Baltimore, Maryland

Introduction
The recession took its toll on the Baltimore Metropolitan Area industrial market in 2008, as the overall vacancy rate climbed to 18.8% from 14.2% a year ago. This was not a uniform downturn, however. The Harford County, East, and North markets had positive absorption, while the Cecil County, Corridor, and West markets were hurt by the large vacancies in just a few buildings which subverted overall performance.

Bulk Distribution Market
The Harford County market absorbed the most bulk distribution space in the metropolitan area for the second consecutive year. Large leases to Procter & Gamble (538,000 square feet), Prime Source Building Products (205,000 square feet), and AGCO (105,000 square feet) helped account for the strong performance. The vacancy rate remained stubbornly high because the market added two new buildings totaling 860,000-square-feet which remained unleased by year-end. Kinsley Equities built a 184,000 square foot distribution center in Cranberry Run Business Center, while Emory Properties and Ryan Development added a 676,000-square-foot distribution center in Perryman.

Like Harford County, the East market added much more bulk distribution space than it absorbed. The difference was that the East market absorbed 60% of the new space it added. Berry Plastics leased 183,000 square feet in Duke Realty’s 344,000-square-foot 5003 Holabird Avenue building. Johns Hopkins Home Care division and Agility Logistics leased Duke’s 118,000- square-foot building at 5901 Holabird Avenue. Winner Distribution completed its move into 300,000 square feet at 7001 Quad Avenue. The East’s overall bulk distribution vacancy rate was 19% at year-end.

The North bulk distribution market is the metropolitan area’s smallest, but also the only one with a single digit vacancy rate. The area’s transformation into an office-retail-services hub has made land prices too high for new industrial development. There are still large legacy manufacturing operations—McCormick Spice, Procter & Gamble’s cosmetics group, and Pall Corporation—and smaller distribution and service businesses. Absent new construction, any absorption reduces the vacancy rate.

The issue in the Corridor was that Sears’ logistics provider vacated the one million-square-foot 8901 Snowden River Parkway property. This helped drive the vacancy rate for bulk distribution space to 23%. Although the market still had several leases over 100,000 square feet, they were not enough to counter the other growing vacancies. Frank Parsons Paper leased 184,000 square feet at 1300 Mercedes Benz Drive, Bunzl Distribution Mid Atlantic leased 129,000 square feet at 7481 Coca Cola Drive; Lagasse, Inc. leased 111,000 square feet also at 7481 Coca Cola Drive;  Ulma Form Works took 107,000 square feet at 8235 Patuxent Range Road, and Sleepy’s Inc leased 119,000 square feet at 8700 Robert Fulton Drive.

Similarly, one large vacancy in Cecil County—345,000 square feet at 4 Center Drive—accounted for the spike in the vacancy rate there. Large new vacancies at 7205 Windsor Boulevard and 626 Hanover Pike hurt the West market’s performance.

The bulk distribution market was statistically flat in the Southwest market, which added 648,000 square feet of new development. FedEx will occupy a 125,000-square-foot building Preston Partners is developing for it at 4801 Hollins Ferry Road. Service Express occupied 100,000 square feet in another building renovated by Preston Partners in the same business park. Belt’s Distribution Services built 154,000 square feet for its clients at 1021 Swann Creek Drive.

Flex and Office Warehouse 
Occupancy declined in both the industrial flex and office warehouse markets. The decline was uniform throughout the metropolitan area, although the Harford County, North, and Southwest flex markets held up pretty well with vacancy rates 10.5% or under. The small office warehouse market in Harford County also maintained a single digit vacancy rate. Otherwise, the vacancy rate for office warehouse space in the metropolitan area climbed to almost 17%.

Investment Sales Activity
The weak economy and lack of readily available financing crimped investment sale activity in 2008. Some of the notable sales that did occur include:
• Exeter Property Group’s purchase of the 213,000-square-foot 7605 Dorsey Run Building for $66.00 per square foot. The building was one-third leased to Iron Mountain.

• Velsor Properties acquisition of two buildings totaling 221,000 square feet in Sieling Industrial Park for $81.45 per square foot. The properties were substantially leased.

• Rhee Brothers bought the 215,000-square-foot building at 7461 Coca Cola Drive from Lincoln Property Company, paying $84 per square foot for a building it would occupy itself.

• TA Associates Realty paid $64 per square foot to acquire the 157,000-square-foot 8801 Citation Road building leased to Crown Holdings.

Outlook
The year-ending cascade of bad news—weak retail holiday spending, rising unemployment, further declines in housing prices, decelerating exports, and lower corporate profits—portends obvious problems in the local industrial market for 2009. The drop in retail sales may perversely lead to a need for additional short-term warehouse space to store overstocked merchandise. Retailers will use every means possible to off-load this excess inventory and carefully manage any build up for the spring and summer seasons. Other foreseeable trends include:
• Disposition of excess manufacturing capacity as companies size their production capacity to match demand. The question will be the market for such facilities given the widespread downturn in the economy.

• Realignment of warehousing networks to match a smaller retail or manufacturing footprint, especially if manufacturing continues to move off-shore. The surge in gasoline prices, that was forcing a re-thinking of logistics and supply chain factors over the summer, has abated. Companies will likely seek flexibility in lease terms until they have a clearer picture of the emergent supply chain for their company and industry.

• Even the largest landlords, such as ProLogis and First Industrial, are facing capital issues of their own as they have had to refinance the debt used to fuel their expansion. Not only will landlords worry about tenant credit, tenants will worry about landlord credit and ability to fund tenant improvements.

• The capital markets are likely to remain frozen for the short term, weakening the prospect for investment sales during the first half.

• At historic rates of absorption, it is expected to take 2–3 years for the Baltimore industrial market to return to normalized vacancy rates.
On the positive side, the Baltimore area has a strong complement of defense companies, which continue to do well. The relocation of BRAC related companies in the 2009–2011 timeframe will boost the area economy, including the market for industrial space. The expected economic stimulus package by the incoming Obama administration should help the market by the fourth quarter and lead to highway and transportation improvements which will be salutary for the industrial market over the long term.

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Contact Information

Rick Latini
410.296.7613
rlatini@collierspinkard.com

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