It used to be a struggle for Baltimore leaders to get developers to believe that people would want to live in the city. Now apartment builders have embraced the idea so enthusiastically that even some of its loudest champions think they might be going too far.
More than 5,360 homes in projects with 15 or more units have been completed in Baltimore in the last five years, according to the city's Planning Department. Another 3,232 are under construction, including 948 that got underway last year. And 2,825 more have been approved, including 1,233 last year.
The Downtown Partnership is tracking about 7,000 homes for sale or rent in Federal Hill, Fells Point and downtown to be completed by 2017. The number outstrips the demand predicted in a 2012 study for the group, which forecast a market for 5,800 units through 2017.
The glut of new apartments has raised questions about whether the units will find renters, especially at the rates that owners of top-of-the-line buildings are asking.
"In the last two years, obviously [building] exploded," said Pikesville developer Yonah Zahler.
His Zahlco Development started putting together its first deal about three years ago and now owns more than 100 rental units in the city.
"I knew this would happen," he said. "I knew these two years would be strong on the construction end. I wonder if demand will meet up."
The growing supply is already reshaping the market.
Vacancy rates in Central Baltimore — an area that includes downtown, neighborhoods around the harbor and Mount Vernon — ticked up to 8.6 percent last year, from 4 percent in 2011 according to Reis, a research firm that tracks apartment buildings with 40 or more units.
That exceeds the 3.9 percent vacancy rate across the Baltimore metro area and the 4.2 percent rate nationwide.
Kirby Fowler, president of the Downtown Partnership, said it's possible that demand has grown in the two years since the nonprofit commissioned its study, as improvements in the area draw even more people and businesses. But his group, which wants to turn downtown into a 24-7 neighborhood, is sounding a soft warning note.
"We're optimistic for the future. However, we have been encouraging developers to consider other uses for buildings beyond apartments," he said. "Ultimately, it's a decision of a developer to move forward on the project, and it's our job to be transparent."
Apartment building took off nationally after the recession of 2008, as builders rushed to capitalize on the growing number of renters and the growing interest in urban living, particularly among younger households.
With financing more readily available for apartments than office or retail or condo projects, the momentum accelerated.
In Baltimore, several years of stronger-than-average rent increases and a tax abatement program for market-rate rentals provided further encouragement.
Some developers don't believe the numbers reflect weakened demand for housing, but rather a lack of appetite for the fancy — and expensive — new products on offer.
Dominic Wiker is development director for the Time Group, which opened the 171-unit 520 Park Avenue apartments last year. The average one-bedroom costs about $1,300 per month and the property is about 95 percent leased. The firm is considering building a new apartment building next door.
"As more units come online, there's going to be price sensitivity," he said. "I think the demand is there. It's just going to be a question of what are people willing to pay, and then who are those people."
Vacancies in the city's Class A buildings — typically, new or recently renovated buildings with up-to-date amenities and the highest rents — were about 6.5 percent at the end of last year, according to the real estate research firm Delta Associates. The rate was 9.1 percent in Fells Point and other waterfront neighborhoods, where landlords are asking rents of more than $2,000 a unit.
Daniel Kline is president of New York-based Delancey Street Capital, which has about 300 Class B apartments in Baltimore, with an average rent of about $1,100.
"If you're a student and you can live in one of my buildings … yeah, the cabinets are not brand-new, the countertop's Formica, not granite, but your rent is $500 less. It's like a no-brainer," he said.
Kline, who closed on the 28-unit Ridgely's Delight Apartments for $2.96 million in February, said he believes properties that are less expensive are a safer investment — especially in Baltimore, where buying a home remains relatively affordable and many rowhouses are available for rent as well.
"I think the other investors don't see the value. They want to be like the sexy retailer that just does the brand-new and cool and hip, and have all these services and amenities," he said. "Some part of the market will pay for it, but the majority of the market won't, and it's reflected in the statistics."
When rental rates are compared to median income, Baltimore is one of the least affordable rental markets, according to the real estate research firm RealtyTrac. The firm ranked the city behind only the Bronx, N.Y.
The firm used fair-market rent figures from the federal Department of Housing and Urban Development, which uses census surveys. HUD's most recent estimate found half of the one-bedroom rentals in Baltimore go for $985 per month or less.
Rent in apartment buildings hit an average of $1,294 in Central Baltimore last year, according to Reis.
Marcel de Pontbriand, a 25-year-old graduate student and barista, shares a two-bedroom house in Seton Hill with a roommate. They pay $1,050, utilities not included.
"Housing is cheap, but it seems like the apartment buildings aren't in a price range for someone like me — and there are certainly a lot of us," de Pontbriand said.
He said he has looked at some of the newer buildings in neighborhoods such as Remington, but the rents never seemed worth it.
"I'm really drawn to how cheap some of the whole houses are," he said. "$1,100 for a one bedroom — even that's a lot, working and being in school."
Nationally, demand for apartments remains strong, but low wage growth has kept rent increases contained. Brad Doremus, a senior analyst for Reis, said that raises questions about the viability of new projects started and financed under more optimistic growth assumptions.
"Apartments have been sort of the belle of the ball in terms of commercial real estate, but rents may not necessarily … be going as high as some would have expected," he said.
Results in Baltimore are mixed. Reis' analysis of the Central Baltimore market found that the rents that Class A apartment owners were asking increased about 3.7 percent for the year, compared to 5.9 percent for other properties.
Delta Associates reported that Class A rental rates in Baltimore City fell 2.2 percent last year, and 4.2 percent in neighborhoods beyond the waterfront.
William Rich, senior vice president at Delta Associates, said he expects the new supply of Class A properties to pull rents down and push vacancy rates up in the short term. But he predicted the market would correct itself.
"The metro areas as a whole is in fairly good shape and over the long term," he said. "I think that Baltimore City will be able to rebound from this supply issue that's currently in the market."
Weakness at the top of the market doesn't mean rents are going down everywhere.
Overall rents in Central Baltimore increased by 6.3 percent last year. The increase was double that of the metro area, and almost 3 percentage points more than the national average.
Zahler, who expects to open a 32-unit building in Ridgley's Delight and break ground on a 60-unit building on Calvert Street this spring, is betting that demand will remain strong for apartments with midrange prices, while slowing for the worst-quality or highest-priced units.
Zahler's apartments typically go for $1,200 to $1,600, he said.
"Rents will climb. The question is, which rents will climb," he said. "There's enough product out there that the consumer can price out and look around."
JK Equities, the owner of the 189-unit Equitable Building at 10 N. Calvert St., expects to start leasing in March. Rates in the newly renovated former office building start at around $1,500 for a studio with Internet, cable, in-unit washer/dryers, and other amenities.
Jerry Karlik, owner of the firm, said he's not worried about overbuilding, given the growing popularity of city living. His property, a conversion with several retail tenants in place, is a less expensive investment than new construction.
"That's been sort of the trend around the country and the trend continues, and there's no reason for Baltimore to be any different from any other place," he said. "You're seeing a bunch of activity, but the activity is minuscule compared to other markets."
As more shopping, restaurants and other services start to follow residents downtown, he said, the scene is likely to create demand that does not exist today.
"It's sort of a cat-and-mouse game with this type of urbanization," Karlik said. "We're very happy to be building in Baltimore. We think there's a lot more opportunity in this market."
Fowler of the Downtown Partnership said the difference between a building with a 90 percent occupancy rate and a 100 percent occupancy rate is important to a landlord. But from the perspective of his group, any increase in residents will benefit the neighborhood.
And in the meantime, he said, queries about residential development keep coming.