Baltimore’s industrial market has been flourishing for years, but current trends suggest it may be poised to become one of the hottest markets in the United States over the next few years. Supporting these dynamics will be continued growth in e-commerce, a new emphasis by manufacturers and retailers on expanding their “safety stock” in warehouses and increasing land constraints in the Mid-Atlantic. The confluence of these trends is expected to drive average Baltimore industrial rents at one of the fastest clips of any market in the United States over the next two years.
In 2021, the Baltimore industrial market recorded its most active first quarter of gross leasing in over a decade. Net absorption of 1.3 million square feet sparked the year with a strong start as the region’s industrial vacancy rate continued to hover near its lowest level in more than a decade. Vacancy in Baltimore industrial properties has been stable since 2018, despite approximately 12 million square feet of new warehouses constructed in that time span.
Ian Anderson, CBRE
Several important trends are driving the record-breaking market conditions and are expected to facilitate growth into the foreseeable future. The first trend is a sharply recovering economy in 2021 that may perform as strongly as it has since the mid-1980s. Higher consumption and trade activity will ensue, both of which are tightly correlated with industrial space demand.
The strong economic rebound will support ongoing growth in e-commerce, even if we see a moderation from 2020’s record activity nationally, underpinning warehouse demand for years to come. Logistics companies, retailers and other users continue to strive to get closer to consumers and businesses, posing challenges for densely populated regions such as the Baltimore-Washington corridor. More than 18 million people — 23 percent of which fall into the 18 to 34 age demographic — live within 100 miles of downtown Baltimore, with a 3.4 percent projected growth rate over the next five years. Not surprisingly, the Baltimore-Washington corridor continues to see the greatest demand.
Baltimore’s strategic location on the East Coast and favorable infrastructure remain key competitive advantages in global supply chains. The city provides convenient access to the CSX and Norfolk Southern rail lines, and every terminal at the Port of Baltimore is within one stoplight of an interstate highway. Baltimore has one of a few East Coast ports capable of handling ships carrying 14,000 twenty-equivalent units (TEUs) or more, and construction is underway for a second 50-foot-deep berth at the Seagirt Marine Terminal, which will allow the port to handle two super-sized ships simultaneously. Four additional neo-Panamax cranes recently arrived and are expected to be operational by the summer.
Intensified demand for industrial warehouse space has been driven by the need to counter supply chain volatility and disruptions, such as the recent closure of the Suez Canal, and shortcomings of just-in-time (JIT) production networks, many of which were revealed by the pandemic. As a result, the need for additional warehouse space to stockpile goods and increase “safety stock” has been heightened to mitigate future disruptions.
At the same time, however, retailers and manufacturers have been rushing to replenish depleted inventories during the pandemic.
The effect of these trends is driving an ongoing rush for industrial space, and there does not appear to be any relief in sight. Forecasts by CBRE Econometric Advisors show that the average asking rent for industrial space will surge by more than 7 percent over each of the next two years, the third fastest rate of any market nationally.
Longer-range forecasts over the next five years show rents increasing by more than 5 percent annually, which if realized will be a stretch of rent growth not witnessed in at least 30 years. Clearly, the booming demand and natural supply constraints of a densely populated region are coalescing to make investing in and owning Baltimore industrial properties even more favorable.
Demand for properties from investors is intense, but pricing is very competitive. Industrial investment sales in Baltimore exceeded the $1 billion mark in 2020 for the third consecutive year. Class A cap rates for industrial properties can range between 4.25 percent and 4.5 percent in the Baltimore-Washington region, making it one of the priciest markets in the country.
Despite the competitive environment, not only for industrial investors but also occupiers, Baltimore’s industrial market is being driven by stable, long-term trends and the region’s favorable attributes. Expect the flourishing industrial market to continue, and Baltimore’s role in it to grow.
— By Ian Anderson, Senior Director of Research and Analysis, CBRE. This article originally appeared in the April 2021 issue of Southeast Real Estate Business.