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CRE firms find upside in Maryland post-COVID-19

Commercial real estate professionals are bracing for extremely slow activity in both leasing and sales across asset types for the foreseeable future, even after COVID-19 stay-at-home orders are lifted.

While “a robust data set” recording the economic toll of the new coronavirus outbreak remains weeks away, a report released Wednesday by Newmark Knight Frank on the Washington commercial market delivered a relatively bleak outlook.

“Government-mandated measures keeping citizens at home for a prolonged period have already affected many industries and will continue to have an impact until the virus is contained,” according to NKF’s report.

Researchers tell NKF that the national economy will retract by 12.6% during the second quarter but that the regional economy, buoyed by the strong government presence and stimulus funds, will decline only by about 1% for the year.

JLL, in its first-quarter report on the Baltimore metro’s office market released Wednesday, found reason for hope among all of the uncertainty in the market.

Prior to the new coronavirus outbreak, building was in the trough of a typical cycle, with planned construction slowing while developers waited for what’s been delivered to lease.

At the start of the second quarter only two major new office projects, Will’s Wharf in Harbor East and 226 Schilling in Hunt Valley, which is undergoing renovations.

The market was entering a stage in which new building was expected to increase. The pandemic’s slowing of the economy, according to JLL, doesn’t mean that will stop.

The firm notes that during the aftermath of the 2008 financial meltdown “building remained at a steady pace” in the metro area. Developers delivered more than 1 million square feet of new building a year between 2009 and 2011.

“Although the long-term impacts of the COVID-19 virus have yet to play out, local developers remain cautiously optimistic regarding upcoming projects… On the occupier side, many smaller tenant requirements in the market are temporarily on hold, but larger groups with expirations further out continue working to explore relocation options,” according to JLL’s researchers.

NKF’s Washington area report also found potential for that region’s office market to rebound relatively quickly.

As a result of the federal government cutting jobs the metro area isn’t as insulated from recession as it was previously. The level of federal employment, however, still provides a bigger buffer than in other regions.

As the federal government pumps stimulus money into the economy, such as the $2.2 trillion Coronavirus
Aid, Relief and Economic Security Act, NKF expects the Washington area economy to benefit. Even though overall spending will slow, the strength of the region’s tech and life sciences should pick up the slack.

“The duration of the outbreak and the degree of the resulting economic decline will lead to private sector job losses across all three of the region’s substate areas. However, the Washington metro area’s economy is likely to benefit from public investment and other federal government activity over the next few months in response to the pandemic,” NKF predicts in its market report.

Those same factors, JLL predicts, also will provide a boost in the Baltimore area. In the past 12 months a plurality of Class A office leases, about 28%, came from government contractors. The cybersecurity sector has expended its cumulative leasing totals since 2010 by 1.7 million square feet.

In regards to capital markets, both JLL and NKF found a potential silver lining in the economic downturn.

Job losses make office assets less appealing for some investors, and investment activity is expected to slow over the first half of 2020. At the same time, during times of crisis investors do tend to flee to what NKF called “hard assets,” such as real estate, as a hedge against stock market instability.

JLL also reached similar conclusions in a special report on market implications from the outbreak.

“Real estate investment has fluctuated during previous crises, but the overarching trend over time has been for increased allocations to the sector and we see no reason for this to change. Real estate continues to offer attractive relative returns in comparison to other asset classes,” JLL’s researchers concluded.

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