Slowing Pipeline Benefits Baltimore Office Market As Leasing Drops

The Baltimore area is facing plummeting demand for office at the same time as a series of new developments are delivering, but researchers say the amount of pre-leased space in those projects should protect the market from the potential supply-demand imbalance. 

While JLL and CBRE expect developers to deliver between 862K SF and 1M SF of office space by the end of 2024, their researchers conclude there is no reason to worry about that amount of space coming online in a demand-constrained market. 

"I know a lot of folks in the Baltimore market area are concerned about all of this space being under construction and delivering with anemic leasing demand and a lot of vacancy already," JLL Research Manager Kate Paine said. "If you take a fine tooth comb to these buildings that are Class A, new waterfront buildings, especially in Harbor East and Harbor Point [and] you look at the blocks of vacant space, there's very, very little space available for those companies."

JLL estimates firms have already leased 85% of the total space available in office buildings set to deliver next year. CBRE counts seven buildings totaling over 1M SF that are expected to open by the end of next year. But CBRE said no new buildings broke ground last quarter and JLL said no additional developments are scheduled to break ground this year. 

"A slowdown in construction should help the rising vacancy with fewer new offices coming to market and adding to the inventory," CBRE Research Director Stephanie Jennings said.  

While both researchers did chalk up a significant slowdown in leasing activity in the last quarter to a summer lull, they also found some reason for concern from the data they collected.  

Paine described leasing activity as "muted" in JLL's third-quarter office market report after new deals in the quarter failed to top 349K SF. This represented a 64% drop from the second quarter, according to JLL. 

"The leasing volume was pretty low this quarter," Paine said. "That was not surprising in the fact that the summer is always pretty slow for leasing volume ... But it was pretty below average, I would say, for our summer quarters."

Jennings said the leasing falloff last quarter created a significant impact on the industry. The absence of leasing velocity pushed Baltimore's vacancy rate up 40 basis points to 19%, a new high for the market, according to CBRE. 

"The greatest driver was the decline in leasing, which fell by nearly half from Q2 2023 and was one of the lowest since the onset of the pandemic," Jennings said. 

However, there is some disagreement when assessing other indicators of the office market's health. In particular, CBRE and JLL's reports differ in their assessment of office occupancy in the third quarter. 

JLL's researchers reported the first quarterly office occupancy gains in over two years. Paine described that finding in the report as delivering a semblance of "stability" to a reeling sector.  

"After several quarters [of occupancy losses], you just come to expect that there's going to be more vacant space at the end of the quarter than what we started with, and that actually wasn't true [in Q3]," Paine said. 

According to JLL, Baltimore's Class-A vacancy rate decreased 30 basis points over the quarter to 18.6%. It's the first time the company’s data analysts recorded a falling Class-A vacancy rate since the first quarter of 2021.     

"While the market is still bleeding, right, it's not as dramatic as it has been in the previous quarters," Paine said.  

However, CBRE’s researchers reached a different conclusion. In its report, CBRE determined the local office market posted an occupancy loss of 257K SF in the third quarter. 

CBRE attributed the loss to a handful of departures and downsizings, such as Superior Vision adding 37K SF of sublease space at 881 Elkridge Landing Road and FEI Systems downsizing from 48K SF to 15,500 SF at 9755 Patuxent Woods Drive. 

On the other hand, Jennings said her team unexpectedly found several submarkets experienced a decrease in vacancy from 2020. Those submarkets included the West Baltimore, Baltimore Washington International Airport and Ellicott City areas. 

The researchers also disagreed about to what degree Class-A properties dominate Baltimore's office leasing market. 

By JLL's count, Class-A properties accounted for 187K SF of occupancy gains last quarter, while Class-B assets offset those gains by losing 156K SF of occupancy between July and September. Overall, JLL tallied a 50-basis-point increase in the vacancy rate among Class-B and Class-C office properties.

Additionally, not all Class-A properties across the market are experiencing increases in occupancy, Paine said. It is the newest Class-A buildings experiencing the sharpest rise in occupancy, she said, especially those developed after 2015.

"It's not only the flight-to-quality from Class B buildings, or maybe a Class-B Building in the suburbs to Class-A [in the city], but also Class-A tenants moving to a newer Class-A building, like what we're seeing right now on Pratt Street and downtown over to Harbor East, Harbor Point, Baltimore Peninsula area," Paine said.

Jennings said her research shows Baltimore has a healthy spread of activity across office market segments compared to other cities. 

"Activity is also spread across the spectrum of price points in proportion to inventory. So, you don’t see one segment of the market capturing an outsized share of demand and another segment of the market being left behind, which is happening in other markets where flight-to-quality trends are dominant."