Multifamily Research

Market Report Third Quarter 2018

Baltimore, Maryland

Substantial Supply Additions Not Weighing on Property Performance

Renewed job growth helping rental
demand meet supply wave. Employers
in Baltimore are expected to hire more than
twice as many people this year than they did
in 2017, with an emphasis on adding more
doctors, nurses and educators to the metro.
This is, in turn, supporting a fourfold increase
in the number of household formations year
over year. As the gap between the average
mortgage and rent payment widens, renting
is becoming more appealing, aiding demand
for apartments. Rising demand will be met
by higher construction as annual deliveries
reached a new peak in 2017, with a similarly
high number of arrivals expected this year.
Developers are primarily targeting areas in
and around downtown Baltimore. Strong
demand on the east side of the city has
driven the vacancy rate there down 110
basis points over the past four quarters as
a record 1,230 new units came online. The
wave of new leases also aided rent growth,
which returned after rates fell the year before.
Metrowide, rent growth will maintain about
the same pace as last year, led by above-
average gains of 4 to 13 percent for select
property classes in secondary submarkets
such as Towson, Ellicott City and Columbia.
Baltimore offers regional appeal late in
cycle. Capital from other parts of the country
has been and remains a critical component
of Baltimore’s investment landscape.
Buyers from Los Angeles, New York City,
San Francisco and Washington, D.C., are
drawn to the area for its comparatively lower
entry costs and higher initial yields. A similar
property can change hands at a sale price
$100,000 to $200,000 less per unit relative
to one of those other metros, with going-
in cap rates that are 200 basis points
higher. Out-of-state investment will serve
as an important factor moving forward,
since further price appreciation could
dissuade some local buyers. Investors
seeking competitive pricing are looking
more broadly for value-add opportunities.
Such is the case in Hartford County, which
in contrast to historical trends led all other
submarkets in sales velocity over the past
12 months. The area is home to many
bedroom communities, and properties
strategically situated near Highway 40
and I-95 can trade for some of the lowest
prices in the market, at initial returns in the
high-6 to low-7 percent range.

2018 Multifamily Forecast

1.3% increase Employment:

in total employment Employers will create 18,000 jobs in 2018, twice the number of positions that were filled last year
when employment growth only reached 0.6 percent.

3,800 units Construction:

will be completed Total completions reach about the same level as last year, when approximately 3,900 units were
delivered. A little under a third of those arrivals, about 1,000 rentals, will open in downtown
Baltimore, with another 800 arrivals expected in Baltimore City East.

20 basis point Vacancy:

decrease in vacancy The region’s vacancy rate drops to 5.5 percent this year, following a 10-basis-point decline in
2017 under a similar-size construction pipeline.

2.3% increase Rents:

in effective rents Falling concessions, especially among Class A properties, will help push the average effective
rent to $1,290 per month this year. Last year rates appreciated by an average of 2.6 percent.
Multifamily Research | Market Report

Employment Trends
Employment
Local Apartment Yield Trends
Metro United States • Employers added 18,900
Apartment jobs over10-Year
Cap Rate the 12-month period that ended in June,
Treasury Rate
4% representing a 1.4 percent expansion to the market’s workforce. In the preceding
year, total 12%
employment rose 1.1 percent.
Year-over-Year Change

3%
• The most positions
9% were created in the business and professional services

Average Rate
2% sector, as well as in the healthcare and education sector, with payrolls growing
6% 6,200 roles, respectively. The unemployment rate rose by 10
by 8,200 and
1% basis points to 4.3 percent, which is 30 basis points above the national level.
3%
0%
Outlook: Employment
0% growth will maintain a pace of 1.1 percent as organizations
14 15 16 17 18* hire 15,000 personnel
00 02for the
04 year.
06 08 10 12 14 16 17

Completions and Absorption Construction

Completions Absorption • Approximately 4,500 units were completed over the past four quarters. Over
2,300 rentals were delivered in the city of Baltimore itself, representing 53
6.0 percent of the delivery pipeline.
Units (000s)

4.5 • The largest project finalized over the past year is The Residences at Annapolis
Junction, a 416-unit luxury development near Fort Mead. Baltimore City East
3.0 welcomed the most individual projects at five new properties that ranged in size
1.5
from 65 to 349 units. Four of the buildings are situated in the Riverside/Tidal
Point area directly south of downtown.
0
14 15 16 17 18* Outlook: Aggregate construction activity remains essentially flat between 2017
and 2018, with 2,000 units arriving within the city of Baltimore this year.

Rent and Vacancy Rate Trends

Vacancy and Rents
Vacancy Rental Rate Growth
8% • An improvement in the absorption of apartments contributed to a 10-basis-
point decline in the vacancy rate to 5.4 percent despite annual completions
4% surpassing 4,000 units for the first time since 2014.
• The average effective rent rose 1.7 percent year over year in the second quarter
Rate

0%
to $1,284 per month. In the preceding period, rents declined 0.1 percent.
-4%
Outlook: Improving demand amid a consistent construction pipeline will enable
-8% a further drop in vacancy as rent growth surpasses 2 percent again this year.

14 15 16 17 18*
* Forecast Sales Trends
• The average sale price has appreciated 81 percent in 10 years, one of the highest
Baltimore Office: Sales Trends
rates in the country. Rising prices may be weighing on investor sentiment, as
Matthew DraneSales Price Growth
Regional Manager deal volume and sales velocity both declined over the past four quarters.
Average Price per Unit (000s)

100 East$80Pratt Street, Suite 2114 32% • Buyers seeking value-add opportunities are considering markets with upside
Baltimore, MD 21202
Year-over-Year Growth

Tel: (202) 536-3700 | matthew.drane@marcusmillichap.com potential, such as Mount Vernon and Mid-Town Belvedere. These neighborhoods
$60 18% near the University of Baltimore have attracted more interest over the past three
years, with recent trades recording cap rates in the mid-6 to 7 percent zone.
$40 4%
For information on national apartment trends, contact:
Outlook: Interest rates that are still near historical lows and yield arbitrage with
John$20
Chang -10%
Senior Vice President, National Director | Research Services other markets will drive continued out-of-state investment in the market.
Tel: (602) 707-9700
$0
john.chang@marcusmillichap.com -24%
13 14 15 16 17
Price: $250 References for mortgage payment are calculated based on the quarterly median home price for a 30-year fixed-rate mortgage
at 90 percent LTV, including taxes, insurance, and PMI.

© Marcus & Millichap 2018 | www.MarcusMillichap.com

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar
Group, Inc.; Experian; National Association of Realtors; Moody’s Analytics; Real
Capital Analytics; RealPage, Inc.; TWR/Dodge Pipeline; U.S. Census Bureau
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain ac-
curate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the
accuracy or reliability of the information contained herein. Sales data includes transactions valued at $500,000 and greater unless
otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is
not intended to provide specific investment advice and should not be considered as investment advice.