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MacKenzie Quarterly Market Report – 1st Quarter 2015

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Baltimore Office Market Recovery Stalls

Absorption Slips, Asking Rents Stagnant

Since the Great Recession ended, the pace of recovery in Baltimore’s office market can be characterized with one word: grinding. But it has been a recovery. Net absorption has been generally positive with quarter to quarter and office vacancy rates edging lower.

If macroeconomic data characterizing regional performance are to be believed, the pace of office market recovery should be accelerating .According to the Bureau of Labor Statistics (BLS), Maryland added just 5,700 nonfarm jobs between February 2013 and February 2014.Over the following twelve-month period, the state added 46,000 jobs. In the Baltimore metropolitan area, the pace of job creation accelerated from 1,600 jobs added between February 2013 and February 2014 to 26,200 jobs added from February 2014 to February 2015.

The improvement in performance can be observed in the professional and business services segment, a heavy user of office space. Between February 2013 and February 2014, this segment of Maryland’s economy added 2,300 positions. Over the following year, BLS reports this segment added 10,000 positions on net. While these data are subject to revisions and have unquestionably been impacted by meteorological forces, there are other indications of improving economic performance in the Free State.

Little of this improvement is reflected in the latest office market statistics. According to MacKenzie Commercial Real Estate Services’ data, the Baltimore metropolitan area office suffered negative net absorption of 45,177 sf during the first quarter of 2015. Direct vacancy, which stood at 14.5 percent a year ago, now stands at 14.3 percent.Vacancy with sublet fell to 14.7 percent in first quarter.

Northern Metro statistics are most closely associated with a lack of progress in terms of office market recovery. During the first three months of the year, the Northern Metro area recorded negative net absorption exceeding 60,000 square feet. Baltimore City also performed poorly with negative net absorption nearing 6,000 square feet.

The most significant exception was City Center Class A+ space, which continues to experience positive net absorption and where asking rents are up by roughly $2.70 per square foot over the past year.

In suburban markets, the most significant amount of positive net absorption occurred in the BWI submarket, which net absorbed nearly 75,000 square feet during 2015’s initial quarter.Asking rent around BWI continues to edge higher. The opposite is true in Columbia. Asking rent is slightly below the year-ago level in Columbia, with the market sustaining more than 50,000 square feet of negative net absorption over the past quarter.

For now the regional economic outlook remains positive. Development activity has picked up in most real estate segments. One presumes that eventually, the ongoing economic recovery will translate into better office market dynamics.