Baltimore Apartment Market Update Q2 2011

Baltimore Apartment Market Update Q2 2011- By Justin Verner; Sperrry Van Ness|RealSite Commercial Group

Local Demographic Factors - In our Q1 report we looked at local economic and employment trends. Let’s now focus on how those factors are affecting the Baltimore Metro area’s demographic outlook.

 

The local job market is moderately stong and is drawing people into the metro area. Baltimore, like many Northeast metros, has seen population growth lag behind US averages for the last 20 yrs. That phenomenon began to shift in 2009 with positive in-migration. Population growth of 1% over the past year ending in November is continued proof of the trend moving forward. Near term population growth is set to continue through 2015 with the steady influx of defense related jobs, but should begin to slow after that.

Baltimore will see a movement in demographics towards the young adult age group (20-34 yrs old) in the next five years. The 6.3% expected growth of the young adult sector is particularly important to the apartment market as the majority of this group are renters. The metro area also boasts above average education levels (35% above 25 yrs of age have a Bachelors Degree) along with higher than average median household income.

 Sources: PPR, Moody’s Analytics

 
Rent Growth – In many ways rental trends can give us more of a feel for the market than occupancy levels. Even in a down market, it is possible to see occupancy rates staying relatively flat, albeit with lower average rents.

 

The Baltimore metro area’s rent recovery is clearly underway and will look to continue in the coming years. Average rents moved up 6.2% for the year ending Dec 2010, near the top of 54 metros measured by PPR. Concessions as a percentage of rent peaked in Feb 2009 at 5.1% and had dropped to 2.3% at year-end 2010, according to Axiometrics. Nearly half of the apartments were offering concessions in Feb 2009 and that figure had decreased to 29% as of Dec 2010. Average annual rent growth of 3.5% is expected from 2011-2015, well ahead of the projected national average of 2.8% during that same period.

The aforementioned positive rental indicators can be attributed to the region’s better than average job market and population growth. With those, landlords have been given solid rental demand and able to hold pricing power while driving down vacancies. 

Sources: PPR, Axiometrics

Pricing Trends – Institutional Grade Class A Apartment properties in top markets have seen an increase in price per unit and decrease in cap rates through Q1 2011. The recovery has seen capital flow to the larger and more liquid markets (NYC, LA, DC, CHI, BOS) and at times even creating bidding wars. The most recent large apartment sale in Baltimore was the Munsey Building on 7 N Calvert. The 146 unit property traded for $13.8M or $94,178/unit and was a debtor controlled sale.

 

Apartments in the sub $5M range offer an advantage in that they are below the level that much of the institutional money will invest in, thus eliminating some competition. In contrast to their larger counterparts, sub $5M apartment deals are still seeing a small increase in cap rates and slighty lower price per units. Locally we are finding a majority of apartment sales in the sub $2.5M value-add category. Those transactions are in buildings that need upgrading, but are in very desirable rental areas. Typical cap rates for these value-add deals are 10% and above.

Sources: Real Capital Analytics- Chart Seen Below is National Avg Cap Rate