The Current State: Market Realities and Disconnects
Downtown Baltimore’s commercial real estate market is currently facing a curious gap between buyer and seller expectations. Buyers are often unwilling to hit the asking prices set by sellers, a hesitation that many attribute to lending conditions. When lenders determine the viability of a loan, they assess the risk and long-term return of the property in question. As a result, current prices often don’t align with what lenders are willing to approve, leading to fewer transactions and sluggish market activity. This discrepancy is not unique to Baltimore—it’s indicative of a broader trend in the commercial real estate industry across the United States.
In some segments, notably retail, the demand remains high, and lenders appear more willing to finance deals, though sellers are often reluctant to part with valuable assets. The limited willingness to sell retail properties contrasts with weaker activity in the office sector, creating a market with selective growth.
Buyer and Seller Dynamics: What’s Holding Deals Back?
A fundamental barrier to property transactions is the rationale behind pricing. Sellers look to maximize their returns, setting high asking prices even in a cautious market. Buyers are increasingly conscious of borrowing conditions and are unwilling to stretch. This tension has left many potential buyers and sellers at an impasse, with both sides waiting for shifts in market conditions. Moreover, some market participants use external factors, such as impending elections or anticipated changes in Federal Reserve policy, as reasons to delay their buying or selling decisions.
A growing number of banks, influenced by regulatory pressures, are also reluctant to issue loans for certain property types, especially office buildings. This regulatory caution adds another layer of complexity to Baltimore’s commercial real estate market, which is already facing pressure to adapt to shifting demand patterns.
The Role of Lenders in Market Dynamics
As the Baltimore Business Journal (BBJ) recently reported (linked here), much of the market’s health rests on the willingness of lenders to finance commercial real estate transactions. However, due to increased pressure from banking regulators, many lenders are cautious about approving loans, particularly for office buildings. Though there is a general consensus that transaction activity will eventually rebound, a misalignment between buyers’ and sellers’ pricing expectations continues to stall office building sales.
Other property types, such as retail, industrial, and multifamily/residential, still attract considerable interest, as investors see more potential for growth and stable returns. This discrepancy suggests that Baltimore’s market reflects a sectoral split, where office properties lag, but demand for other types of properties remains strong.
Impacts of the Work-From-Home Shift
So why exactly are office properties not selling? While the initial economic impacts of the COVID-19 pandemic are receding, the shift to remote work has had a lasting effect on the commercial real estate landscape. Many businesses in Baltimore are now opting for hybrid work models, creating less demand for physical office space. Consequently, large office buildings now have limited market appeal unless they can be adapted to new uses.
However, converting office spaces into other property types—such as mixed-use buildings with retail, residential, or entertainment components—also presents significant challenges. Floor plates, elevator location, parking, window lines, ceiling height and width of hallways are just a few of the challenges. Only a small portion of office structures are viable for adaptive reuse, especially given the architectural constraints and costs associated with transforming office properties.
Navigating Sector-Specific Trends: Opportunities Beyond Office Spaces
Despite the challenges in the office sector, other property types are performing well. The demand for retail properties, bolstered by the rise in e-commerce and a shift toward convenient consumer services, is driving investment in strategically located retail spaces. Investors view retail properties, particularly those in high-traffic areas, as a stable and high-return investment option.
Although there has been a heavy reduction in new industrial construction, the demand for existing industrial properties also remains robust, as supply chain dynamics and logistics requirements favor these assets. The multifamily residential sector also continues to attract investment.
Investors are also eyeing data center and industrial outdoor storage facilities as niche but high-potential opportunities. These sectors, while specialized and highly competitive, represent an avenue for diversification that appeals to investors looking to capitalize on the region’s infrastructure and strategic location.
Black Swan Events and Market Stability
The commercial real estate market is inherently vulnerable to unforeseen disruptions, or “black swan” events, such as economic recessions, regulatory changes, or shifts in international trade policies. While no one can predict these events with certainty, recent history has highlighted the importance of resilient investment strategies that can accommodate unexpected changes. The aftershocks of the COVID-19 pandemic (specifically the shift in work culture) serve as a reminder that Baltimore’s commercial real estate market must be agile in the face of new challenges.
The long-term effects of these shifts will depend on how quickly the market adapts. While Baltimore’s commercial real estate market is grappling with structural changes, these dynamics also present opportunities for rethinking investment strategies to focus on assets that can withstand and even benefit from shifting demand patterns.
The Path Forward: What to Expect
As we look ahead, Baltimore’s commercial real estate market is likely to experience incremental shifts rather than dramatic changes. While the office sector may take time to stabilize, robust interest in retail, industrial, and residential properties suggests that the market will gradually recalibrate.
For investors, identifying properties with stable, long-term appeal will be crucial. The market’s future will largely depend on finding equilibrium between buyer and seller expectations and navigating regulatory pressures that influence lending practices. Patience will be essential, as both parties adjust to realistic valuations and lenders continue to play a decisive role in facilitating or withholding financing.
About Trout Daniel & Associates
Trout Daniel & Associates is a full-service commercial real estate brokerage serving investors and businesses throughout the mid-Atlantic and beyond. The firm takes a highly-customizable approach to providing a full range of commercial real estate services, including brokerage, development, consulting and management to the retail, office, industrial, multi-family and investment market segments.
For more information call 410-435-4004 or visit www.troutdaniel.com.