It’s no secret that office spaces in Greater Baltimore are changing. Gone are the days of offices with large file rooms; high cubicle dividers; stuffy, closed offices;and dark hallways. Open-plan workspaces, industrial warehouse conversions,and “live, work, play” communities are hot in the Baltimore Metro market. And millennials and next generation leaders are driving those desired trends.
Employees are now challenging the notion of 9-to-5 jobs, requesting flexible work arrangements where they are able to work at different times and in different locations. That demand has driven a new craze for “live, work, play” communities — environments that offer a full array of walkable amenities and attractions including housing, office space, grocery stores, banks, gyms, restaurants and retail. Baltimore has seen this trend within the Maple Lawn Communities, developed by St. John Properties in Howard County, as well as Harbor East and McHenry Row in downtown Baltimore — and there are notable benefits. Companies that are based within these communities can save on parking costs, and health insurance premiums are often lowered since employees who live close to work can bike or walk, increasing their levels of daily exercise.
Millennials are shaping the way companies engage real estate and capital project decisions. Employees want collaborative work environments, casual meeting areas and conference rooms, portable technology and areas that have “fun” spaces with leisure activities such as pool, ping-pong, workout areas and even bars. Executives want work environments that are an extension of employees’ lives, where they can be creative and entrepreneurial. They also want to entertain clients while attracting and keeping the top talent in the area. This is evident along the prime space of Pratt Street and Harbor East in downtown Baltimore. Spearheading the revitalization of Pratt Street in October of 2014 was the development at 400 E Pratt Street, with new office space build outs surrounded by new retail and restaurants such as Shake Shack, Chick-fil-A and CVS. Nearby, 85,000 square feet was leased at 250 W Pratt Street by Pandora in late 2014.
Around the corner, Harbor East has become a luxurious shopping and dining area, with more apartments and a 50,000-square-foot Whole Foods opening in the coming year as they expand from their smaller current store to build off the rapid success and growth within the area in the last ten years.
Research tells us the economy in Baltimore is expected to grow through at least 2019 with strong inclines in 2016 and stability in 2017. Vacancy rates edged down to 10.4%, below the 10-year moving average of 11.5%, while rents also increased 1.5%. Vacancy rates are expected to decrease to as low as 9% during FYE 2017 with rents increasing up to 2.5%. Direct average asking rent is the highest ($22.92/square foot) since pre-recession during 2007 ($23.04/square foot).As of the end of 2015, there is 1.8 million square feet of office space under construction or renovation with a pre-lease rate of 59% in the Baltimore Metro area. 88% of that space is being built in Baltimore City, led by the 477,000-square-foot headquarters for Exelon and projects with McCormick and JMT Engineering. This does not even include the anticipated move of Under Armour’s headquarters and the Port Covington, Locust Point and Sparrows Point community redevelopments.
Under Armour and its related entities and ventures have led the charge of shaping the Baltimore of tomorrow. The company’s new headquarters in Port Covington defines the “live, work, play” environment, with affordable housing, restaurants, parks and transportation. Under Armour has also opened City Garage, a 133,000-square-foot industrial-building-turned-innovation-center. It also plans to open a new 1.3 million-square-foot distribution center in Sparrows Point, along with a new Whiskey Distillery in South Baltimore and redevelopment of the Baltimore Water Taxi routes. The $5.5 billion dollar investment in South Baltimore is the most influential revitalization plan Baltimore has undergone since the planning and development of the Inner Harbor in 1963 by Mayor Theodore McKeldin.
Employment is up more than three times the 20-year annual average in Baltimore City, and the city is attracting some of the top talent on the East Coast, especially in areas such as cyber security, healthcare, technology, education and e-commerce. The technology and entrepreneurial sectors are expanding by building and/or opening places such as John Hopkins Fast Forward, the Foundery Baltimore and the University of Maryland BioPark, which is 250,000 square feet on the west side of the city. Also, Baltimore is recruiting tech talent with technology and co-working incubators such as Betamore, Spark and emerging technology centers such as Beehive, Accelerate, Incubate and TEDCO. Finally, new warehouse and industrial buildings, ranging from 250,000 square feet to 1.5 million square feet, continue to rise fueled by prolific e-commerce demand and same day delivery methods. Amazon recently converted a former GM site into its 1 million-square-foot fulfillment center in late 2015 in Sparrows Point, and Under Armour converted an old steel mill into a new distribution center.
But this increase in talented workers is not without its challenges. Millennials don’t have the same needs that their parents did, nor do they tend to stay at the same job for 30 to 40 years. They want to be pushed and be able to relate to their culture and workplace, making the planning and movement into new or updated spaces extremely important for future leaders and executives. Another big challenge is that millennials tend to want to live in downtown Baltimore City or close to their work and attractions, but young neighborhoods such as Canton and Federal Hill have limited availability for businesses — especially technology businesses that want to attract young talent — forcing the rents sky high in the current landscape. Looking and planning for trends multiple years out can help mitigate these costs, by pre-leasing into locations and new developing communities before the major influx.
With open work environments and remote working access, businesses need to be mindful of security and information technology risks, and make sure they have the technology capabilities both in-house and externally to be successful. Companies are able to lease less square footage than ever before when they allow employees to work remotely, but those costs can be heavily offset by the infrastructure that needs to be implemented and maintained for companies to be able to function efficiently with employees working at different times, and from different locations, while keeping the company safe from security and liability breaches.
The real estate market has changed dramatically over the last 10 to 15 years, which is the last time most company executives reexamined their office leasing needs. This reexamination process is known as “going to market.” Going to market is a decision that should be properly planned, with the input of professionals who can help advise on certain issues such as tax credits and lease incentives for areas that are deemed less established or up and coming, or old warehouse and industrial conversions from localities or states. Cost segregation studies by professionals can mitigate and accelerate savings for companies of all sizes as well. Cash flow models should be developed to compare square footage needs versus increased and/or decreased costs that accompany the square footage needs in today’s local landscape.
While the future of the real estate market is bright for Greater Baltimore, we need to continue to invest in our communities, and turn out-of-date warehouses and industrial spaces into new living or working communities. The talent is here and wants to stay here—we now need to take advantage of it and cultivate future leaders to steer us successfully into the future.
MICHAEL A. STRAUSS, CPA, is a director in the audit, accounting and consulting department of Ellin & Tucker. He is a leader within the firm’s Real Estate Services Group. He works closely with real estate developers and investors, construction contractors, as well as not-for-profit organizations providing affordable housing throughout Maryland.
He can be reached at 410-727-5735 (ext. 3052) or mstrauss@ellinandtucker.com.
TRAVIS T. KLEIN, CPA, MBA is a supervisor in the tax department of Ellin & Tucker and a member of the firm’s Real Estate Services Group. He specializes in providing various tax and consulting services to a wide variety of privately held businesses, including commercial real estate, construction, distribution, manufacturing and technology services. He can be reached at 410-727-5735 (ext. 3089) or tklein@ellinandtucker.com
