Delta Associates

Market Information: Baltimore

Economy

Office

Industrial

Multifamily

Economy: Year-End 2009

Job Losses Moderating; Slow Recovery Through 2010 and Beyond

The Baltimore metro area economy contracted during 2009, as the national recession reduced spending and eliminated jobs in the metro area. However, we believe the worst period of the recession occurred during the first part of 2009, impacting any gains experienced during the balance of this year. Although conditions remain sluggish, the worst conditions are behind us, as we believe a slow recovery is underway.

The Baltimore metro area cut 29,100 payroll positions during the 12 months ending October 2009. This represents a decline of 2.2%, compared to the national decline of 3.9% during this period. The Baltimore area unemployment rate was 7.7% in October 2009, up from 5.1% one year prior. However, it was down from 7.9% in July 2009. Baltimore compares favorably to the national rate of 10.2% in October 2009. The national rate retracted to 10.0% in November 2009.

The Financial Activities sector represents 18.2% of the Baltimore metro area’s gross regional product (GRP). The Federal and State government closely follows, representing 18.1% of the GRP. Baltimore’s GRP in 2008 totaled approximately $133.0 billion, growth of 2.2%, from $130.2 billion in 2007. We expect growth to slow in 2009, once the numbers are finalized, as the Baltimore metro area slowly climbs out of the national recession.

We expect the Baltimore metro economy to contract during 2009, once the numbers are finalized. We believe the recession ended in 2009 in Baltimore and the local economy is currently on a path to slow recovery. The worst period of the recession occurred during the first three months of 2009, impacting any gains experienced during the balance of the year.

Office: Year-End 2009

Absorption Flat in 2009; BRAC Fuels Construction

The Baltimore metro area office market ended the year on soft terms. Vacancy increased 230 basis points during the past year, putting downward pressure on rents. Although BRAC has created leasing demand from contractors, most tenants remain frozen in leasing decisions, as they wait for an improving economic climate. BRAC fueled construction starts this year, as a handful of projects broke ground in anticipation of future contractor demand. Although the Baltimore metro area should experience sluggish conditions in the near-term, the market should stabilize quicker than many other metro areas due to the expanding health care industry and the onslaught of BRAC relocations to the area.

Year-End 2009 Market Highlights:

Net absorption: Negative 15,000 SF, compared to 1.4 million SF during 2008.
Sublease space: Increased by 406,000 SF. Sublease space is 1.0% of standing inventory.
Overall vacancy rate: 14.4%, up from 12.1% one year ago.
Direct vacancy rate: 13.4%, up from 11.5% one year ago.
Pipeline (U/C and U/R): 870,000 SF, down from 2.3 million SF one year ago.
Pipeline pre-lease rate: 17%, down from 53% one year ago.
Rents: Down 5.2%, compared to a decline of 0.5% in 2008.
Investment sales: $266 million. Average sales price: $236/SF.

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Flex/Industrial: Year-End 2009

Regional Flex/Industrial Market Contracted in 2009

The Washington/Baltimore flex/industrial market contracted during 2009. Market conditions held up better in the Baltimore metro area than in the Washington metro, as a handful of large bulk warehouse lease deals kept absorption only modestly negative during the year. The Washington metro experienced a larger share of tenants vacating space – with fewer large lease deals to offset the loss. Rents declined over the past 12 months as property owners competed for tenants. The amount of space in the construction pipeline is down, which will help stabilize the market during 2010. However, a handful of spec construction projects started in the Baltimore metro area in 2009, as the area prepares for BRAC-related tenants. Overall, flex/industrial conditions are weak in the Washington/Baltimore region, but should regain solid footing in 2010 due to the relative strength of the Baltimore market.

Year-End 2009 Market Highlights:

Net absorption: Negative 2.3 million SF, compared to positive 4.4 million SF in 2008.
Sublease space: Increased by 217,000 SF. Available sublease space represents 0.9% of standing inventory.
Overall vacancy rate: 11.4%, up from 10.1% one year ago.
Direct vacancy rate: 10.5%, up from 9.3% a year ago.
Under construction: 1.1 million SF, down from 3.5 million SF one year ago. 41% pre-leased, up from 30% a year ago.
Space delivered: 1.8 million SF during 2009, compared to 7.3 million SF in 2008. 25% of space delivered during 2009 was leased upon delivery, compared to 24% during 2008.
Rents: Down 4.3%, compared to rising 0.3% in 2008.
Investment sales:$136.9 million, compared to $564 million in 2008. Average sales price: $58/SF.
Land Sales: $20.3 million in 2009, compared to $18.3 million in 2008. Average price per land SF: $5.09.

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Class A Apartment: Year-End 2009

36 Month Outlook Improves as the Pipeline Shrinks

Demand for rental housing in the Baltimore area has moderated as year-over-year job growth has remained negative, though the fundamentals are looking up as supply comes into line with demand.

Apartment Market Highlights at Year-End 2009:

Stabilized Class A vacancy is up 50 basis points from last year at this time across the metro area, at 5.1%. Vacancy in Baltimore’s southern submarkets is up to 5.3% from 4.7% a year ago. Vacancy in Baltimore’s northern submarkets is up to4.0% from 3.7% last year. The Baltimore region’s vacancy rate continues to outperform the national average of7.6%. Concessions in the Baltimore metro area remain elevated at 6.1%, compared to4.1% last year.
Average effective rents in the metro area are $1,375 ($1.36 per SF). Rent growth in this metro area is negative over the year by 1.3%. Rents in the Baltimore suburbs fell very slightly this quarter by 0.1% since year-end 2008. Effective rents in the southern suburbs dropped 0.4% from 4th quarter 2008 and the northern suburbs grew effective rents by 0.2% during the same period. Effective rent growth in the Baltimore City submarkets was negative over the year, falling 6.1% in both the Fells Point/Inner Harbor and Downtown submarkets.
The supply pipeline metro-wide has resumed its downward trend after ticking up slightly last quarter. Some 2,955 units are planned to deliver in the next 36 months in the Baltimore metro area (down from the 3,338 units planned this time last year). These counts exclude Baltimore’s southernmost suburbs of Anne Arundel and Howard Counties, whose units are also counted in the Washington metro pipeline and do not account for attrition.

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Condominium: Year-End 2009

Condo Highlights at Year-End 2009:

Sales: There were 198 net sales during the 4th Quarter of 2009. For the year, there were 414 sales metro-wide, an increase of 188% from 2008.
Prices: Effective new condo prices are down 7.4% metro-wide in 2009.
Concessions: Concessions are down 160 basis points metro-wide from last year.
Pipeline: There are 2,083 unsold units currently marketing in the metro area, or 5.0 years of inventory.

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