Region seen weathering slump

The Baltimore Sun

The Baltimore-Washington region is better equipped than much of the nation to weather the economic downturn in commercial real estate, thanks to the proximity of federal government jobs and top universities that attract employers, according to an outlook released yesterday by the Johns Hopkins University's real estate department and a local chapter of the Appraisal Institute.

Trend Watch 2008, an annual survey of about 120 regional experts in real estate, development, investment sales and business, says the federal government will continue to be a stable source of jobs, while universities will attract employers in defense, life sciences and telecommunications, helping to cushion the region's commercial real estate market and keeping property values stable for the next couple of years.

The report, put out by the Maryland chapter of the Appraisal Institute and the Edward St. John Real Estate Department at Hopkins, said the region's commercial market will be helped in part by the federal base realignment, which is expected to shift tens of thousands of civilian and military workers to the region. The report noted that job growth has been strong, with metropolitan Baltimore adding 22,000 new jobs in 2005, 17,000 in 2006 and a projected 9,000 last year.

"It's always been the perception ... that the region exhibits greater stability, and it seems to be borne out," said Eric Smart, Trend Watch's project director and a managing principal of real estate consulting firm Bolan Smart Associates. "Something broadly reflected in the interviewees' findings is that there is more or less a balance in supply and demand in the marketplace -- demand has slowed down, and supply has slowed down."

But the report cautioned that the region is not recession-proof. The economy remains uncertain, construction costs are rising, building operating costs are increasing and the credit crunch has limited financing, keeping commercial lending tight for the couple of years.

"At the end of the 1980s, people for a while thought the Baltimore-Washington area was recession-proof, and we did not end up being recession-proof," said Joseph M. Cronyn, a partner with Lipman, Frizzell & Mitchell LLC real estate consultants, and a survey respondent. "Despite all of the strengths and the clear new demand to be created by BRAC (base realignment) for commercial space as well as residential building, we many not be hit as hard by a recession, but we're no more recession-proof than we were at the end of the 1980s."

Most of the base realignment-related growth is expected in the BWI Marshall Airport corridor, Columbia and Harford County, where millions of square feet of office space is under construction or planned. But 80 percent of survey respondents said the impact from base realignment could be delayed because of a funding shortfall to build infrastructure.

Almost half of the experts surveyed said development in the region will decrease over the next one or two years, while a quarter believe it will increase. And more than half of those surveyed said investors should hold, rather than buy or sell, real estate.

As a target for investment, Washington respondents favored their own market, with none choosing Baltimore. Baltimore respondents chose Baltimore and the region as their top choices.

"Real estate is still a valued asset class," the report said. "If the fundamentals are solid, capital may still be available. While the pool of potential investors has shrunk, some continue to be actively involved in acquisitions."

Tighter financing may create some problems for developers in the short run, but could also help in the long run, said Terry Dunkin, a senior vice president and principal of Colliers Pinkard and a survey respondent.

"The banks pulled their horns in earlier than they may have done in past ... and that hopefully will again soften the impact that it otherwise would have had," Dunkin said.

The strongest sector for future development and acquisition will be the multifamily apartment market because of growing demand for rental housing and a dependable stream of income for investors, the report said. The sector has been able to remain aligned with incomes, as opposed to the for-sale market, where rapid price appreciation far outpaced wage growth, experts said.

The industrial sector, which has shown resilience in economic downturns because of the proximity of the federal government and a diminishing supply of industrial land, is also expected to perform well, as is waterfront-anchored development.

The office sector, though, is facing slowing absorption and increasing vacancies. The metro Baltimore office vacancy rate has ranged from 10 percent to 14 percent over the past three years, and is expected to continue to rise.

"From everything I can see, there's softening demand at this point for office space and employment space, and it's because hiring for new jobs is tapering off," Cronyn said.

In the Baltimore area, almost half of the respondents believe the city is an emerging market, with specific emerging neighborhoods identified as Locust Point, Brewers Hill and Penn Station. Opinions were mixed on whether downtown is in danger of becoming overbuilt.

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