Interest Rates, Low Supply Hinder Baltimore-Area Retail Investment Sales

The strong leasing performance of Baltimore-area retail assets is generating buyer demand, but a difficult financing environment and lack of properties for sale are holding back the investment sales market.  

The Baltimore-area retail environment has generated positive indicators, such as low vacancy rates and rising rents, considered hallmarks of a healthy sector. But local brokers and investors say economic headwinds are making it hard to close deals. 

The supply of available retail investment opportunities in the Baltimore region is "extremely limited," according to KLNB Senior Vice President Don Schline. 

“Sellers are limited in reinvestment opportunities due to limited availability of offerings, and acquisition financing [is] significantly more expensive as compared to existing debt,” Schline said in an email.

For years, brick-and-mortar retailers struggled to compete with online retailers, and then the coronavirus pandemic nearly stopped retail sales. 

Even so, tenants like auto parts stores, fast-casual restaurants and barbershops proved resilient and showed the untapped potential of retail centers.

In the second quarter of 2022, the Baltimore metro area had a retail vacancy rate of 6.4%, roughly the same as the prior quarter and last year, according to MacKenzie Commercial Real Estate Services. That is despite 17 new projects delivering 200K SF during the prior 12 months.   

Meanwhile, rents climbed from $20.29 per SF the year before to $20.75 per SF in the second quarter, according to MacKenzie. 

“The properties themselves continue to thrive,” Continental Realty Corp. Chief Operating Officer David Donato said.

The sector's resilience has caught the attention of investors nationwide that have launched new ventures to spend billions on retail assets. 

That investor demand is reflected in Chicago Trend’s purchase of the downtrodden Edmondson Village Shopping Center for $17M, a deal the firm's CEO, Lyneir Richardson, celebrated the completion of on Wednesday with Baltimore Mayor Brandon Scott.    

“The multi-year, multi-phase transformation and investment in this historic shopping center will ultimately provide the Edmondson Village community with access to a modern shopping center with high-quality goods, services, and amenities," Richardson said in a statement. "We will be intentional in our efforts to attract national retailers, support local entrepreneurs and Black-owned businesses, creating jobs and improving site security."

In June, Schline's KLNB team brokered a pair of retail investment sales: an $8.5M purchase of a 42K SF property at 1848 Reisterstown Road in Baltimore County and a $4M agreement for a 12K SF building at 1720 Liberty Road in Carroll County. The buyer of both properties, Baltimore County-based K&S Capital subsidiaries, was drawn to the properties' flexibility, tenant mixes and prominent locations, Schline said.

Researchers at Marcus & Millichap said investment activity in Baltimore's retail sector during the 12-month period that ended in March reached the second-highest level on record, despite elevated vacancy and rising interest rates.

"Although deal flow began to slow during the first three months of 2023, the number of trades still outpaced the long-term average of first-quarter sales volume," Marcus & Millichap's second-quarter market report says. 

MacKenzie's researchers recorded eight retail sales in the first half of 2023. That includes $19.4M for 71K SF in the first quarter and $30M for 140.7K SF of retail transactions in the second quarter. 

The sales volume could be higher if more properties were on the market for buyers to acquire, but many owners with healthy assets are holding on to them. Industry pros said this is making it increasingly challenging to find properties on the market and close deals. 

“Right now, there’s fewer sellers,” Donato said. “Those that are selling generally are being forced into that position.” 

Despite the headwinds, Donato said CRC has managed to acquire 10 retail properties outside the Baltimore metro area over the last several months. 

Much of the uncertainty that is hindering retail investment sales stems from the actions of Federal Reserve officials to curb inflation.  

Fed officials have increased the pivotal federal funds rate 11 times since March 2022, including a 25-basis-point bump during the Open Markets Committee meeting in July. 

Nonetheless, Federal Reserve officials have shown signs of support for holding off on future interest hikes. Minutes from the committee's July meeting reveal a divide among Fed officials on raising rates due to signs of easing inflation and moderating employment growth. 

Researchers at Marcus & Millichap said a stabilized interest rate environment would boost local retail sales volume. They warned that transactions will remain slow "until more clarity emerges in the capital markets."

It's hard to predict whether stabilized interest rates will boost retail investment sales, Donato said. 

“We’ve just never been through a time in my career when interest rates have gone up so high so suddenly,” Donato said. “Any market does best with predictability.”