REAL ESTATE OUTLOOK BALTIMORE OFFICE MARKET FOURTH QUARTER 2015 The Baltimore metro area office market experienced steady conditions during the fourth quarter, as net absorption was positive 172,000 SF due primarily to a handful of mid-sized deals. During all of 2015, net absorption totaled 1.0 million SF. Given this, the vacancy rate edged down to 10.4%, which is below the 10- year average of 11.5%. Landlords increased asking rents by 1.5% during the year, as the vacancy rate is low enough to justify rent increases. The construction pipeline is tame and holds a healthy pre-lease rate at 59%. We expect fundamentals will improve during 2016 driven by cybersecurity, cloud computing, and health care industries. Improving conditions will be felt more in the suburbs surrounding BRAC-related military bases compared to the Baltimore CBD. ECONOMY Robust year-over-year job growth Payroll employment increased 33,500 during the 12 months ending October 2015, which is over three times the 20-year annual average of 11,500. Baltimore City took 6,200 or 19% of these new jobs. The education/health sector was the leader in job growth during the past 12 months, adding 7,900 new jobs. Approximately 73% of these jobs were added to the health sub-sector. The trade/transportation/utilities sector followed with 6,200 new jobs, with 66% of these jobs added to the retail sub-sector. The Baltimore metro area unemployment rate is 5.4% at October 2015, down from 5.7% one year ago. The unemployment rate is below the 10-year average of 6.0%. This compares to the national unemployment rate of 5.0% at October. We expect the economy to pick up during 2016 and 2017. Through 2019, we expect job growth to average 18,500 per year with the peak of job growth occurring during 2016, but still remaining elevated during 2017. We project the strongest growth to occur in health, education, technology, and food services fields. Office market steady during Q4 Leasing activity drives net absorption OFFICE TRENDS 10-YEAR TREND FOURTH QUARTER 2015 DIRECT VACANCY 10.4% Vacancy rate edges down ABSORPTION 1.0 Million SF Healthy absorption YTD RENTAL RATES $21.57 PSF Asking rents edging up UNDER CONSTRUCTION 1.8 Million SF Growing pipeline JOB GROWTH 33,500 jobs During 12-months ending October 2015
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real estate outlook Baltimore office market...2 REAL ESTATE OuTLOOk Baltimore office market Q4 2015 BaltiMORe Office MaRket FOuRT QuARTER 2015 office VAcAncy AnD DemAnD Net absorption
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Real estate OutlOOk
Baltimore office marketfourth Quarter 2015
The Baltimore metro area office market experienced steady conditions during the fourth quarter, as net absorption was positive 172,000 SF due primarily to a handful of mid-sized deals. During all of 2015, net absorption totaled 1.0 million SF. Given this, the vacancy rate edged down to 10.4%, which is below the 10-year average of 11.5%. Landlords increased asking rents by 1.5% during the year, as the vacancy rate is low enough to justify rent increases. The construction pipeline is tame and holds a healthy pre-lease rate at 59%. We expect fundamentals will improve during 2016 driven by cybersecurity, cloud computing, and health care industries. Improving conditions will be felt more in the suburbs surrounding BRAC-related military bases compared to the Baltimore CBD.
economy
Robust year-over-year job growthPayroll employment increased 33,500 during the 12 months ending October 2015, which is over three times the 20-year annual average of 11,500. Baltimore City took 6,200 or 19% of these new jobs. The education/health sector was the leader in job growth during the past 12 months, adding 7,900 new jobs. Approximately 73% of these jobs were added to the health sub-sector. The trade/transportation/utilities sector followed with 6,200 new jobs, with 66% of these jobs added to the retail sub-sector.
The Baltimore metro area unemployment rate is 5.4% at October 2015, down from 5.7% one year ago. The unemployment rate is below the 10-year average of 6.0%. This compares to the national unemployment rate of 5.0% at October.
We expect the economy to pick up during 2016 and 2017. Through 2019, we expect job growth to average 18,500 per year with the peak of job growth occurring during 2016, but still remaining elevated during 2017. We project the strongest growth to occur in health, education, technology, and food services fields.
