Baltimore’s a Case Study for Multifamily Stability

Features| Paul Bubny In contrast to some of the Sunbelt cities that have weathered sharp declines in rent growth, the Baltimore metro multifamily market has been steadier in 2024. According to locally based Harbor Stone Advisors, which specializes in private client and middle market multifamily investment sales in Baltimore and the broader Mid-Atlantic region, the year has seen robust renter demand even as new supply has been elevated.

Rent growth in Baltimore is accelerating as a result, “and year-over-year rental gains align with the growth in its Mid-Atlantic counterparts like D.C., Richmond and Norfolk,” according to a blog posting on the Harbor Stone website. “The market is poised for continued recovery, with asking rents expected to rise steadily through 2025 and the next several years as the pace of new deliveries slows.”

We recently spoke with Harbor Stone president Justin Verner to gauge the current state of the local market and where he and his team see it going in the year ahead. Here’s what he told us:

Q: Have you seen construction of new apartments at an elevated level in the past couple of years? If so, has that had an effect on pricing in terms of sale prices and also rents for existing product?



A: Yes, more apartments have been getting delivered as of late. Those are coming out of the post-COVID boom, when rates were low and penciled with lower constructions costs. Those projects got going, the delivery has continued and remains somewhat elevated.

Having said that, we’ve seen a marked slowdown in new projects, Permitting is down about 60% compared to the average over the past eight years. And so we anticipate a pretty significant drop-off in deliveries in 2026 and 2027. Looking beyond 2025, what you’ll probably see happening is rent growth as a result of supply not coming online as it typically would. It should be an interesting phenomenon to watch.

In Baltimore City in particular, most of the deliveries have happened along the waterfront and in downtown Baltimore. Places like Canton, Brewers Hill, Fells Point Harbor and East Federal Hill have been a little more susceptible to elevated new supply. And there's been a lot of old office buildings repurposed to apartments in downtown Baltimore.

 

Q: At the same time, renter demand has been at an all-time high. What's driving this?

A: We've seen the average vacancy rate drop 80 basis points or so in 2024. It’s interesting that you have all this supply coming online, but you haven't seen the vacancy rate increase significantly. A lot of people say Baltimore has a high floor, in the sense that there are so many government jobs. They call it the "meds and eds effect.” There are so many government jobs, medical jobs and large universities, which will be a feeder to a lot of these apartment communities.

 

Q: In terms of recent sales closings, you and your team have been quite prolific. Are you seeing any sweet spots as far as investors are concerned?

A: 2021 and 2022 were two of the best years for multifamily investment sales the market's ever seen. In the back half of 2022, rates started to rise and things started to change. A lot of the business we had in 2022 was from the first half and people that had locked in rates and deals were continuing to close in the third quarter. But things started to get tough toward the end of ‘22, and ‘23 was the lowest multifamily investment sales activity in a decade or so. The reason for that was rapidly rising interest rates.

Toward the end of ‘23 and into ‘24, the bid/ask spread has narrowed a great deal. A lot of that is because we've been in this environment for over two years now and sellers are starting to get their heads around valuations. When rates go up that quickly, it's hard for an owner to accept that your property is worth 10 or 20% less than it was. Now you're starting to see a lot more deals transact and go under contract. Our business is tracking about 75% higher versus versus ‘23. So that's pretty indicative of what's going on again, with more realistic sellers and buyers having confidence that we're now in a falling rate environment.

In terms of the types of deals that have been trading, big value-add plays have been much easier to sell in the past couple of years than Class A product where all the rents are to market. And, you know, the reason for that is investors who are going to put a bunch of money into a property and may have gotten a bridge loan, some form of short-term debt. They’re not locking in permanent financing on day one, with the expectation that in a year or two when they refinance, rates will be lower. And sellers are often more realistic on properties that somebody will need to inject a lot of capital into as well. We have also seen debt assumption deals become much more prevalent.

In Baltimore, the middle market deals that we focus on have been more of a challenge to get sold than the pure value-add product. I'd also say that it's been easier to sell deals in the metro area outside of Baltimore City. You’re dealing with less bureaucracy and a lower tax rate. So there's been a focus from the investment community on suburban-type deals that are outside the city line. We've gotten more bids on those and those have tended to transact with a lot more buyer velocity when they come to market.

On the capital markets front in terms of financing, we've done some analysis internally on the deals that we’ve done and we saw a precipitous drop in buyers using agency financing over the past two years as rates have gone up significantly. And we've seen that with balance sheet lenders and regional banks, a lot of them have pulled out of the market. Some of them are certainly still lending, but nowhere near as many as a couple of years ago. So other folks have stepped in. We've seen a lot of life companies come in at lower leverage: 60%, 65% LTV. And we've seen a lot of bridge loans, hard money loans, debt assumptions, and also some people purchasing in cash.

In the 2021 to early ‘22 period, most people were looking to lock in permanent financing because rates were so low. And they were willing to make very aggressive offers on class-A product where there might not be as much value-add. The shift with rates certainly changed the landscape of the debt markets and caused investors to go look to other avenues. As rates have come down a little bit, we're seeing more investors look toward permanent agency financing, as they can borrow in the fives again, which is going to have a real impact on the market as a whole.

 

Q: The Fed has begun finally lowering the federal funds rate. Do you anticipate that this is going to have a real near-term impact on the cost of capital, or is this something that people have already priced in?

A: Over the long run, it most likely will if history repeats. Right now, it hasn't had a huge impact. I think it's going to take some more work on their front and the folks who trade Treasuries to start believing in what's happening.