Baltimore Multifamily 2017 Mid-Year Forecast
The past year has been very favorable to the Baltimore Metro multifamily market. Following a strong year of job growth in 2016, demand for workers remains steady in a number of sectors including healthcare, government and education.
This has been met with a substantial new apartment unit delivery schedule, mostly in downtown Baltimore. The Baltimore Metro area had a significant amount of development in 2016 with an additional 3,300 new apartment unit completions expected by the end of 2017. Construction will remain most concentrated in the central Downtown area of Baltimore City as builders capitalize on demand for residences that offer a live-work-play environment. Over the coming year, the number of development projects will continue to increase, with expected supply increases roughly unchanged. Despite the new supply hitting the market in 2017, steady job growth and pent-up housing demand from the millennial generation should sustain a healthy multifamily sector outlook.
Harbor Stone Advisors expects rental rates to hold steady with variations across area submarkets. Our forecasted multifamily vacancy rate is expected to reach 5.5% by end of 2017, up from 5.0% in 2016. Despite another year of sizable supply growth, healthy tenant demand will keep average monthly effective average rent up 2.9% to $1,320. This marks a slight decrease in average effective rent growth of 3.5% in 2016. We also predict the average price per unit of $130,000 in 2016 will remain steady although, will vary depending on asset class.
Additional Market Insights
- Job growth is expected to increase by 1.6% in 2017, down from 2.2% in 2016
- Occupancy is anticipated to average 94.5% in 2017
- Market will experience rents flattening until absorption of new product lowers supply.
- Multifamily investment sales transaction volume estimated to increase by 6.2% in 2017.
With an anticipated rise in interest rates, Baltimore multifamily property values could show a slight decline after a strong market over the past several years. Though rent growth is expected to continue next year, it won’t increase at the same level as the past several years.
For many owners and investors, moderate value-add deals will provide more yield than ground-up construction as labor costs continue to climb. Cap rate compression will continue this year for Class A multifamily as investors migrate from Washington, D.C., Philadelphia, and New York City to Baltimore in search of potentially higher returns. The volume of new Class A product is raising average effective rental rates in the Baltimore metro market. We expect Class B and C multifamily cap rates to edge up slightly between 6.1 - 8.2%. In Q1 2017, Harbor Stone Advisors sold The Professional Building at 330 N. Charles Street at a 6.4% cap rate, and 16 E. Biddle Street Apartments at 7.2% cap rate.
More than $1.46 billion worth of multifamily assets changed hands in 2016, marking a strong transaction volume. Although, we may see some widening between seller price and what buyers are willing to pay, transaction volume is expected to increase from 2016. Overall, Harbor Stone Advisors foresees the investor sentiment toward Baltimore multifamily for the remainder of 2017 to remain positive.
Sources: CoStar Group, Inc.; Real Capital Analytics, Baltimore Development Corporation, Axiometrics, IRR, Reis.