Trouble brewing in Baltimore’s multifamily market

Despite a robust national economy, there’s concern among developers that Baltimore is not experiencing enough job growth to support all of the multifamily development in the pipeline.

Concerns about a multifamily bubble in Baltimore have lingered as a development boom sparked by tax credits and millennials’ supposed preference for urban living resulted in an abundance of projects in recent years. But more and more developers invested in that market segment are now voicing concerns.

“I think the developers are right to be concerned,” said Anirban Basu, an economist and CEO of the Sage Policy Group. “Part of the issue is the enormity of the pipeline, and part of the concern probably is that our apartment vacancy rate isn’t altogether that low right now.”

An estimated 3,300 rentals will be built in 2017 in Baltimore, according to a recent report from commercial real estate brokerage Marcus & Millichap, the same number as in 2016.

Thibault Manekin, of Seawall Development, said his firm is not a traditional multifamily developer, but he also is worried there are not enough jobs in the city to support the product in the pipeline.

“My feeling is that people are starting to get a little nervous about the amount of product proposed for Baltimore,” Manekin said.

Ernst Valery, president of SA+A Development and Ernst Valery Investments, also expressed concern about Baltimore’s job creation. But because his projects, such as The Nelson Kohl apartments at 20 E. Lanvale St., are based around Penn Station, his tenant’s access to the Washington job market provided him with more confidence.

“(Manekin’s) absolutely right, but the way we look at it… our product sits on top of train stations,” Valery said.

The state Department of Labor, Licensing and Regulation reported Monday that Maryland added 7,500 private-sector jobs in January, while the state’s unemployment rate held at 4.2 percent. But the unemployment rate in Baltimore from December, the latest figures available, was 5.7 percent.

There’s also concern about the kind of jobs being created. The largest gains in employment in the state in January came from the leisure and hospitality sector, which added 3,900 jobs. That boost came entirely from the food services subsector, while the art, entertainment and recreation subsector lost 2,000 jobs. Food-sector jobs generally, don’t pay the white-collar professional wages developers are depending on to rent luxury apartments downtown.

Commercial real estate brokerage Marcus & Millichap’s 2017 outlook for Baltimore’s multifamily market predicts delivery of product will outpace job creation. But the report, released last month, provides a fairly rosy outlook for the Baltimore’s multifamily market through 2017.

“The market will undergo a period of softening as deliveries move higher, with vacancy set to rise for a second straight year as net absorption falls short of completions,” the report states. “However, the volume of new Class A product is raising average effective rental rates in the metro, which will record an eighth consecutive year of advancement.”

But Marcus & Millichap’s report also points out Baltimore’s biggest weakness in jobs is that growth is predicted in the health care, government and trade sectors – at a time when President Donald Trump has proposed slashing government agencies and supports a health care reform bill with an uncertain impact on the industry.

Basu agreed the Trump administration’s plans may negatively impact Baltimore’s workforce and employees’ ability to rent units being delivered.

“The whole regional economy really should be the focal point, not just Baltimore’s economy,” he said. “Because a significant fraction of the folks who live in those apartments don’t work in the city, and the driver of the suburban economies is the federal government and federal government contractors.”