Savills Studley Report Baltimore office sector Q3 2016 Savills Studley Research Baltimore SUMMARY Market Highlights AVAILABILITY RATE UP AND DOWN Following a decrease in the second quarter, the region's overall availability rate inched up in the third quarter, rising by 0.2 pp to 18.5%. The Class A rate increased by 0.3 pp to 19.8%. Baltimore City's Class A sector bucked the regional trends, falling by 0.9 pp to 20.3%. SPORADIC LEASING PREVAILS Tenants have leased 4.8 msf in the four most recent quarters, 18.6% below the long-term historical average of 6.0 msf. Deal volume for the region has not attained its historical average since late 2014. RENTS FLAT The overall average asking rent in the region ticked down from $22.40 to $22.39 but has jumped by 3.3% year-on-year. The Class A average rent fell by 0.5% to $26.05 in the third quarter but has increased by 6.3% from a year ago. "Leasing activity remains sporadic. Tenants looking for prime Class A space on Pratt Street or bigger blocks in Columbia and Annapolis face slightly tighter conditions. In the balance of the market, though, most tenants have multiple options to consider." Savills Studley Research
Following a decrease in the second quarter, the region's overall availability rate inched up in the third quarter, rising by 0.2 pp to 18.5%. The Class A rate increased by 0.3 pp to 19.8%. Baltimore City's Class A sector bucked the regional trends, falling by 0.9 pp to 20.3%.
SPORADIC LEASING PREVAILS
Tenants have leased 4.8 msf in the four most recent quarters, 18.6% below the long-term historical average of 6.0 msf. Deal volume for the region has not attained its historical
average since late 2014.
RENTS FLAT
The overall average asking rent in the region ticked down from $22.40 to $22.39 but has jumped by 3.3% year-on-year. The Class A average rent fell by 0.5% to $26.05 in the third quarter but has increased by 6.3% from a year ago.
"Leasing activity remains sporadic.
Tenants looking for prime Class A
space on Pratt Street or bigger blocks
in Columbia and Annapolis face slightly
tighter conditions. In the balance of the
market, though, most tenants have
multiple options to consider."
Savills Studley Research
02
Savills Studley Report | Baltimore
Slow and Steady Tightening
Payroll growth among office-using sectors in the Baltimore region has lagged the national pace for most of the recovery. Industries such as healthcare, logistics, retail and leisure/hospitality have expanded, but hiring in Baltimore’s financial, information and professional/business services sectors has gained momentum only within the last several quarters. Office-using sectors rose by 3.3% in the last twelve months, doubling the 1.6% growth rate in 2015. Despite the recent acceleration businesses in Baltimore are doing their best to control their two biggest expenses – office rent and payroll.
Larger expansions have been few and far between. A few firms have added a floor or two. Northrup Grumman took the remaining 35,329 sf at 2810 Lord Baltimore Drive in the Baltimore County West submarket. The Greene Turtle Sports Bar & Grille moved its headquarters to Columbia, leasing 7,000 sf at 6990 Columbia Gateway Drive, nearly doubling from its 3,900 sf in Hanover. Many of the largest expansions in the market continue to be in the industrial and medical office sector.
The Baltimore office market reflects these broad market trends. A few spots have registered increased demand, but leasing volume has generally been below the long-term average. Tenants have leased just under 5.0 msf in the four most recent quarters, the weakest annual total since 2009. Leasing has failed to reach its long-term average of 1.5 msf in four of the last five quarters, pushing availability up a bit in multiple submarkets.
With the exception of a few pockets of limited availability, tenants across the region have a wide range of options to consider. In turn, they do not have to rush their space-use decisions. Availability exceeds 15.0% in nearly all submarkets and is approaching 25.0% in North suburban locations such as the Route 83 Corridor.
