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Maryland real estate market suffering due to budget threats

A number of groups are reporting that uncertainty about the federal budget has caused significant problems for Commercial real estate markets in Central Maryland and the greater Baltimore area. A large proportion of office tenants in the region are federal agencies or contractors, many of whom have held off on leasing new space in 2012's third quarter fear of potential spending cuts.

Three large real estate brokerages published reports explaining that sequestration caused by disagreements on Capitol Hill were primarily responsible for the slowdown of Commercial real estate markets in Maryland. Sequestration refers to the automatic federal spending cuts if President Obama and Congress are unable to reach a new budget agreement before January. Some economists have suggested that the scheduled end of the Bush-era tax cuts at the beginning of 2013 could also affect real estate markets.

Defense contractors would be particularly affected by sequestration, which would lower defense spending by around $500 billion over 10 years. As such, a number of contractors have been seeking short-term leases with termination rights in preparation for large-scale cuts.

Baltimore's Commercial real estate market has improved gradually since 2010, when it had an office vacancy rate of approximately 19 percent. Today, that rate has fallen to 15 percent, though that is still significantly worse than before the recession when the office vacancy rate was under 12 percent. However, experts are uncertain of the area's future. "There is still a dramatic improvement from where the metro area was three years ago. The bad, but not horrible, news is that it is hard to get a handle on where we are going," explained one brokerage's managing director.

Another expert noted that some signs point to a partial recovery in the metro Baltimore area, but added that "full recovery in this market is not expected to gain much momentum in the last quarter . . . causing many officer users to delay their real-estate decisions until after the election."

Source: Baltimore Sun, "Federal cuts dampen Baltimore's Commercial real estate market," Steve Killar, Oct. 8, 2012

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