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Baltimore's government- and defense-driven neighbor, Washington, D.C, has historically overshadowed the city’s apartment market. Yet setbacks caused by sequestration and concerns of oversupply across the Washington metropolitan area have recently unveiled a new light on Baltimore. After six decades of continuous population decline, the city has finally turned the corner, registering positive growth for the first time since the city’s peak in 1950. Strong market fundamentals driven by improving economic trends and favorable demographic shifts have begun to attract a new cast of institutional investors and top-level developers, establishing Baltimore as a top-tier investment market. The city’s new attraction has resulted in a significant increase in both ground-up apartment developments and residential conversion projects that continue to reshape the character of the downtown area.
Predominantly driven by education and life sciences, the Baltimore economy maintains a significant employment base of 1.3 million payroll jobs. Following a loss of 100,000 jobs during the downturn, the metro has rebounded to pre-recession levels registering positive year-over-year employment growth for the past 37 consecutive months. Additionally, the region is expected to add 70,000 new jobs by year-end 2015, according to Moody’s Analytics, helping to further decrease the current unemployment rate of 6.7 percent.
The metro area has also benefited from the Base Realignment and Closure Act (BRAC), which has relocated military personnel to both Fort Meade and Aberdeen Proving Ground, two of the region’s largest employment hubs.
The two bases combined have received approximately 12,000 new employees since the summer of 2011, and Fort Meade alone is projected to create an additional 26,800 new jobs by year-end 2015 as it evolves into the region’s epicenter for cyber-security. The continued expansion at Aberdeen Proving Ground and Fort Meade, as well as the John Hopkins Hospital and Health System and other medical-related industries, has brought significant demand for rental apartments to the Baltimore region creating outstanding market fundamentals that have led to a large run-up in new residential development.
As of April 2013, the average vacancy rate for the metro area was 3.6 percent, having reduced nearly 300 basis points from its peak in 2009 due to three years of positive net absorption. Effective rents grew 5.1 percent during 2012 and despite increased supply projections, are expected to grow between 3 and 5 percent through year-end 2017, according to Reis. While the Baltimore metro’s 36-month apartment pipeline has historically averaged 3,600 units with approximately 1,600 units under construction during any given year, current demographic trends and the region’s red hot rental market have fostered a significant increase over the historical norm. New developments, predominantly in the downtown area, have inflated the city’s pipeline well above historic averages and there are currently more than 2,600 units under construction across the metro area.
Of the total units currently under construction in the region, 1,738 units, or 66 percent, are located in the city of Baltimore, while only 876 units are currently under construction in the surrounding suburbs. The favoring of downtown development has arisen due to national developers such as Bozzuto, Jefferson Apartment Group, PMC Property Group and others that have begun to take advantage of the city’s recent demographic trends and the opportunity to convert existing office buildings into luxury rental communities. Conversions have become typical for the downtown area and continue to pop up in the Inner Harbor and surrounding areas, such as Federal Hill and Locust Point. Current, high-profile residential conversions include 301 N. Charles Street (90 units), 10 Light Street (445 units) and 521 St. Paul Street (69 units).
Outside of existing office conversions, Baltimore has also begun to experience a considerable wave of ground-up development for the first time since the early 2000s. Jefferson Apartment Group’s Gateway at Washington Hill and Bozzuto’s Harbor East and Union Wharf developments have created a new form of downtown living to accommodate the recent influx of city residents. Since 2000, the downtown area has experienced a significant population increase and developers are taking advantage.
Looking ahead, apartment fundamentals in the Baltimore metropolitan area are expected to continue their positive trends due to continued economic growth and the diversification of the once blue-collar, industrial city.
Expanding life sciences and BRAC relocations to Aberdeen Proving Ground and Fort Meade will ensure that occupancy remains healthy across the region while effective rents continue to grow. As housing prices remain high and mortgage underwriters maintain their strict standards, the metro area’s vast renter base will continue to favor renting versus owning, thus positioning metro area apartments to capitalize on the region’s demand for quality rental product.
— AJ Cissel and Scott Melnick, managing directors of Jones Lang LaSalle's Washington, D.C., office