A few Tight Spots
Tenants will face challenges in a few spots, Law firms and professional/business services in the CBD, particularly those looking for larger blocks of prime space on Pratt Street and surrounding areas, have limited options. As of late September, only nine buildings in Downtown Baltimore were offering a contiguous block of 50,000 sf or more. Many of these buildings, such as
Source: Bureau of Labor Statistics
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
0.20
0.22
0.24
0.26
0.28
0.30
0.32
0.34Millions
Baltimore Office Emp. Baltimore % Change U.S. (% Annual Change)
Office-Using Employment Trends
$26.05$25.07
$20.14
$19.12
$0
$5
$10
$15
$20
$25
$30
3Q16 3Q15 3Q14 3Q133Q123Q11
($/sf) Rental Rate Trends
Class A Class B & C
Asking Rent Trends
19.8%
19.0%17.7%
20.7%
0%
5%
10%
15%
20%
25%
3Q16 3Q15 3Q14 3Q13 3Q12 3Q11
(%) Availability Rate Trends
Class A Class B & C
Availability Rate Trends
savills-studley.com/research 03
Q3 2016
Tenant Sq Feet Address Market AreaRK&K 113,000 111 Market Pl CBDPSA Financial Center, Inc* 50,320 11311 McCormick Rd Route 83 CorridorAdvanced Programs, Inc* 30,000 7125 Riverwood Dr Howard CountyBambeco, Inc* 21,283 621 E Pratt St CBDProteus Technologies 18,000 133 National Business Pky Anne ArundelClearview Group 17,351 11155 Red Run Blvd Reisterstown Rd CorridorAscend One Corp 16,200 9755 Patuxent Woods Dr Howard CountySeasons Hospice of Maryland, Inc* 16,148 5457 Twin Knolls Rd Howard CountyWomble Carlyle Sandridge & Rice LLP 15,676 100 Light St CBDBerkeley Research Group 14,879 307 International Cir Route 83 CorridorSum of Top Leases 312,857
Metro West, are Class B properties that may require extensive build-out to suit the needs of most tenants. Firms requiring 100,000 sf of Class A space have only one option – Sylvan Learning, which is moving to Howard County, vacated its long-time headquarters at 1001 Fleet Street in Harbor East. Rent within the very highest-caliber properties in the Pratt Street area are approaching $30.00/sf. Despite a quarter-on-quarter decrease of 0.9 pp, Baltimore City’s Class A availability rate, 20.3%, remains quite elevated and is nearly 200 basis points above its mark of 18.4% in the third quarter of 2015.
Businesses requiring larger blocks within the confines of Baltimore City continue to seek out opportunities to consolidate multiple locations. Exelon’s relocation from the Candler Building to Harbor Point has opened up a big block of space. RK&K leased 116,000 sf of the former Exelon headquarters and will combine three different locations in Baltimore at the property. The engineering firm is selling its Midtown campus at 81 Mosher Street to the Maryland Institute College of Art.
Rising rent and limited space options has pushed a few companies out of Pratt Street to South Baltimore. New projects such as McHenry Row are poaching a few of the tenants. Planit Advertising, for example, recently occupied its new 26,815 sf location at 1414 Key Highway, moving from 500 E Pratt.
Conversions in Baltimore City
Despite this quarter’s decline in availability, leasing activity has actually been quite choppy in the CBD. Tenants have leased just over 600,000 sf in the four most recent quarters, falling short of the market’s long term average by nearly 20.0%. Negligible new construction and the conversion of some buildings to apartment units has resulted in fewer space options. While office leasing has been a bit subpar in the Baltimore CBD, multi-family demand has been robust, supporting continued conversion of older, Class B office buildings to residential use.
In addition to new ground-up buildings a few developers are converting some older office buildings. Berman Enterprises, which secured a 180,000-sf lease with the Army Corps of Engineers at 2 Hopkins Plaza this summer, is moving ahead with the conversion of the top 11 floors to multi-family units. Work is expected to be
completed in mid-year 2017.
New Construction Continues in Suburban Locations
These converted buildings have not been replaced by new office product. On the other hand suburban Baltimore has seen a bit more development – 1.3 msf of the 2.4 msf currently underway is in suburban Baltimore. Steady leasing activity in Howard County and in the White Marsh/Bel Air area is supporting new development. Howard County’s Class A availability rate ended the third quarter at 14.2%, a 190 basis point decrease from the third quarter of 2015. Deal volume in Howard County during the last four quarters has totaled 1.0 msf, accounting for more than 20.0% of the region’s deal volume and capturing much of the relocation activity.
Looking Forward
The election often provides a convenient explanation for why demand is “holding back.” There is little evidence over the course of multiple cycles to suggest, though, that elections actually cause most tenants to delay pulling a trigger on a lease. That said, this election could have long-term implications for defense contractors and cybersecurity/intelligence agencies concentrated in Baltimore County West, Fort Meade, BWI and Aberdeen.
` Baltimore Region 98,777 309 4,767 18,236 0.7% 17,901 18.5% 0.2% 18.1% $22.39 0.0% $21.68Baltimore Region - Class A 41,020 357 2,555 8,111 1.4% 7,407 19.8% 0.3% 18.2% $26.05 -0.5% $24.51
Net Absorption & Leasing Volume
AvailableSF
AvailabilityRate
Asking RentsPer SF
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(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.