Office market steady during Q4 Leasing activity drives net absorption
Office tReNds
10-YEAR TREnd FouRTh QuARTER 2015
Direct VAcAncy
10.4%Vacancy rate edges down
ABSorPtion
1.0 Million sfHealthy absorption YTD
rentAL r AteS
$21.57 PsfAsking rents edging up
UnDer conStrUction
1.8 Million sfGrowing pipeline
JoB GroW tH
33,500 jobsDuring 12-months ending October 2015
2 REAL ESTATE OuTLOOk Baltimore office market Q4 2015
Baltimore office marketFourth Quarter 2015
office VAcAncy AnD DemAnD
Net absorption falls short of 2014 levelThe direct vacancy rate in the Baltimore metro area was 10.4% at December 2015, down 20 basis points from September 2015. This compares favorably to the 10-year average rate of 11.5%.
Baltimore South, which includes the submarkets of Columbia, Route 1 North, BWI, and Anne Arundel South, holds a lower direct vacancy rate at 9.6% at December 2015. This compares to Baltimore North at 10.8%, which is due in part to the elevated vacancy rate in Baltimore CBD and Harford County.
Net absorption totaled positive 172,000 SF during the fourth quarter of 2015 as demand was limited. Net absorption for Class A space totaled positive 45,000 SF during the fourth quarter of 2015, while Class B/C totaled positive 128,000 SF.
Net absorption totaled 1.0 million SF during 2015, which was just below the 1.2 million SF achieved during 2014. This compares to the 10-year average of 1.4 million SF.
The BWI submarket experienced the strongest positive net absorption during the fourth quarter, contributing positive 100,000 SF. One of the bigger deals in the BWI submarket was Teksystems expanding by 12,000 SF at 999 Corporate Boulevard. It is important to note that most of the positive trends in BWI are attributed to the National Business Park, as its vacancy rate is very low at 2.9% at December 2015 while the balance of BWI is 13.4%. The National Business Park is made up almost entirely of government contractors and subcontractors and its proximity to Fort Meade makes it a highly desirable destination for these tenants.
Some other mid-sized deals include the 20,000 SF Advanced Radiology lease at 9409 Philadelphia Road in Baltimore County East and the 17,000 SF CyberReliant lease at 180 Admiral Cochrane Drive in the Anne Arundel South submarket. Notably, during 2015, the tech sector represented the largest share of leasing activity at 30%. We expect continued activity from this sector during 2016, as cybersecurity and cloud computing expand in the Baltimore area.
uNeMPlOYMeNt Rate
PaYROll JOB GROWtH
-4%
-3%
-2%
-1%
0%
1%
2%
3%
06 07 08 09 10 11 12 13 14 15*
UNITED STATES BALTIMORE METRO AREA
BaltiMORe MetRO aRea Office Net aBsORPtiON aNd VacaNcY
6%
7%
8%
9%
10%
11%
12%
13%
14%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
06 07 08 09 10 11 12 13 14 15*
NET ABSORPTION IN MILLIONS DIRECT VACANCY RATE
* At October 2015 SOURCE Bureau of Labor Statistics, Transwestern.
0%
2%
4%
6%
8%
10%
12%
06 07 08 09 10 11 12 13 14 15*
UNITED STATES BALTIMORE METRO AREA
* 12 months ending October 2015 SOURCE Bureau of Labor Statistics, Transwestern.
* At fourth quarter 2015 SOURCE CoStar, Transwestern.
REAL ESTATE OuTLOOk Baltimore office market Q4 2015 3
Baltimore office marketFourth Quarter 2015
office SUPPLy AnD DeVeLoPment
Well pre-leased pipeline due to deliver in 2016There were no deliveries during the last three months. During 2015, deliveries totaled 912,000 SF and came online at 72% pre-leased.
There is 1.8 million SF of office space under construction or renovation at December 2015. Projects are 59% pre-leased, above the 10-year average pre-lease rate of 47%. All pipeline projects are currently on pace to deliver during 2016. The Balance of Baltimore City submarket has the greatest amount of space under construction, totaling 821,000 SF in the pipeline at 88% pre-leased. This is highlighted by 477,000 SF at 100 Block Street currently being constructed for Exelon.
office ProJecteD SUPPLy VS. DemAnD
Vacancy rate to declineWe project the overall Baltimore metro area office vacancy rate to decline to the low-9% range by December 2017, from 10.6% today. Demand will be boosted by pre-leased deliveries and from the growing cyber security field. We project the vacancy rate in the Baltimore metro area will decline steadily, as demand gradually rises and construction is held in check.
office rentAL r AteS
Asking rents rise 1.5% during 2015The average rental rate in the Baltimore metro area increased to $21.57 PSF during the fourth quarter, a 1.5% rise from year-end 2014. Class A office rents averaged $24.68 PSF, while Class B/C rents averaged $20.33 PSF. Baltimore South holds a higher asking rate at $23.81 PSF at December 2015, compared to Baltimore North at $20.65 PSF.
