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Job Losses, Construction Slowdown Cause Sharp Leasing Drop For Baltimore Apartments

Baltimore's high-end apartment market has continued recovering from the pandemic, but job losses, a lack of new units and dramatically slowing absorption hindered the sector's momentum last quarter, according to a recent report.

The Axel Brewers Hill is one of several new apartment buildings searching for tenants this spring.

Baltimore city has suffered a sharp decline in net absorption of new apartments, according to Delta Associates' first-quarter apartment market report. The city absorbed 157 Class-A apartments in the 12 months ending March 31, compared to 972 units in the previous year.

It's not just the city that has undergone a beating. Absorption in the overall Baltimore metro area plunged from 2,205 units the year before to 284 units during the 12 months ending March 31. 

"It's more of a supply issue than a demand issue," Delta Associates President Will Rich said. "Lack of new product in the marketplace, not just in Baltimore City, but throughout the metropolitan area, has resulted in the lack of absorption in the market over the past year, compared to last year and pre-Covid."

Recent job losses in the region are a significant concern for the local apartment sector, according to Delta Associates' report. It found the Baltimore metro area lost 6,600 jobs in the 12 months ending in February. By comparison, long-term averages show the area typically adds around 7,400 jobs annually. 

Those job losses hit the professional services sector, which employs many Class-A apartment tenants, particularly hard.

"The professional and business services loss of 8,500 jobs is a head-scratcher in terms of what's going on in the market and could be cause for some concern with the development community since that particular sector is one of the larger sectors that generates demand for Class-A apartments," Rich said. 

Yet, recent job reports held a silver lining for Baltimore-area apartment developers. Baltimore's leading employment sectors, the educational and medical fields, were tops in the region for job growth. 

"There is some good news in that education health sector remains relatively strong, but is tempered with what's happening in that professional services sector," Rich said.

Job growth in what is known as the eds and meds fields has bolstered some developers’ belief in Baltimore's Class-A apartment market. 

Developers with properties in Baltimore said the prevalence of eds and meds jobs plays a critical role in deciding whether to build an apartment project locally and in other markets.

The Chasen Cos. The Chelsea in Fells Point festooned with a banner looking to attract tenants to the property.

Chasen Cos. Chief Operating Officer Drew Peace told Bisnow in April that the ubiquity of educational and medical jobs represent essential indicators his company considers before pursuing a new apartment project.

"That's what we're targeting ... are those type of markets that provide that type of workforce in medical, educational and government fields," Peace said.

CLD Partners Managing Partner Chris Mfume said his multifamily projects in Baltimore continue to benefit from the ubiquity of medical professionals in the city. 

"We are particular about locating our projects near employment centers," Mfume said. "As you know, in Baltimore, our main employment is driven by eds and meds. We still see robust leasing."

Job losses aren't solely responsible for the nosedive in Class-A leasing. Rich said a lack of product in the development pipeline also affected falling absorption. 

"We're moving in the right direction in terms of increased economic activity in the multifamily market," Rich said. "But we're still below what the typical amount of units that would come online in a given year would be in the market."

He said the lack of new products primarily stems from a pause in construction at the beginning of the pandemic. Fewer than 300 units entered the market in the 12 months ending in March 2022.

However, in the years after the initial shock to the industry delivered by Covid-19's outbreak, Class-A apartment construction starts increased. Through the most recent 12 months, the number of high-end apartment units delivered in Baltimore more than tripled.    

While overall net absorption is down, Mfume said demand at his properties has surged. He said that leasing activity spiked last month in Baltimore, particularly at the recently delivered 149-unit, $32M Hohm Highlandtown building. 

Mfume said he had heard similar stories about strong spring leasing at other properties in the city, such as Greystar's $969M, 500-unit The Lucie in Brewers Hill.

"[Hohm Higlandtown] is leasing up really well. That's actually going quicker than we anticipated. It's really started picking up. Baltimore is a super-, super-seasonal leasing town, and so as soon as April started rolling around, we saw leasing pick up a ton," Mfume said. "I have not seen the softening in terms of leasing."  

CLD Partners Chris Mfume said the Hohm Highlandtown has experienced a surge in leasing this spring.

While the number of units coming online last year increased, the national economy may put the clamps on that growth. Rising interest rates, tighter lending and soaring construction costs have resulted in an ever-thinning pipeline of projects set to break ground soon.

"Development deals are becoming more difficult to pencil as construction costs continue to rise and interest rates remain elevated. So, there's the possibility that some projects may not move forward as planned, given the current state of the capital markets," Rich said. "But that's not to say those projects will never occur."

"As escalating construction costs start to stabilize, and the interest rate environment improves, those projects could move forward in the future, just not necessarily over the next few months," he added. 

While Delta Associates' report delivered a heavy dose of bad news for apartment owners, it also found reasons for optimism. One primary reason for confidence, Rich said, is Baltimore's Class-A apartment market has performed better than its mid-Atlantic neighbors, such as D.C. and Philadelphia, since the outbreak of the pandemic.

The stabilized vacancy rate for Class-A apartments in the Baltimore area last quarter was 3.4%, according to the Delta Associates' report. The region's average effective rents grew 1.4% year-over-year. 

"If you're looking in urban areas ... Baltimore has weathered the pandemic better than its counterparts to the north and south, not just in terms of rent recovery, but also in vacancy where they can see in Baltimore stabilized vacancy is lower in Baltimore City," Rich said. 

Developers also remained bullish on Baltimore apartments due to recently completed overhauls of venues like CFG Arena and significant renovations underway at Penn Station. 

"There's a number of developers that are doing a lot of good things and see the potential of downtown Baltimore," Peace said.   

Mfume said he has no idea what to expect from Baltimore's apartment market in the next 12 to 24 months. But he said hopefully interest rates fall and construction costs decline. Arguably the most significant development, he said, would be a rebound in transaction volume. 

"That's a big thing that hasn't happened. You haven't been able to transact because the expectations of buyers and sellers are misaligned. So, buyers think it's 2008, and sellers think it's 2021, and we can't seem to bridge the gap right now," Mfume said. "You're seeing a lot less transaction volume. So, I'm looking for that to reconcile within the next 12 months."