Despite the ongoing pandemic, office absorption in the Baltimore metro area remained positive in the second quarter of the year. Net total absorption during the quarter was 114,000 SF, compared to 69,000 SF in the prior quarter. The Class A market outperformed the rest of the market with 151,000 SF of net absorption recorded in the second quarter. This compares to the -38,000 SF of net Class A absorption during the first quarter of the year.
The most notable leasing news during the quarter has to do with the short-lived nature of recently signed leases. Most notable was the cancellation of WeWork’s 69,000 SF lease at the Wills Wharf trophy building scheduled to deliver this summer at the Harbor Point development. Another tenant that recently signed a lease in Baltimore will actually occupy the space, but only in the near-term. While the National Association for the Advancement of Colored People (NAACP) agreed to lease 20,000 SF at 7 Paul St. in Central Baltimore in the first quarter, it appears that the move will be temporary as the civil rights organization has committed to eventually move their headquarters to the District of Columbia.
We have revised our supply-demand projections downward due to economic disruption caused by the pandemic. While the long-term picture is not yet fully clear, we believe that office demand will be negative over the next couple of years. As of now, we conservatively project that the metro-wide overall vacancy rate will be 12.5% at June 2022, an increase of 80 basis points from the current vacancy rate.
The Baltimore office market entered the COVID-19 pandemic on a strong rebound with solid absorption and declining vacancy over the past year. However, we believe things will turn negative pretty quick moving forward. The economy is now officially in recession. The depth of the downturn and the duration of the current pandemic are still major unknowns, but it’s safe to say that turbulent times are ahead. The good news is that the market is far from the verge of collapse. The Baltimore office market should outperform most other office markets at the same tier, thanks primarily to the outsized presence of the federal government and the restrained pace of growth keeping supply in check.
SECOND QUARTER 2020 HIGHLIGHTS
Net absorption: 114,000 SF in Q2 2020, up from 69,000 SF in Q1 2020.
Direct vacancy rate (single and multi-tenant): 11.6% as of Q2 2020, down 10 basis points from Q1 2020 and down 40 basis points from one year prior.
Under Construction:0.4 million SF.
Effective rents: Up 1.6% from one year prior.
Investment sales:$120.4 million ($170/SF) in Q2 2020, compared to $346.8 million ($174/SF) in Q2 2019.
Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals which has been providing consulting and subscription data services to the commercial real estate industry for over 35 years.
