An oversupply of apartments?

Mayor Stephanie Rawlings-Blake wants to encourage the construction of more apartments in the city, but a softening market may be undercutting her ambitions.

During her State of the City address earlier this month, Rawlings-Blake announced her intentions to push legislation extending tax credits to encourage the construction of apartments citywide. Currently similar credits are only available for developments in targeted areas, such as downtown.

But some fear the demand may not be there.

“It’s a market that held up very, very well in the downturn, which attracted a lot of new development. But the problem that it’s had is that job growth hasn’t really taken off to support that development,” said Jay Denton, vice president of research at Axiometrics Inc., a Dallas-based apartment data and market research firm.

Denton said that in the five years between July 2008 and July 2013, Baltimore’s average rent went up 10.5 percent, even with the economic downturn, which was better than the national average. But he said the market is slowing down, primarily because of weak job growth. The research firm’s forecast predicts job growth in Baltimore to drop from 2 percent in 2013 to 1.78 percent in 2014.

“We expected the job growth to be much better than it was. You’re in a situation where if the market is going to improve you need supply to slow down, or you need job growth to improve,” Denton said.

Axiometrics anticipates almost exactly the same number of unit deliveries this year as last — 3,423 compared with 3,424 in 2013. There are already 1,228 units expected to be available in 2015.

David Tufaro, founder of Terra Nova Ventures LLC, a Baltimore-based development company, also expressed concern about the stability of the multifamily development market. He said the occupancy rate for apartments in Baltimore, which Axiometrics placed at 94.2 percent, is inflated because rents can be quickly manipulated to lure tenants. Data from Axiometrics shows that rent growth for January 2014 was only at 1.28 percent, down from 2.2 percent year over year from January 2013.

“I do think we’re in a bubble in Baltimore city,” Tufaro said.

But Rawlings-Blake refuted the idea that the city’s plans to encourage more multifamily developments will lead to a bubble, and said the market would balance itself out.

“In at least in the downtown area, the residential market can’t keep up with demand. And because of that lenders believe that it continues to be a good investment to do conversion projects,” Rawlings-Blake said last week. “If that were to change, and the vacancy rate were to increase, it would become less attractive for investment, and you know, that’s where the market balances it out.”

Barbara Simmons, administrative vice president at M&T Bank, said she views Baltimore’s multifamily market as a good place for additional investment. She said the bank is optimistic about the city’s prospects, and said she liked the fact that there’s a range of apartment developments for a variety of income levels.

She also said that the current occupancy rate is encouraging — even if it has declined slightly — because occupancy rates the last two years have been running higher than longer-term historical averages.

“Again, if you look at your submarket there’s going to be some variation in submarkets, but an overall average of 94 [percent] is still pretty darn healthy regardless of the submarket, whether it’s Fells Point, Canton or Federal Hill,” Simmons said.

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