We expect asking rents to rise 2.0% to 2.5% during 2016, as the vacancy rate continues to decline.
BaltiMORe MetRO aRea Office askiNG ReNtal Rates
$10
$12
$14
$16
$18
$20
$22
$24
$26
$28
06 07 08 09 10 11 12 13 14 15*
CLASS A CLASS B/C
* At fourth quarter 2015 SOURCE CoStar, Transwestern.
BaltiMORe MetRO aRea Office deVelOPMeNt PiPeliNe MILLION SF
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
06 07 08 09 10 11 12 13 14 15 16*
COMPLETED UNDER CONSTRUCTION PRE-LEASED UNDER CONSTRUCTION AVAILABLE
* Completed YTD SOURCE CoStar, Transwestern.
4 REAL ESTATE OuTLOOk Baltimore office market Q4 2015
Baltimore office marketFourth Quarter 2015
office inVeStment mArKet
Investment sales rise above the 2014 level Investment sales volume totaled $645 million or $156 PSF in the Baltimore metro area. This compares to $634 million in sales closing at $168 PSF during all of 2014. Investors focused capital on Class A and B assets equally, as each class represented 50% of the total sales volume in 2015. Not surprisingly, 59% of the total capital YTD was focused on assets located in highly walkable neighborhoods with access to transportation, retail, and other amenities.
The most notable deal during the fourth quarter of 2015 was when True North Management Group purchased 1 South Street for $64.3 million or $134 PSF in the Baltimore CBD submarket. This asset is 89% leased. We expect investment sales to increase during 2016 as investors chase yield.
office mArKet oUtLooK
Improving conditions projected in 2016 We expect the Baltimore metro area office market to improve during 2016. With a controlled pipeline that is well pre-leased and rising demand, we expect the vacancy rate will decline to the low-9% range by year-end 2017. As the vacancy rate declines, asking rents should rise 2.0% to 2.5% during 2016. n
Baltimore Metro Area Office Market Indicators
suBMaRket iNVeNtORYuNdeR
cONstRuctiONQ4 Net
aBsORPtiON2015 Net
aBsORPtiONdiRect
VacaNcYsuBlease
sPaceOVeRall
VacaNcYaVeRaGeRate Psf
Harford County 3,668,302 99,000 15,000 33,000 20.9% 0.1% 21.0% $22.47
Baltimore County West 13,059,476 223,600 (39,000) 13,000 11.1% 0.2% 11.3% $20.52
Baltimore County North 16,297,276 45,000 65,000 224,000 9.1% 0.1% 9.2% $20.98
Baltimore County East 2,782,972 108,790 11,000 70,000 10.4% 0.2% 10.6% $19.18
7160 Columbia Gateway Drive, Suite 210Columbia, Maryland 21046
Baltimore Metro Area Office Market Indicators
PROPeRtY class iNVeNtORYuNdeR
cONstRuctiONQ4 Net
aBsORPtiON2015 Net
aBsORPtiONdiRect
VacaNcYsuBlease
sPaceOVeRall
VacaNcYaVeRaGeRate Psf
Class A 35,301,882 1,498,356 45,000 696,000 9.7% 0.2% 9.9% $24.68
Class B/C 76,002,151 295,814 128,000 186,000 10.7% 0.2% 10.9% $20.33
total 111,304,033 1,794,170 172,000 1,006,000 10.4% 0.2% 10.6% $21.57
SOURCE CoStar, Transwestern.
Baltimore Metro Area Office Market Notable Lease Transactions
teNaNt deal tYPe addRess suBMaRket sQuaRe feet
BAE Systems Renewal 6315 Hillside Court Columbia 25,000
Advanced Radiology New Lease 9409 Philadelphia Road Baltimore County East 20,000
CyberReliant New Lease 180 Admiral Cochrane Drive Anne Arundel South 17,000
International Youth Foundation New Lease 1 E. Pratt Street Baltimore CBD 17,000
Teksystems, Inc. New Lease 999 Corporate Boulevard BWI 12,000
TEDCO New Lease 7021 Columbia Gateway Drive Columbia 12,000
CalAtlantic Group, Inc. New Lease 9710 Patuxent Woods Drive Columbia 11,000
SOURCE CoStar, County Newsletters, Baltimore Business Journal, Transwestern.
