Ranked as the highest performing asset class in commercial real estate for years, today’s industrial market in Maryland is anything but a simple path to robust profits, rapid deals or shovel-ready development opportunities. The state’s industrial sector is experiencing high occupancy levels, healthy rent increases, space requirements from a diverse and growing array of businesses, yet “eerily slow” leasing levels in the first half of 2024.
Investor interest in the sector is reportedly at an all-time high yet interest rates and disagreements about property values have kept transactions low. Land shortages, high construction and financing costs, and policies by local governments are constraining new development.
The Howard Street tunnel project, a proposed container terminal, is expected to increase business at Tradepoint Atlantic and surrounding industrial properties. Photo courtesy of Tradepoint Atlantic.
Yet demand for space is expected to increase as interest rates and inflation levels ease and major infrastructure projects — including the Howard Street tunnel and a second container terminal — drive more freight through the Port of Baltimore.
Consequently, succeeding in today’s complicated industrial market requires deep understanding of market forces, firm adherence to CRE fundamentals and the courage to dive into difficult projects.
No easy developments
Three years of work on White Marsh Interchange Park finally produced a banner day in June when Merritt Properties announced delivery of Phase 1 of the 750,000-square-foot light industrial development and signed the park’s first three leases.
Like some of its other projects in Baltimore County, however, Merritt had to purchase and demolish an existing building to create space that fits today’s market “and that’s a really expensive way to develop,” said Scott Dorsey, Chairman and CEO of Merritt Companies.
High demand for light industrial space enabled Merritt Properties to redevelop the former General Motors site in White Marsh. Photo courtesy of Merritt Properties.
In White Marsh, Merritt paid $34.5 million for a 56-acre General Motors property and dismantled the shuttered transmission plant. At the time of the purchase (March 2021), light industrial rents in White Marsh averaged $10 per square foot.
“We realized early on that we would have to get a 50 percent increase in rent just to have this project make any financial sense,” Dorsey said. “Demonstrating that we would be able to provide return to our investors was a challenge.”
On the 32-acre site of the former Seton Keogh High School, MRP Industrial created City Logistics, which is comprised of two buildings totaling more than 300,000 square feet. Photo courtesy of MRP Industrial.
Lack of comparable space in the region, however, pushed rents to a viable level. Merritt is now working to entitle another property — the former Quest Diagnostics site off Washington Boulevard – in order to build a 132,400-square-foot, two-building development.
On the 32-acre site of the former Seton Keogh High School, MRP Industrial executed a similar transformation and created City Logistics, which is comprised of two buildings totaling more than 300,000 square feet.
Kate Nolan Bryden, Senior Vice President at MRP, believes demand for industrial space along the I-95 corridor presents significant opportunities for other urban infill projects, like City Logistics.
“I think there is huge potential to redevelop in Carroll, Camden, Pigtown and other typical industrial areas of Baltimore City that are no longer as functional as they once were,” Nolan Bryden said. “We need to take a look at the buildings that are underperforming and identify where the opportunities exist to redevelop sites, add circulation and parking and building characteristics that modern tenants find desirable.”
Successfully completing such projects, Nolan Bryden said, requires two things: strict adherence to CRE fundamentals and improvements in the city’s permitting process. Current entitlement processes take lengthy and unpredictable periods, make some investors nervous and prevent developers from setting firm construction timelines.
Slow entitlement processes in some Maryland counties are actually helping to manage the supply of new industrial space coming onto the market, said Danielle Schline, Senior Vice President and Market Officer at Prologis.
Entitlements which typically take two to three years for a site, “mean that someone can’t just come into the market and throw up a million square feet in the Baltimore-Washington corridor.”
At established industrial parks like Meadowridge, occupancy rates are high and lease prices have climbed 50 percent in recent years. Photo courtesy of MRP Industrial.
Steadier growth has helped keep rental rates strong, she added.
In Harford County, however, developers are dealing with a fresh obstacle to industrial developments. Last October, the county council passed legislation blocking construction of warehouses larger than 150,000 square feet. The law exempts select warehouses up 250,000 square feet and puts no size restrictions on new manufacturing facilities.
The council’s action effectively blocked Chesapeake Real Estate Group’s (CREG) plan to build 5.2 million square feet of industrial space on its 700-acre Mitchell Farm property.
