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Sunday, June 3, 2018

Oversaturation

 
It was bound to happen, I wrote warning posts, I wrote posts on how and where Developers should revert funds to keep this happening. That being said, here we are. The new construction market for Apartments in Baltimore is officially oversaturated. As the Market recovered from late 2000s recession, the market for Condos did not. This is why many proposed Condo projects switched to rental Apartments. And then a frenzy of luxury mid to high rise Apartments began popping up throughout the gentrified parts of Baltimore at a break neck pace.
The number of Apartments that have been completed or in the pipe line or proposed is staggering; Stadium Square, The Rotunda, McHenry Point, Harbor Point, Inner Harbor East, Wells St., the Pepsi Building, Canton Crossing, 414 Light St., Harborview, various buildings being re-purposed Downtown, multiple proposed high rises in Little Italy, Anthem House, Anthem House II, and Port Covington. When will it end? Also keep in mind I'm sure I've left out many other projects that didn't come to mind.
Although the number of Apartments is high, the rent is much higher and that is what concerns me. As rents go up, the number of people who can afford those rents goes down. How often do you happen by an Apartment Building under construction, see what the rent is and go "Who can afford to live here?" Especially since a lot of these new Apartment Buildings are targeted at Millennials, a generation entering an awful job market already saddled with Student Loan debts and are lucky to find a job that pays a living wage let alone the ability to afford $2,000 a month for an Apartment the size of a closet.
I have feared this oversaturation for a few years now and now, according to the Baltimore Business Journal, the median rents for Baltimore and Towson have gone down. When something like this occurs it means the supply outweighs the demand. In this instance, it means that it's been tough finding tenants for these Apartments. This makes sense since Baltimore's crime rate has been in the news ever since the unrest of April 2015. Additionally, the overall population has gone down by 6,700 Residents in the past year. These statistics don't bode well for builders of high end Apartments trying to fill units.

So now what? Well, the only way to make these new Apartments successful is to fill them. That might mean lowering the rent for projects that have begun construction. This might not mean lowering the amount of the rent check tenants have to write each month but it include free parking, free dry cleaning at a nearby location, free gym membership, or free utilities. These expenses all add up so having them taken care of by your landlord will make the high rents worth it. I don't think the actual rents will go down by much if at all since doing so would make investors think twice before pumping anymore into the Baltimore Market.
Now I'm sure you're wondering why investors should continue investing large amounts of money into a shrinking City with an already oversaturated Apartment Market? Well, the Baltimore real estate market is more than just high end Apartments in showcase Neighborhoods. It may surprise you to know that despite the population loss, there is a robust market in other parts of the City for new low to moderate income housing both for rent and for purchase. In this case, the supply and demand factor is the opposite of the high end Apartment Market; high demand low supply.
How do I know this? In the few instances in which affordable housing be it for rent or for purchase has gone up in struggling Neighborhoods, they're or sold at a record pace. If anything were to fall through with financing for buyers or renters, the developers have long wait lists they can fall back on. Now, does this mean I'm advocating for abandoning any and all high end Apartment projects being built in the City and focus solely? Not at all. However, I do think Developers are milking one segment of the market dry while ignoring another cash cow.
So imagine if you will, if Developers of the proposed additional high rises in Harborview, Canton Crossing, 300 E. Pratt, and Port Covington diverted those dollars into areas like Sandtown, Druid Heights, Upton, Park Heights, and Broadway East, I believe the population loss in Baltimore would
reverse and growth would occur as would the job market for Residents in those areas. Crime would go down, the tax base would go up, as would overall investments infrastructure and School Construction.
Now lets fast forward 10-15 years into the future. After all this investment in poorer Neighborhoods has been beneficial to the City and its crime rate, what do you think the demand will then be for higher end Apartments? If you said higher, you're right. As more vulnerable citizens are the focus of investment dollars be they public or private, everybody benefits, if the small percentage of people in the City who can afford these $2,000 are the focus of investment dollars, only they benefit in the short term, the rest of the City gets left behind, and we have the oversaturation we see today.

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