Baltimore Metro Area Office Market Construction Activity
suBMaRket sQuaRe feet uNdeR cONstRuctiON PeRceNt PRe-leased
Harford County 99,000 89%
Baltimore County West 223,600 0%
Baltimore County North 45,000 100%
Baltimore County East 108,790 2%
Balance of Baltimore City 821,456 88%
Columbia 330,900 56%
BWI 100,000 0%
Anne Arundel South 65,424 13%
total 1,794,170 59%
SOURCE CoStar, Transwestern.
MetHOdOlOGY
The information in this report is the result of a compilation of information on office properties located in the Baltimore metro area. This report includes single-tenant, multi-tenant and owner-user office properties 15,000 SF and larger, excluding properties owned by a government agency.
cONtact
Elizabeth NortonManaging Research Director | Mid-Atlantic [email protected]
The Baltimore metro area flex/industrial market experienced strong conditions during the fourth quarter of 2015, as the direct vacancy rate decreased 20 basis points and net absorption was positive 1.0 million SF due to several tenants leasing large blocks of space. Due to these conditions, landlords increased asking rents by 2.0% during the past three months and 3.5% during all of 2015. The age of the current inventory suggests future ground breakings, as tenants are showing preference for newer product with efficient floor plates and adequate loading docks. We expect continued growth in the Baltimore flex/industrial market during 2016.
economy
Robust year-over-year job growthPayroll employment increased 33,500 during the 12 months ending October 2015, which is over three times the 20-year annual average of 11,500. Baltimore City took 6,200 or 19% of these new jobs. The education/health sector was the leader in job growth during the past 12 months, adding 7,900 new jobs. Approximately 73% of these jobs were added to the health sub-sector. The trade/transportation/utilities sector followed with 6,200 new jobs, with 66% of these jobs added to the retail sub-sector.
The Baltimore metro area unemployment rate is 5.4% at October 2015, down from 5.7% one year ago. The unemployment rate is below the 10-year average of 6.0%. This compares to the national unemployment rate of 5.0% at October.
We expect the economy to pick up during 2016 and 2017. Through 2019, we expect job growth to average 18,500 per year with the peak of job growth occurring during 2016, but still remaining elevated during 2017. We project the strongest growth to occur in health, education, technology, and food services fields.
Flex/Industrial rebounds in Q4Large lease deals drive net absorption
2 REAL ESTATE OuTLOOk Baltimore flex/industrial market Q4 2015
fLeX /inDUStriAL VAcAncy AnD DemAnD
Robust market conditions during Q4The direct vacancy rate in the Baltimore metro area was 8.7% at December 2015, down from 8.9% the quarter prior. This compares favorably to the 10-year historical average of 9.1%. Flex/warehouse has the lowest vacancy rate among the three product types at 7.1%, down 20 basis points from third quarter.
Net absorption totaled positive 1.0 million SF in the Baltimore metro area during the fourth quarter of 2015, well above the 10-year quarterly average absorption of positive 406,000 SF. Even after a weak third quarter of negative 419,000 SF, net absorption has totaled positive 563,000 SF during 2015. This compares to the 10-year annual absorption average of 1.6 million SF.
The Route 1 North submarket contributed the strongest positive net absorption during the fourth quarter, accounting for positive 369,000 SF. This was due in large part to AEX Group signing for 112,000 SF at 7951 Oceano Drive as well Hills Pet Nutrition leasing 65,000 SF at 6745 Business Parkway. The delivery of 7775 South Chesapeake Bay Court to MP Seafood Ventures also contributed positive 88,000 SF. The Harford County submarket experienced the weakest quarter as net absorption was negative 145,000 SF, which was driven by Pier 1 Imports vacating 349,000 SF at 400 Old Post Road but offset slightly by Natural Animal Nutrition leasing 121,000 SF at 151 Bata Boulevard.
fLeX /inDUStriAL SUPPLy AnD DeVeLoPment
Pipeline tame with healthy pre-lease rate Four projects delivered during the fourth quarter of 2015 totaling 1.1 million SF at 17% pre-leased. Notably, Chesapeake Real Estate Group delivered 571,500 SF at 610 Chelsea Road in Harford County and Redgate Real Estate Advisors delivered 300,000 SF at 4803 Hollins Ferry Road in the Baltimore County West submarket. Both projects delivered vacant. During 2015, 2.5 million SF of flex/industrial space has delivered at 31% pre-leased.