“We are currently working with the county to come up with a compromise,” said Matt Laraway, Partner and Head of Transactions/Leasing at CREG. “We expect to build a project that is significantly smaller than 5 million square feet and with a mixture of different building sizes.”
But Laraway predicts the development restrictions will have significant impacts on the industrial market in Harford and surrounding counties. Sharply limited new construction in Harford will drive rents for existing spaces higher and leave existing businesses with few opportunities to expand locally.
“That could benefit Cecil and Baltimore counties as companies look for alternate buildings nearby,” Laraway said.
Sluggish leasing, growing demand
For industrial tenants, limited availability of space combined with high rental, construction and interest rates are presenting their own set of challenges.
“Class B industrial is shining right now,” said Patrick Smith, Vice President of MacKenzie Commercial Real Estate Services.
After making Baltimore a hub for roll-on/roll-off vehicle shipments, Tradepoint Atlantic believes the Howard Street tunnel project, an optimized intermodal yard and a new container terminal will boost cargo traffic through the Port of Baltimore. Photo courtesy of Tradepoint Atlantic.
Renting at $8 to $11 per square foot on average, Class B space is highly attractive to many local and small companies that can’t afford Class A space. It’s also very hard to come by.
In late June, Smith was finalizing Class B leases for two clients — a manufacturer and a third-party logistics (3PL) company.
“It’s good they started looking early,” he said. One client’s property search took six months. The other’s lasted an entire year.
Demands for industrial space are growing because “there are a lot of new tenant companies coming into the Central Maryland market,” Smith said.
The region is already under-supplied in industrial space to serve e-commerce companies, data centers and other users, Nolan Bryden said.
“There are new types of businesses every day that figure out the utility of operating within a warehouse, that see it as an opportunity to get low-cost real estate that serves many facets of their business,” she said. I expect to see the tenant community be even more creative than the developers about how these buildings can be used.”
In addition, Class B space is the right fit for several industries that are currently experiencing robust growth in Maryland, including 3PLs, the food and beverage sector, construction supply companies and contractors. Those industries are also driving demand for industrial outdoor storage (IOS).
“Demand for three- to five-acre outdoor storage with 5,000- to 20,000-square-foot buildings seems to be where the deepest tenant pools are right now,” said Bryan Herr, Vice President, MacKenzie Commercial Real Estate Services.
While low availability is limiting leases, economic concerns have also depressed leasing activity this year in Class A and B industrial space.
“Customers are interested in controlling their costs right now. That is weighing on decision makers and the pace of leasing,” Schline said. “We see this dichotomy on tours where members of a company’s operations team say they need more space to grow their business, but the business decision makers take longer to approve moving forward.”
Infrastructure improvements
Industry watchers, however, expect industrial leasing activity to pick up towards the end of the year as interest rates are expected to ease.
Some developments on the horizon could also create significant added demand for industrial space in Maryland in the near future. The Howard Street tunnel project, which will enable the double stacking of cargo containers on trains to and from Baltimore, is expected to be completed in 2026. Meanwhile, Tradepoint Atlantic is working to accelerate its plans to create the Sparrows Point Container Terminal.
“This would create significant demand for industrial real estate throughout the 95 North corridor and the BWI corridor,” said Kerry Doyle, Managing Director of Tradepoint Atlantic. “By creating this second container terminal, we will be able to provide alternative services and, hopefully, a best-in-class operation for vessel lines so they can really consolidate their services in the Port of Baltimore.”
As much as 20 million square feet of Class A industrial space at Tradepoint Atlantic plus the new double-stacking capability could create efficiencies for shippers and new opportunities for Baltimore to compete with Norfolk and other ports. Photo courtesy of Tradepoint Atlantic.
As much as 20 million square feet of Class A industrial space at Tradepoint Atlantic plus the new double-stacking capability could create efficiencies for shippers and new opportunities for Baltimore to compete with Norfolk and other ports, Doyle said.
“We are setting up our inter-modal yard in a manner that gives ultimate flexibility and efficiency. We will be able to optimize the design to best move containers from vessels to storage to railcars and on to the Midwest,” he said. “The impact on this region is going to be significant from the perspective of industrial activity, port commerce and economic development.”
“We have been ignoring infrastructure improvements in this country for way too long. We will lose out on business if we do not meet the shipping community’s needs,” Nolan Bryden said. “Having these investments in infrastructure is going to help more real estate deals pencil out.”