Baltimore Sees Leasing Bump As Battered Office Market Aims For Stability

After years of underwhelming performance in the wake of the coronavirus pandemic, Baltimore-area commercial real estate professionals expressed guarded optimism that the office market will finally pull out of its nose dive in 2024. 

Baltimore-area brokers and researchers said there are signs of renewed momentum in the market, but they stopped short of predicting a significant surge in new deals. After all, the market still suffers from occupancy losses, a limited development pipeline and a shortage of new businesses looking to take space in Baltimore.  

"So, we're starting 2024 off in a very different place than we were starting 2023, right?," JLL Research Manager Kate Paine said.

"A year ago, we were afraid of a recession. Over the year, we saw rising interest rates, failing banks, and some harsh inflation numbers. Coming into 2024, we are expecting the Fed to either keep those rates stable or see decreases in rates, which is a positive signal we're seeing lower inflation. So I think that different starting place is going to drive momentum into 2024."

While the sector's performance in the final quarter of 2024 remained sluggish overall, improved macroeconomic factors and new year-end data have sparked hopes of this year becoming an improvement from the previous few years. 

Researchers at JLL and CBRE calculated that the Baltimore metro area lost more than 100K SF of occupancy during the final three months of the year, the fourth consecutive quarter the market posted an occupancy loss.  

Yet, the market's gross leasing activity increased by 112% from the third quarter to 1M SF last quarter, according to CBRE, marking the second-highest quarter for leasing activity since the start of the pandemic. 

A total of 31 tenants signed leases over 10K SF in Q4 2023, an increase from 18 tenants in Q3. 

The three largest leases of Q4, according to CBRE, were Johns Hopkins University's Carey Business School renewing 120K SF at 100 International Drive,  Northrop Grumman signing an 87K SF extension at 1304 Concourse Drive, and Maryland Lottery & Gaming inking a 66K SF renewal at 1800 Washington Blvd. The largest new lease was the Department of Emergency Management taking 36K SF at 7229 Parkway Drive. 

Additionally, JLL researchers found that the amount of available sublease space declined by 0.12% in the final three months of 2023, marking an end to three consecutive quarters of increases. The market has 1.7M SF of sublease space available, which represents more than 2% of the area’s total office inventory. 

JLL also found that the development pipeline is poised to provide needed new office product, with two new developments expected to break ground this year. This comes after a 2023 where zero traditional office projects broke ground and two office buildings delivered, totaling 224K SF.

New office development remains necessary, Paine said, because Class-A offices built after 2015 are the only local office properties where vacancy rates dropped. 

“We are involved in several conversations for larger projects, proposed projects in Baltimore City, that are really exciting. We're hoping that lowering interest rates will give developers, investors and lenders more confidence in new office [projects],” she said. 

While there are certainly signs of improvements, most expect the office market in 2024 to look a lot like it has in the last few years.  

MacKenzie Commercial Real Estate principal Scott Wimbrow warned that the office market must go a long way to recover to where it was before the pandemic.   

So far, certain submarkets are faring better than in recent years, but the region's office market isn't poised to emerge as a poster child for post-pandemic office leasing either, he said.   

"[I expect] excellent improvement over this year, but still challenged. The back to the office movement is ongoing, but it's still slow. [It] still hasn't resonated at all markets," Wimbrow said. "I think the Baltimore metro market will be one of the last ones to realize the kind of return to activity levels like we had pre-pandemic."   

Terri Harrington, founder of Harrington Commercial Real Estate, also doesn’t expect much to change in the local office market this year. In her experience, Harrington said, companies are still trying to figure out their needs regarding space and culture amid the continuing demand for hybrid work. 

“I think we're also going to continue to see companies looking for shorter terms. Larger companies downsizing their footprints, but going into spaces that offer more amenities and might cost a little more rent,” she said. “For the last couple of years, we've been waiting to see the fallout. I think we've stabilized, and what we're seeing today will persist in the future.”