BaltiMORe MetRO aRea flex/iNdustRial Net aBsORPtiON aNd VacaNcY
BaltiMORe MetRO aRea flex/iNdustRial askiNG ReNtal Rates
BaltiMORe MetRO aRea flex/iNdustRial deVelOPMeNt PiPeliNe MILLION SF
4%
5%
6%
7%
8%
9%
10%
11%
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
06 07 08 09 10 11 12 13 14 15*
NET ABSORPTION IN MILLIONS DIRECT VACANCY RATE
$0
$2
$4
$6
$8
$10
$12
$14
06 07 08 09 10 11 12 13 14 15*
BULK WAREHOUSE FLEX/WAREHOUSE FLEX/R&D
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
06 07 08 09 10 11 12 13 14 15 16*
COMPLETED UNDER CONSTRUCTION PRE-LEASED UNDER CONSTRUCTION AVAILABLE
* At fourth quarter 2015 SOURCE CoStar, Transwestern.
* At fourth quarter 2015 SOURCE CoStar, Transwestern.
REAL ESTATE OuTLOOk Baltimore flex/industrial market Q4 2015 3
Projects under construction or renovation total 1.3 million SF at December 2015. The pipeline is currently 44% pre-leased, which is above the 10-year average pre-lease rate of 27%. All pipeline projects are due to deliver during 2016. Baltimore City has the greatest amount of space under construction, with two projects totaling 576,000 SF. They are located at 5300 Holabird Avenue and 1921 62nd Street and are 496,000 SF and 80,000 SF respectively. As of December 2015, they have no tenants in place.
Tenants are in the market for upgraded space with a focus on efficient building design and site layout, which includes better trailer loading, clear heights, column spacing, and parking. As a result, we anticipate spec construction to ramp up to satisfy the undersupply of upgraded space during 2016.
fLeX /inDUStriAL ProJecteD SUPPLy VS. DemAnD
Overall vacancy rate to decline We project the overall vacancy rate will decline in the Baltimore metro area flex/industrial market from 8.8% today to the high-7% range by December 2016. We expect leasing activity to pick up pace and pre-leased deliveries will add a slight boost to net absorption.
fLeX /inDUStriAL rentAL r AteS
Asking rents rise 3.5% during 2015Flex/industrial asking rents increased 2.0% during the last three months to $5.98 PSF. During all of 2015, asking rents increased 3.5%, compared to declining 1.2% during 2014. Flex/warehouse experienced the greatest rise in rent at 5.1% during 2015, followed by bulk warehouse rising 3.3%. We expect asking rents to rise 3.0% to 3.5% during 2016.
fLeX /inDUStriAL inVeStment mArKet
Investment activity slightly off pace compared to 2014Investment sales totaled $443 million or $61 PSF in the Baltimore metro area during 2015. This compares to $552 million in sales recorded at $79 PSF during all of 2014.
The Route 1 Corridor accounted for 34% of the total sales volume in 2015, followed by Harford County at 21%. In addition, investors focused capital on bulk warehouse assets, representing 59% of the total investment sales volume.
The most notable deal during the fourth quarter of 2015 was First Industrial Realty Trust’s purchase of two bulk warehouse properties at 400 & 500 Old Post Road in Harford County for $61.9 million or $62 PSF. In addition, Lion Industrial Trust bought a bulk warehouse at 6650 Business Parkway in the Route 1 North submarket for $15.3 million or $98 PSF.
We expect the investment sales market to pick up pace during 2016, as flex/industrial market fundamentals improve.
fLeX /inDUStriAL mArKet oUtLooK
Demand and rents projected to riseWe expect demand for flex/industrial product in the Baltimore metro area to rise during 2016. As demand increases, we expect the vacancy rate to decline to the high-7% range by year-end 2016. We anticipate spec ground breakings during 2016 as market conditions improve, driven by demand for newer space. As the vacancy rate declines, we expect asking rents to rise 3.0% to 3.5% during 2016. n
The information in this report is the result of a compilation of information on flex/industrial properties located in the Baltimore metro area. This report includes single-tenant, multi-tenant and owner-user office properties 15,000 SF and larger, excluding properties owned by a government agency.
cONtact
Elizabeth NortonManaging Research Director | Mid-Atlantic [email protected]
t 443.285.0770www.transwestern.com
7160 Columbia Gateway Drive, Suite 210Columbia, Maryland 21046
Baltimore Metro Area Flex/Industrial Market Indicators