Office vacancy in the Baltimore metro area rose to more than 18% at the start of 2023, hitting a new all-time high after leasing activity declined by about 50% from the final quarter of 2022, according to CBRE's first-quarter market report.
The 40-basis-point increase in vacancy follows consecutive quarters of falling vacancy in the second half of last year. However, researchers at CBRE said the fall-off in leasing activity, which declined from 1.3M SF of gross leasing in Q4 to 669K SF in Q1, wasn't unexpected for a variety of reasons.
"Strong public sector leasing in the second half of 2022 bolstered total activity for those quarters," CBRE research analyst Steven Wagner said in an email. "With those requirements largely satisfied, we expect Q2 2023 to be more in line with Q1 2023 as recessionary conditions set in and continue to impact private sector demand."
Researchers called the sector's performance in the fourth quarter an "outlier ... propped up by large government leases," given the market's performance over 2022. The Baltimore metro area ended 2022 with negative absorption of 57.6K SF. The sector has posted a negative year-to-date absorption annually since 2020.
Outside of slowed government leasing, downsizing and relocations also significantly increased office vacancies, according to CBRE.
Pandora leaving 72K SF at 250 West Pratt St. for New York and S3 Shared Services leaving 50.4K SF at 971 Corporate Blvd. for 38.9K SF at 1501 South Clinton St. were also significant factors contributing to the rise in vacancy, according to CBRE.
Another factor hindering absorption is the availability of space for sublease, which researchers called "elevated." Through the first quarter of this year, researchers found 1.5M SF of sublease space available, which is 94% higher than pre-pandemic levels. Sublease supply has fluctuated between 1.4M SF and 1.6M SF in recent months, according to CBRE.
However, downsizing firms have shown a willingness to take on subleases. Firms opting to sublease include S3 Shared Service Solutions' downsizing, Enlighten IT subleasing 23.7K SF at 10960 Grantchester Way and Thomas Park Investments subletting 14K SF at 1906 Towne Centre Blvd.
"We do not expect the total square footage of sublease inventory to increase meaningfully since it has been relatively consistent since around the middle of 2021," Wagner said.
The development of new office properties in the market also continues to outpace demand. While vacancies are at a five-year high, there is still 1.2M SF of office space under construction.
But CBRE found some silver linings in the first-quarter data. While researchers project the supply coming online this year to outpace demand, they said those properties stand to benefit from the ongoing flight-to-quality trend dominating leasing preferences.
At the same time, asking rents haven't plummeted despite headwinds in the market. The average gross asking rent per SF slightly increased from $23.12 at the end of last year to $23.82 at the start of 2023.
"Landlords are keeping rents relatively flat and using concessions like tenant improvements and free rent months to entice tenants while the market is currently in the occupier's favor," Wagner said.
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