Here is the problem.

1. Create an Outlook Contact like this:
Full Name: John Smith
Business:
Suite B
123 Main St.
Anywhere, CA 90210

2. Select the newly created contact and go to Tools - Mail Merge.
Choose "Only selected contacts", Document Type Envelopes, click Ok.
3. Once Word starts Complete the setup, click setup, choose the default
Size 10 envelope, click OK, click Close.
4. In the envelope add the default Address Block.
5. Click "View merged data" button.

Here is the output:

John Smith
Suite B
123 Main St.

Anywhere, CA 90210


Notice the blank line before the City,State Zip line.

Now start over and start from Word.
1. New document.
2. Click Tools-Letters and Mailings-Mail Merge
3. Select Envelopes for document type.
4. Click Next: Starting document
5. Click Envelope Options, click OK.
6. Click Next: Select Recipients.
7. Choose "Select from Outlook contacts.
8. Click "Choose Contacts Folder"
9. Select your Contact folder that has the above entry.
10. Only select the entry above.
11. Click Next: Arrange your envelope
12. Select the address area of the envelope and click Address block,
just accept the default.
13. Click Next: Preview your envelope

Notice it looks like this:

John Smith
Suite B
123 Main St.
Anywhere, CA 90210

Just like you want it without the extra blank line. So why doesn't it
work this way when Mail Merge is started from Outlook? It does not
matter how you arrange the address street information if you have
multiple lines, you end up with this blank line if you start the mail
merge from Outlook, but you don't have the extra line if the mail merge
is started from Word, even though the data source is the same.