street. I mean, all those were office assets being converted to apartments.
The problem that we’re going to have going forward is all that’s going to slow down because lenders are tightening the approval process which is taking much longer. The cost of capital is going up and the cost of labor and supplies are going up.
So, all this activity is gonna come to a creep in the next few years.
Sofia: It definitely makes sense. Thank you. On a similar note, Baltimore, you know, is currently undergoing some big changes. It also has an unfair, at least in my opinion, bad reputation. Do you think this is going to affect the city’s future growth in relation to commercial real estate? And do you also foresee current businesses pulling out of Baltimore?
Leo: Well, there’s no doubt that Baltimore has gotten a bad rep when it comes to publicity. It seems like the only thing that they ever publish about Baltimore is crime – what the crime rate is and Baltimore is no different than any other major city across the country. I mean, we have our fair share of problems with panhandling and homelessness. We have our local squeegee boys.
Those are all issues that we encounter but it’s no different than anybody else. It’s interesting to note that the vast majority of crime in Baltimore is not in the downtown core area, you know, it’s elsewhere and I’ve worked in the downtown area for 23 years. I’ve never felt unsafe.
Of course, I’m there during the day but the reality is, you know, that, I just think that it’s overblown to a large extent.
Sofia: Yeah. Yeah. And, I also think that beyond what the news says, there are so many potential pieces to building Baltimore and creating a city that will prosper and cultivate new cultures and history. I know on my end, I’m hoping business owners are able to see, you know, the potential here and envision what the city can become because there is potential. Which leads me to my next point – downtown is currently ripe for revitalization. Do you think it’ll experience a renaissance or become a complete ghost town?
Leo: Well, I think Baltimore’s history has been to work in spurts. I’d like to rephrase it as progress in Baltimore is referred to as 1 to 2 steps forward and one step back and while that’s progress, it’s a sort of a meager pace of progress, but nevertheless, it’s progress.
What I see going forward though is that, I mean, we have so many assets downtown. You have, you know, nationally known hospitals, colleges. You have all the entertainment, casinos. You’ve got a waterfront, I mean, there’s a lot there that people love and don’t have in other cities.
But I think the sheer economics of Baltimore. Baltimore’s real estate is so cheap, the cost of living is low. And in this time of pandemic, a lot of people are sitting back and asking, you know, do I really want to live here?
I’ve seen a lot of folks from the west coast moving to Baltimore and it’s because, you know, they’ve got so many issues there, whether it be traffic congestion, climate, the cost of living, they’re finding that Baltimore is very walkable and it’s a great place to consider.
Sofia: Absolutely. Absolutely. While we are talking about the future of the city, what do you think can help attract businesses and make downtown a more appealing place to be?
Leo: I’m glad you asked that question because I think that the key to Baltimore’s revival is this issue and that is competent city administration. If we get competent management to run the city, if the citizens of Baltimore can expect that their services are going to be provided, you know, on time and accurately, then you’re gonna have happy people and they’re gonna buy into the city.
We don’t have that now and you know what we’ve had in the past has been water bills that have been submitted that have been outrageously high and they’re bogus. And it takes the person who unfortunately received it six months to resolve the issue.
If people can call the city for a pothole to be filled and it gets filled, if your trash is picked up on a regular routine basis, that makes a huge difference in people’s lives. We don’t have that right now. If we get that and you get the development occurring downtown as it is right now, then this city is gonna really take off.
Sofia: Yeah, thank you. I agree wholeheartedly and I feel that when cities like Baltimore are able to pivot, that also changes the landscape of commercial real estate and businesses want to start expanding their culture and start opening their businesses in the heart of where everything happens – that is right downtown. But I really do thank you so much for sitting down with me today.
As an expert in the subject, is there anything else you would like to share?
Leo: I guess to summarize everything, I think that in Baltimore, one of the things that we really need, it’s definitely moving in the right direction. There’s frustrations with the pace. But I think that one of the biggest things that people can do, the residents and the employees who work at these office buildings downtown, they have to buy in. They have to actually participate in the success of the downtown.
So if you’re an employee downtown and you live out in the suburbs, you need to come back downtown, you need to spend that money. That’s where you earned it. The retailers down here need your help.
You know, the museums, theaters, they, need your help and support and, if you want to make things better, you can start it right through.
Sofia: Yes. Well, Leo, this is all really incredible information. Speaking for myself, I have a much better understanding of commercial real estate and the market and, and, and Baltimore and how the way and the way that the city is perceived and how that plays a role and I’m sure our audience does as well.
So, thank you again. I appreciate it. Thank you.