Baltimore, Maryland

Overview
It comes as no surprise, in the wake of the recently confirmed recession, that the Baltimore Metropolitan Area office market continued to soften in 2008 for the second consecutive year. The vacancy rate rose to 16.8% from 15.2% a year ago, as the market added 1.86 million square feet of new space, while absorbing 448,000 square feet, the lowest amount since 2002. Employment growth began to slow over the course of the year. The unemployment rate climbed to 5.1% in October from 4% in January, although still better than October’s national average of 6.5%. Lay-offs by such tenants as Constellation Energy, Zurich American Insurance, HSBC and Northwest Airlines dampened the effect of sizeable lease announcements by others — Northrop Grumman (160,000 square feet), Integral Systems (131,450 square feet) and CACI (60,000 square feet).

While leasing activity slowed, developers completed 1.8 million square feet of new construction, 82% of which remained available at year-end. Construction exceeded absorption in every market, pushing vacancy rates higher than a year ago. Over 75% of the new space was added in the northern Baltimore-Washington corridor — Howard and Anne Arundel Counties and the greater Annapolis area — with 85% of that still available. Some of the larger new buildings — 7740 Milestone Parkway and 8210 Dorsey Run Road — are located to capitalize on the growth around Ft. Meade resulting from the Base Realignment and Closure Act (BRAC). There is no question that BRAC could buffer the market against a protracted downturn in the economy, but until government agencies and contractors actually relocate, Baltimore remains dependent on the internal dynamics of the local tenant base.

Illiquidity in the credit markets, the gap in pricing expectations between buyer and seller, and pessimism about economic prospects suppressed investment sales volume for the year. There were still notable sales. Topping the list was Wells REIT II’s purchase of 1580 A and B West Nursery Road from West Group/ASB Capital for $301 per square foot. Those single tenant buildings were occupied by Northrop Grumman, which will lease a third building being developed by Opus.

At year-end, Asset Capital Corporation sold the 121,322-square-foot, 20 S. Charles Street building to CSG Partners (Prudential) for $76 per square foot. General Growth Properties sold the Carefirst leased 10455 and 10453 Mill Run Circle properties in Owings Mills for $244 per square foot. Liberty Property Trust sold the 93,850-square-foot, 5950 Symphony Woods building to Washington Capital Partners for $166 per square foot, Principal Life Insurance sold the 215,345-square-foot Lakeview I & II in Columbia to The Goldstar Group for $154 per square foot, while the Maryland Association of Realtors bought Sun Life’s 51,971-square-foot-office building in Annapolis for $246 per square foot. Oekos Management bought a nine-building, single-story office and flex portfolio in Rivers Business Park in Columbia for $158 per square foot.
 
Capital Markets
 - With the weakening of tenant demand and scarcity of capital, asset values have dropped and cap rates continue to increase to more historical ranges with certainty of income and credit tenancies being valued with little or no attention given to tomorrow’s promises.

 - There were few transactions in downtown Baltimore, which saw a flurry of institutional quality asset sales between 2005 and 2007. During these uncertain times, we expect those select downtown buildings with proven waterfront locations to perform best in regards to rent growth and tenant retention, which will ultimately result in a stronger investor appetite.

 - A majority of the 2008 sales that did take place were located in the Baltimore-Washington corridor, a rapidly growing submarket that remains a target of many institutional investors due to its proximity to Washington, DC and growth in tenant demand from government agencies and related private sector contractors.

 - Those investors who are fortunate to have the capital for investment will take a “flight to quality” mentality with regards to the assets they choose to pursue. In addition to location and building quality, a clear exit plan will be scrutinized.

 - Today’s lenders, life companies and local and regional banks, have scaled back lending volume and are further scrutinizing deals, resulting in loan to value ranges of 55%–65% and spreads over treasuries in the 350–450 point range.

 - Preparing an investment property for sale in order to extract the most from the marketplace is again a positioning exercise that demands experience, focus, and attention to detail.

Outlook
The impact of the severe recession on the Baltimore office market may be buffered by the area’s strong health care and higher education sector, BRAC-related growth at Ft. Meade and Aberdeen Proving Grounds, and a substantial state and federal government presence abetted by proximity to Washington, DC. This is not to say that the office market won’t continue to experience rising vacancies next year as job growth slows and lay-offs rise. It is more that this economy is less dependent on those sectors hardest hit by this downturn- financial services, manufacturing, and retail.

Demand
 - Average job growth through October (according to DLLR), was less than .4%.

 - Job growth was strongest in professional and business services (up 2.4%) and education and health care and social services (2.02%).
 
 - At 2008’s job growth rate, it will take 2.5–3 years to return the market to a 12% vacancy rate. This recovery will be delayed if the growth rate stagnates or falls even lower.

Supply
 - 47% of the space under construction has been pre-leased.

 - Some of the largest buildings under construction — the 525,000-square-foot building at 701 Aliceanna Street (Legg Mason and Hogan & Hartson), the 278,000-square-foot 1300 Thames Street building (Morgan Stanley), the 160,000-square-foot 1550 W. Nursery Road building (Northrop Grumman), and 6721 Columbia Gateway Drive (Integral Systems) — have been substantially pre-leased.

 - The Vacant and Under Construction Index, Colliers Pinkard’s measure of the impact of new construction, is 19.2%, up from 18.8% in 2007. Given the lack of financing for new development, the construction spigot should be shut for new projects in 2009 that don’t have substantial pre-leasing and developer equity.

 - Next year will be challenging for landlords facing weak demand, assertive tenant negotiations, and the cost and availability of financing. Tenants facing cost constraints of their own will initiate steps to reduce occupancy cost, space, and the length of their lease terms. Late next year and early 2010, however, the market should begin to feel the impact of BRAC relocations which will eventually stabilize and grow occupancy.

View Statistical Overview 

About Colliers Pinkard

Colliers Pinkard recently completed the consolidation of its ownership structure with Colliers Turley Martin Tucker, Cassidy & Pinkard Colliers, and Colliers ABR, forming a holding company that is one of the nation’s largest commercial real estate service firms. The consolidated entity completes more than $13 billion in worldwide transactions annually and manages more than $30 billion in real estate. The holding company’s portfolio totals 300 million square feet under property management, 210 million square feet of space for lease, and $5 billion in capital markets transactions annually. The Corporate Solutions division sustains more than 20,000 locations for Fortune 1,000 companies and delivers a new location “Every 80 Minutes.”

About Colliers International

Colliers International is a global affiliation of independently owned commercial real estate firms. The organization's 10,092 employees span the world in 267 offices in 57 countries. On a worldwide basis, Colliers manages 672,945,918 square feet, and has revenue of $US 1,620,958,349.

Contact Information

Jeff Samet
410.347.7535
jsamet@collierspinkard.com

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