Let’s hear it for the ripple effect. Thanks to its proximity to Washington, D.C., Baltimore has enjoyed a rise in government spending that has sheltered its employment sectors and helped its multifamily market hold a relatively secure line through the downturn. In fact, Baltimore holds the nation’s fourth-lowest unemployment rate. The market also has a relatively low cost of living, easy connectivity to other major metros, and a Forbes ranking as the seventh-best city for young professionals—a key demographic for stable apartment occupancy levels.
Many of these young professionals work in one of Baltimore’s four primary industries—health care, education, defense, or financial services. Major employers include the world-renowned Johns Hopkins University and Johns Hopkins Hospital, as well as the U.S. Social Security Administration. In addition, the military’s Base Realignment and Closure (BRAC) Act is funneling 25,000 jobs into two prominent military bases located to the north and south of Baltimore.
A secondary employment market—tourism—is supported by the Baltimore Orioles and Ravens stadiums, which are located within walking distance of downtown, as well as the rejuvenation of the Inner Harbor, which has turned into a sought-after tourist destination in warmer months.
The economic downtown, however, has not entirely spared Charm City. The market has seen an increase of 1.7 percentage points in its unemployment rate from January 2009 to January 2010. In the multifamily sector, average Class A apartment rents have experienced a 6 percent year-over-year decrease. Broken down geographically, this represents average rents of $1,500 in Baltimore itself; $1,038 in Harford County; $1,288 in Baltimore County; and $1,414 in Anne Arundel County. What’s more, the overall vacancy rate has exceeded 8 percent in Baltimore and some surrounding counties. According to New York-based Real Capital Analytics (RCA), Class A multifamily properties are selling for an average of $110,000 per unit, at an average 7.25 percent cap rate.
Despite this downward pressure, Baltimore is holding steady as a solid apartment market with a positive long-term outlook.
Compared to 15 sales in 2008 and 47 deals in 2007, RCA reported only nine transactions (each valued at more than $2.5 million) in the Baltimore metro in the past year. The total value of the 2,661 units sold was $262 million.
Fortunately, very few of these sales were for distressed properties. In fact, prior to January, when Standard Austin Group purchased three distressed properties in the metro for $92.4 million, Baltimore had seen less than much of the rest of the country on the distressed property front. One of the few examples of distressed multifamily property sales occurred last year in northwest Baltimore. That area is home to an abundance of Class B and C garden apartments, and in the summer of 2009, a 54-unit complex sold for $2.625 million at a recorded cap rate of 8.6 percent (in line with what similar properties would convey in today’s market.)
With the significant drop in overall transactions and tighter financing, the gap between buyer and seller pricing is beginning to improve, as cap rates edge higher and prices decline. Still, with the exception of Class A trophy assets, Baltimore continues to see a lack of offers. Class B and C properties with cap rates below 8 percent remain particularly slow to sell, and are often taken off the market entirely.
Much of this slowdown remains due to a lack of investor capital. Although multifamily housing finance is not the source of the current credit crisis, it has been disrupted by it. The good news is that multifamily rental loan performance in the Baltimore metro market has held up well. The bad news is that many private sources of multifamily finance have exited the market. The CMBS market has essentially shut down. And banks are presently not lending.
Meanwhile, life insurance companies, pension funds, and endowments that have provided permanent financing in the past are still standing on the sidelines. This leaves seller financing—along with regional and community banks where buyers have existing relationships—to fuel the market. The government-sponsored agencies Fannie Mae and Freddie Mac—and to a lesser degree the Federal Housing Administration (FHA)—have been the only viable funding sources.
According to Alexandria, Va.-based Delta Associates, the number of rental units scheduled for delivery during the next three years in the Baltimore area has risen to more than 1,900. This is up from 1,570 apartments planned at the end of 2008, but far below the nearly 2,800 scheduled for delivery at the end of 2006.
One of the newest projects to hit the market is the 275-unit Fitzgerald, which was built in midtown by Greenbelt, Md.-based The Bozzuto Group and is seeking to become Baltimore’s largest LEED-rated residential development. The Fitzgerald includes studio, one-, and two-bedroom rentals and is within walking distance of the University of Baltimore. In addition, south of Baltimore, construction has begun on Mission Place, a 262-unit building that was spurred by demand from the thousands of BRAC-related jobs coming to nearby Fort Meade. Mission Place will be part of a $53 million mixed-use project that includes apartments, retail, and office space.
By most expert accounts, Baltimore’s economy will begin to recover toward the latter half of 2010. This is a somewhat quicker turnaround than is expected in other U.S. metros and can be attributed in part to the BRAC-induced growth of nearby military instillations. Developments in biotech and tourism should also help the Baltimore area track ahead of the national economy in terms of job growth. One thing that should be monitored closely, however, is any contraction in federal and defense spending, as this would immediately impact Baltimore’s local labor force.
Green development is also worth monitoring. Although many of the nation’s markets consider LEED development to be a pivotal point of competition for new apartment development, the green movement has been slow to take off in greater Baltimore. Outside of projects like The Fitzgerald, there are very few LEED-rated apartment buildings in the area, in comparison to LEED-rated office space. However, social awareness is growing in the marketplace, as is an understanding among owners and investors that green buildings improve efficiencies and reflect in the bottom line. The proliferation of government green programs as well as stricter codes should also continue to drive sustainable building initiatives.
In the meantime, Baltimore will maximize its strong geographic position, hoping to offset its relatively mild case of near-term negative rent growth, rising vacancy rates, and stale absorption with an earlier-than-normal economic recovery. The greater Baltimore region should begin to see some positive indicators toward the back half of 2010, causing many of these negative factors to begin to turn and allowing Baltimore to look forward to good news. Among these: Multifamily annual net absorption of 1,006 units in the 2010 to 2012 window and apartment values that are expected to rise 5 percent, which is sharply ahead of a nationally predicted decrease of 2.63 percent, according to Viewpoint 2010 by New York-based consultant Integra Realty Resources.
And that is not a bad line to hold.