Key takeaways from MacKenzie Companies-sponsored “The Way Forward” Seminar

The greater Baltimore-area commercial real estate market has hit the bottom, but conditions are expected to start improving later this year. That was the overarching conclusion of the MacKenzie Companies-sponsored “The Way Forward” seminar, held recently at L’Hirondelle Club of Ruxton, and attended by more than 70 financial, development, legal, appraisal and assorted real estate professionals. Topics included the current interest rate environment, headwinds expected to be encountered in the year ahead, available capital sources, and the importance of adding value to assets. The discussion was led by John Black, President, MacKenzie Capital, LLC and Owen Rouse, Senior Vice President, MacKenzie Commercial Real Estate Services.

Key takeaways from the wide-ranging discussion included:

• Following an unprecedented rise in interest rates, the Federal Reserve dropped rates several times last year which put an end to the inverted yield curve which is expected to spur investment sales activity this year.
• Owners and investors with the ability to add value to an asset, as well as those that soundly understand the market and utilize data-driven analytics, will be rewarded in this environment.
• The Baltimore City commercial office market along the Pratt Street corridor is in trouble, with vacancy rates reaching 50 percent among the estimated 3.7 million square feet of space.
• Headwinds to watch include the recently-announced tariffs and tax policies, the labor/immigration situation, property valuations and still high construction costs

Additional message points included:

• Consumers continue to spend although they are becoming more creative in their spending habits as prices soar.
• Large corporations continue to enforce back-to-work policies including AT&T and Barclays demanding employees in the office five days each week. Other prominent companies, led by Apple, Starbucks Coffee and Uber are satisfied with a two-three-day commitment. It appears that the majority of Baltimore-area organizations have already convinced their workers to return.
• New construction starts in the commercial office sector have ground to a virtual standstill prompted in part by soaring construction costs, but also due to a soft leasing environment. The cost to build multifamily product have risen in well, a situation exacerbated by the plateau of rental rate increases.
• Following historical low transactional volume in the Baltimore MSA area in 2022, activity is slowly returning and reached the $3.1 billion mark last year.
• The market is currently in a post-COVID, post-presidential election, and post-rate stabilization period, with leasing and investment sales expected to tick up in 2025.
• Promising signs suggest the region is on the upswing, although the state of the commercial office segment remains concerning, especially in parts of the City.
• The retail real estate asset class continues to remain strong among investor groups, especially those with grocery store anchors.
• Among the most prolific assets classes is Industrial Outdoor Space, which is a fenced-in site as small as one to two-acres.
• 2025 is expected to see an increase in capital liquidity as interest rate volatility dissipates and terms improve for preferred equity, private debt, and other capital.
• The amount of sublease space on the market is expected to subside, office downsizing is projected to slow, and the quality of the location will increasingly play the major role in real estate decisions.
• Low interest rate loans will continue to come due and owners will need to be increasingly creative in dealing with the new rate structure. Many owners will have to adjust to the new normal with respect to interest rates and proceeds. There will be an emphasis on recapitalization and resizing.

“The real estate loans that are maturing in 2025, 2026 and 2027 were made in pre-2023 and were all in the 3 and 4 percent range as compared to the current 6 to 6 and one-half scenario,” Black said. “Expect to see capitulation in the capital stack. We continue to face rapidly-changing conditions with borrowers and capital providers.”

“Owners and investors of commercial office buildings should continue to evaluate new disposition or reposition strategies,” Rouse said, “especially older and smaller assets with stubborn vacancy levels, aging HVAC systems or physical improvements on the horizon. Holding onto an asset for too long in a declining market can turn owners in check writers.”

The MacKenzie Companies operates five separate full-service divisions addressing all real estate asset classes including MacKenzie Commercial Real Estate Services, MacKenzie Contracting Company, MacKenzie Capital, MacKenzie Investment Group, and MacKenzie Management. For additional information, visit www.mackenziecommercial.com