Baltimore-Area Office Investment Sales Plummet
Sales of Baltimore-area office properties dramatically slowed in the fourth quarter of 2022, traditionally a time of year when a substantial number of deals close, according to Newmark's fourth-quarter market report.
Researchers at Newmark expected lower quarterly transactions due to higher interest rates essentially freezing debt markets. However, the decrease in local deals underperformed even those lowered expectations, and Newmark said there were no office sales of significant size in the quarter.
Through the first two quarters of 2022, the pace of office investment sales in the Baltimore area remained in line — at roughly $1B a quarter — with previous years dating back to 2017.
In the third quarter, sales slipped to their lowest levels since the initial outbreak of the coronavirus pandemic. That drop-off accelerated in the fourth quarter, when sales fell below $400M.
That is the lowest quarterly office sales total recorded by Newmark in the last six years. By comparison, investment sales in the region topped $1.2B in the fourth quarter of 2021.
Brokers working in the Baltimore metro area said the decrease in office investment sales reflects the national economy rather than a uniquely lousy office market in the Baltimore area.
Paralyzed debt markets created uncertainty nationwide, and office sales slowed across the board. MSCI's Capital Trends report, based on data collected through Dec. 20, found the volume of transactions nationwide was down 12% year-over-year.
“Nobody was borrowing, and bigger transactions usually need a combination of debt and equity,” said Owen Rouse, vice president of investment sales at MacKenzie Commercial Real Estate Services.
The slowdown in Baltimore office sales last quarter is the result of a combination of factors, Rouse said.
He said an unresponsive debt market was the primary culprit. However, Baltimore's status as a market where investors don’t feel compelled to own property and lingering doubts about how companies will use office space post-pandemic didn't help.
Joe Friedman, a partner at Edge Capital Markets Group, said uncertainty didn't just cool demand. It also caused building owners to hold off putting assets on the market. All of the uncertainty surrounding the debt markets made it easy for sellers to punt to 2023, he said.
“If people don’t know what to do, they don’t do anything,” Friedman said.
Rouse said that one aspect contributing to a decrease in investment sales in Baltimore is the role of a flight to quality in making specific properties more attractive to buyers.
While there's a nationwide trend of tenants taking smaller spaces in nicer buildings, he said it's more complex locally, particularly in the city.
Unlike cities such as New York, he said, there's not a tremendous difference between Class-A offices in Baltimore.
However, buildings on Pratt Street are struggling to fill holes while tenants gravitate toward Harbor East and Harbor Point properties.
“It’s not like Harbor East has gold on the ceilings,” Rouse said.
T. Rowe Price is leaving a roughly 450K SF hole on Pratt Street by relocating from 100 East Pratt St. to a new headquarters at Harbor Point. Over the next few years, Pandora is closing its 90K SF office at 250 West Pratt St. and replacing it with 27K SF at 1540 Broadway in New York.
“We’ve got a problem on Pratt Street, and that’s the best of the best,” Rouse said.
Brokers expect more clarity on how the economy will perform and whether interest rates will stabilize by the middle of this year.
Once the debt markets settle and investors adjust to higher interest rates, some, like Friedman, believe office investment sales activity will return to levels closer to historical norms.
“There’s a tremendous amount of money that didn’t get spent last year,” Friedman said.
