Real estate development companies and brokerage professionals alike are predicting robust activity among all asset classes in the year ahead. NAIOP Maryland sat down with David Fritz, CCIM, SIOR, Principal, KLNB; Matt Laraway, Senior Vice President, CBRE; and Morgan Wimbrow, Vice President, MacKenzie Commercial Real Estate Services to get their insight on what’s to come for 2025.
Industrial market unaffected by Baltimore City image
Matt: “Large industrial/warehouse real estate decisions are predicated primarily on where the space is readily available and the prospects of skilled labor to handle the requirement. Conversations about the image of the City and any challenges being faced have not weighed heavily on decisions. And, when it comes to Maryland and Baltimore City, this area’s ranking remains favorable based on the presence of a major port, an advanced transportation network that can access one-third of the US population with a day’s truck drive and a stable blue-collar workforce. The dialogue is likely quite different when an out of-town company is looking to relocate hundreds of employees downtown but, in my view, HarborEast and Baltimore Peninsula remain largely isolated from some of the negative issues being faced by owners of other downtown-area properties.”
Morgan: “Something that will never change is Maryland’s proximity to the federal government and those tentacles remain an extremely powerful magnet for out-of-town companies. Baltimore City and the surrounding region are a considerably less expensive place to establish a business and live when compared to other East Coast cities, and those considerations are very real when final real estate decisions are made. Young people are still moving downtown, which contributes to energy and a discernable and positive vibe. When I hear negative comments about the area, I think it emanates from people who have not visited here in quite some time.”
David: “There is no question that Baltimore City is still fighting a crime issue that hurts its image, and the greater Maryland region is struggling with the perception of not being exceptionally friendly to businesses. Ignoring either of these issues will not make them disappear and actually exacerbates the problems. On the flip side, Maryland offers many positive attributes including tremendous higher education institutions, strong statewide demographics, the presence of the federal government and major hospital systems which stabilizes the marketplace and helps overcome some of the negative situations. Baltimore Peninsula was successful in securing CFG Bank but that was a locally sourced deal and its long-term success will be predicated on luring out-of-state groups.”
Remote work still a pressing problem
David: “Five- and 10-year leases have not yet fully cycled to expiration from the onset of COVID-19, so we continue to experience the negative impact of corporate downsizing, but there are definitive patterns. The trend to reduce the office space footprint and market sub-lease space is still occurring, but we believe the change in administration offers a glimmer of hope. The incoming group has pledged to encourage federal government workers to return to the office full-time, and we believe large and medium-sized companies will follow suit. This will provide relief to downtown restaurants and retailers as well. We are also hearing instances in which companies gave back too much space and are now reversing course by taking some back.”
Morgan: “Downsizing is typically the first order of business when the lease renewal process begins and, although we are seeing new companies growing gradually, a group doubling in size from the former lease is a rare occurrence. Companies want protection and greater flexibility when signing leases, but it cannot be a one-way street leaving the owner or landlord exposed. Employees are still trickling back to work and we believe remote work is waning.”
Matt: “Luckily downsizing and remote work is not an issue faced in the world of warehouse/industrial space because it is impossible to operate a forklift or a piece of manufacturing equipment from your kitchen table. Conversely, the work-from-home phenomenon supercharged the industrial market due to rapidly rising inventories because of the increase in home deliveries.”
Sublease activity subsiding
Morgan: “The length of the remaining lease drives everything because, with only two years left on the original lease, it hardly makes sense to enter into a sublease agreement. Companies tend to get sticker shock when learning what the actual rental rate was or when it is time to go direct with the landlord and pay a market rate and market escalations, when making plans to stay in the space. Big blocks of sublease space remain throughout the market but we are chipping away and there is light at the end of the tunnel finally.”
David: “The sublease overhang in the marketplace remains. Some companies see opportunity when entering a space with all necessary furniture, fixtures and equipment and this situation is especially attractive to startups. The total amount of sublease agreements executed last year remains small in the aggregate.”
Matt: “Third-party logistics providers and e-commerce companies were gobbling up everything in sight during COVID. Some non-core and underutilized spaces were placed on the market last year, but much of it is being absorbed.”
Runway remains for Industrial/warehouse activity
Matt: “Industrial/warehouse transactional activity experienced during COVID was likely a once-in-a-career occurrence, but the relative lack of new construction starts and continued activity are keeping rents up and vacancies down in this region. We expect another solid 2025 despite the fact that Harford County has been essentially shut down from generating new space inventory. We predict Baltimore County and Cecil County, as well as Baltimore City will be the beneficiaries.”
Reduced construction activity benefits vacancy and rental rates
Matt: “Areas such as Atlanta and Dallas have room for unlimited growth but Maryland is limited by the presence of water, residential communities, military installations and jurisdictions, like Harford County, that have taken an anti-business and anti-development stance. Requirements are starting to look outside of the state for certainty of product and the timing of delivery and that hurts every Marylander.”
Morgan: “The most pressing continuing issue is higher interest rates, and materials and labor costs which also makes tenant build-out expenses steeper. There is more than enough office inventory available now, so the demand for new space is not impacting our activity. In time, we will see vertical construction returning.”
David: “The entitlement process remains too rigorous for developers, with many seeking opportunities out of the state to keep their teams in Maryland intact and busy. Howard Hughes Corporation delivered a medical office building in Columbia last year, and COPT Defense Properties is set to complete a new project at The National Business Park with both targeting select end-users rather than traditional tenants. We are not anticipating significant development in the mid- to high-rise office sector other than that.”