'The Sky’s Not Falling': Baltimore Industrial Activity Slowing, But Insiders Aren't Worried

Industrial leasing and investment sales activity slowed in the Baltimore metro at the end of last year, but players in the market still expect 2023 to yield strong results. 

Despite a looming recession stemming from attempts to slow inflation with higher interest rates, brokers, investors and developers said they remain bullish on the Baltimore-area industrial sector in the short and long term.  

“The sky’s not falling, the macro trends are down, but the industrial real estate [outlook] in Baltimore has not changed,” said Danny Coffman, principal at Triten Real Estate Partners.

While a hobbled economy likely means less activity than in recent years, that is relative to a period when the sector has performed historically well, especially since the arrival of the coronavirus pandemic.

“It’s been incredible both in Baltimore and the other markets we’re active in,” 1788 Holdings Managing Principal Larry Goodwin said. 

Economist Anirban Basu of Sage Policy Group this week told a NAIOP Maryland industry roundtable the economy has yet to cross the line into a recession. But he said it's a matter of when, not if, that will happen.   

"The environment will not get as bad as the late-1980s and certain asset classes will have a good year — such as industrial/warehouse — despite what you might be reading about Amazon no longer seeking an abundance of new capacity," Basu said.

In its most recent Greater Baltimore market report, Columbia-based Lee & Associates | Maryland found a substantial slowdown in leasing activity last quarter. The company includes data from Prince George's, Washington and Frederick counties in its report.  

Firms in the metro area last quarter soaked up a net total of over 1.1M SF of industrial space, resulting in an overall vacancy rate of 4.5%, according to Lee & Associates. The market has an additional 13M SF under construction. 

By comparison, in the final three months of 2021, tenants in the Baltimore area had a net absorption of nearly 3.5M SF, producing a roughly 4% vacancy rate. The market had 12M SF under construction at the end of 2021.

The largest industrial lease in the region last quarter, according to Lee & Associates, was Baltimore International Warehousing & Transportation taking 244K SF at 5250-5330 Holabird Ave. in Baltimore, a property owned by BentallGreenOak. The second-largest lease was Amazon signing on for 242K SF at NorthPoint Development's 1713 East Patapsco Ave. in Baltimore, according to Lee & Associates. 

“Although the volume of industrial/warehouse space leased regionally is down from totals reported one year ago, the total amount of space under construction is consistent with year-end 2021 statistics, which represents continued confidence in this asset class,” Tom Whelan, principal at Lee & Associates | Maryland, said in a statement. 

JLL estimated the Baltimore market, which it defines as the city and immediate surrounding counties, hit 1.7M SF of occupancy gains in the fourth quarter and sucked up over 4M SF total in 2022. JLL found vacancy rates in the market sit 220 basis points under the trailing three-year average. 

Industrial assets in the Baltimore area are experiencing what JLL researchers in the firm's Q4 report called "historically compressed" direct vacancy rates. 

As a result, both Lee & Associates and JLL found surging industrial rents in the Baltimore area.  

Direct asking rents rose 5.1% quarter-over-quarter and nearly 27% year-over-year, according to JLL.

Meanwhile, Lee & Associates said Class-A rents remained at "all-time highs" in the fourth quarter. Its analysis found an overall average rent of $7.87 per SF, compared to $7.90 per SF in the third quarter.

Much of that rent growth, according to JLL, stemmed from activity in the Baltimore-Washington corridor, which produced a sub-2% Class-A vacancy rate. 

Class-A rents in that area soared more than 36% year-over-year to $13.61 per SF. That marked the fourth consecutive quarter JLL reported rents in the double digits for top-of-the-line space.  

Yet the industrial market has not escaped the fallout from the economic downturn.

While the final quarter of 2022 wasn't devoid of deals — Prologis made the biggest splash with its $230M purchase of 2.5M SF from Duke Realty — researchers at JLL and Lee & Associates reported slowing sales activity. 

The primary culprit for that sales lull was higher interest rates and tighter lending. As a result, buyers and sellers opted not to pursue deals because of the higher cost of borrowing and the lack of competition in the market to drive up prices.

Goodwin, of 1788 Holdings, said his firm is among those that backed away from plans to sell assets. The company had planned to sell its property at 1601 Wicomico St. in Baltimore.

Despite the property landing the third-largest lease in the region last quarter — Transdev inked a deal for more than 168K SF — uncertainty in the market convinced 1788 Holdings to keep the property through at least 2030, Goodwin said.  

“We’d be leaving too much on the table,” he said.  

Overall, however, industrial real estate professionals feel market factors in the area work in their favor.

That is particularly true regarding the limited supply of industrial-zoned properties in locations near transportation hubs, such as the Port of Baltimore and Baltimore Washington International Airport. 

That imbalance, they said, will continue to benefit industrial properties ranging from new, Class-A distribution space to industrial outdoor storage spaces.     

Although the industrial market's performance in 2023 is likely to fall short of recent years, those working in the Baltimore area's industrial market still see the market producing strong results for the foreseeable future.  

“We feel confident, and the long-term picture is very bullish,” Coffman said.