Delta Associates

Market Information: Baltimore

Economy

Office

Industrial

Multifamily

Economy: Mid-Year 2009

Job Losses Similar to 1991 Downturn - So Far; Baltimore Area Holding Up Better Than the Nation

The Baltimore metro area economy contracted further during the 2nd quarter of 2009. During the 12 months ending April 2009, companies cut 38,000 jobs, mainly in the Retail and Construction sectors. This is similar to the 1991 recession, when companies cut 44,800 jobs. Unemployment increased to 7.1% at April 2009, a 350 basis point rise from one year ago.

The Baltimore metro area cut 38,000 payroll positions during the 12 months ending April. This represents a decline of 2.9%, compared to the national decline of 3.8% during this period. The Baltimore area unemployment rate was 7.1% in April 2009, up from 3.6% one year prior.

The Federal and State government represents 18.1% of the Baltimore metro area’s gross regional product (GRP). The financial and professional services core industry is a comparable size. Baltimore’s GRP in 2008 totaled approximately $132.8 billion, growth of 2.0%, from $130.2 billion in 2007. We expect growth to slow in 2009, as the Baltimore metro area continues to feel the impact of the national recession.

We expect the Baltimore metro economy to contract during 2009, as the national recession continues to impact the area. However, we believe conditions will start to improve modestly late in 2009, with recovery underway in 2010.

Office: Mid-Year 2009

Vacancy Edges Up; Rents Decline 2.2% in the First Half of 2009; Spec Construction Awaits BRAC Tenants

The Baltimore metro area experienced slow market conditions during the 2nd quarter of 2009. Although absorption was slightly positive, it was boosted by pre-leased deliveries. Vacancy is elevated, as it increased 120 basis points during the past year. However, this rise is modest due to the stability of the health industry located here. Tenants remain frozen in leasing decisions, as they wait for an improving economic climate. Although construction levels have declined since last year, a handful of spec projects have started or planned to start by year-end, as developers rely on tenants relocating to the area under the BRAC decision. Rents ticked down during the past six months, as property owners with available space struggle to obtain tenants. Although the Baltimore metro area is poised for slowing conditions in the near-term, the market should stabilize quicker than other metro areas due to the expanding health care industry here.

Mid-Year 2009 Market Highlights:

Net absorption: Positive 37,000 SF, compared to the quarterly average of 350,000 SF during 2008.
Sublease space: Increased by 176,000 SF. Sublease space is 0.7% of standing inventory.
Overall vacancy rate: 12.8%, up from 11.6% one year ago.
Direct vacancy rate: 12.1%, up from 10.8% one year ago.
Pipeline (U/C and U/R): 1.7 million SF, down from 4.2 million SF one year ago.
Pipeline pre-lease rate: 48%, up from 34% one year ago.
Rents: Down 2.2% during the 1st half of 2009, compared to a decline of 0.5% in 2008.
Investment sales: $88.5 million. Average sales price: $221/SF.

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Flex/Industrial: Year-End 2008

Market Shows Stress, More So in Washington; Sturdy Absorption and Decline in Pipeline Offset by Rise in Vacancy and Modest Rent Growth

The Washington/Baltimore flex/industrial market experienced moderating conditions during 2008. Although net absorption totaled just below the long-term average, it was boosted by healthy leasing activity in the Baltimore area, which was opposite to the sluggish leasing activity in the Washington area. Rents were hesitant to rise in the region given changing market conditions and the national economic climate. The amount of space in the construction pipeline is easing, which allowed demand to catch up with the new supply – as reflected in the rise in the pre-lease rate. Overall, flex/industrial conditions are easing in the Washington/Baltimore region, though market fundamentals remain fairly healthy.

Year-End 2008 Market Highlights:

Net absorption: 4.4 million SF, compared to 6.6 million SF in 2007.
Sublease space: Increased by 753,000 SF. Available sublease space represents just 0.8% of standing inventory.
Overall vacancy rate: 10.1%, up from 9.5% one year ago.
Direct vacancy rate: 9.3%, up from 8.8% a year ago.
Under construction: 3.5 million SF, down from 6.4 million SF one year ago. 30% pre-leased, compared to 24% a year ago.
Space delivered: 7.3 million SF in 2008, compared to 6.4 million SF in 2007. 24% of space delivered in 2008 was leased upon delivery, compared to 27% during 2007.
Rents: Up 0.3%, compared to rising 2.8% in 2007.
Investment sales: $564 million, compared to $1.5 billion in 2007. Average sales price: $102/SF.
Land Sales: $18.3 million in 2008, compared to $149.7 million in 2007. Average price per land SF: $5.11.

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Class A Apartment: Mid-Year 2009

Rents and Vacancy Flat

Recently, the demand for rental housing has moderated as job growth in the Baltimore area has turned negative and supply has increased.

Apartment Market Highlights at Mid-Year 2009:

Stabilized Class A vacancy is the same as last year at this time across the metro area, at 5.4%. Baltimore’s southern submarkets are down to 4.7% from 4.9% a year ago. Baltimore’s northern submarkets are also lower at 4.9% from 5.6% last year. In addition, the Baltimore region’s vacancy rate is well below the national average of 6.6%. Concessions in the Baltimore metro area have risen compared to the same time last year (5.7% compared to 4.0%).
Average effective rents in the metro area are $1,353 ($1.36 per SF). Rent growth in this metro area is essentially flat over the year at negative 0.1%. Year over year rents in the Baltimore suburbs grew slightly this quarter by 0.2%. Effective rents in the southern suburbs grew by 1.3% from mid-year 2008 and the northern suburbs fell 1.2% from last year. Effective rent growth in the Baltimore City submarkets was negative over the year, falling 1.4% in both the Fells Point/Inner Harbor and Downtown submarkets.
Supply pipelinemetro-wide has recently trended downward but did not continue that trend this quarter. Some 4,072 units are planned to deliver in the next 36 months in the Baltimore metro area (up from the 3,761 units planned this time last year). These counts exclude Baltimore’s southernmost suburbs: Anne Arundel and Howard Counties (whose units are already counted in the Washington metro pipeline).

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Condominium: Mid-Year 2009

Condo Highlights at Mid-Year 2009:

Sales: There were 162 net sales during the 2nd Quarter of 2009.
Prices: Effective prices dropped 7.2% during the same time period.
Concessions: Concessions are up slightly metro-wide from last year, averaging 4.1% of the purchase price.
Pipeline: The actively marketing pipeline has declined since the first quarter, mainly due to sales activity – at 2,623 unsold units, or 7.8 years of inventory.

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