The 2008 Forecast: Cloudy, With Intermittent Sun

Compiled and Edited by Mark R. Smith, EDITOR-IN-CHIEF

Another new year is upon us and it begins with degrees of apprehension in various quarters. Sales in the residential housing market have slowed to a crawl, credit is tight, and home fuel and gas prices have shot up sharply in the last year, fueling rumbles about a possible national recession.
While that information has been tough to digest, there are other positive notes to consider, such as employment levels remaining steady. And even if the economy dips, the Corridor area enjoys what might be considered blanket protection due to the overwhelming presence of that ultimate corporate headquarters, the federal government - which will soon dump even more jobs into the region when the effects of the much anticipated Base Realignment and Closure (BRAC) start shifting.
To gain keener insight, The Business Monthly asked business and government leaders in the Corridor and the state for their thoughts about 2008:

Walt Townshend, president, Baltimore Washington Corridor Chamber
In a word, the first half of 2008 will be ... slow.
The White House Office of Economic Advisers is forecasting that the Gross Domestic Product (GDP) will grow by 2.7% next year, down from the earlier predictions of a 3.1% increase. The housing slump is being blamed for the lowered forecast. This downturn is expected to generate a higher unemployment rate, in the 4.9% to 5% range, but that is still considered relatively low by historical standards.
In 2007, the unemployment rate was at 4.6%, a six-year low. This compares to unemployment rates averaging through October of 2007 in the Corridor counties of Anne Arundel (3.3%); Howard (2.8%); Montgomery (2.9%); and Prince George's (4%). Economists cite a bright spot of the growth of the economies in developing countries (averaging 7.3% in 2006), particularly China (10.7%) and India (9.2%), pushing exports from the United States. It was the fourth year that their economies expanded. Fortunately, imports will not accelerate, so net exports will make a major contribution to the GDP.
Nationally and locally, energy costs continue to impact both residential and business users. The recent Public Service Commission Report to the Maryland General Assembly does not contain good news, indicating that "... unless steps are taken now, the state of Maryland faces a critical shortage of electricity capacity that could force mandatory usage restrictions, such as rolling blackouts, by 2011 or 2012."
We face this crisis because Maryland sits in a highly-congested portion of the regional electric transmission system (which makes it difficult to bring more power in) and because we use more electricity than is generated here. We can respond in two ways: We can add more capacity, either through new generation or transmission; or we can reduce the amount of electricity we use. At the end of the day, we will need to do
some of both.

Dick Story, CEO, Howard County Economic Development Authority
2007 was another banner year for economic development in Howard County and 2008 may be just as strong ... or not. That's because, while many parts of Howard County's economy continue to shine, the outlook on other sectors is not so bright.
The county has several factors working in its favor, including a dynamic leader in County Executive Ken Ulman, who fully understands the important role business plays here in Howard County. Add to the mix a top-ranked public school system, great public safety and a nationally-acclaimed quality of life and you can better understand why I am cautiously optimistic that Howard County' economic outlook for 2008 is solid.
While Howard County was not significantly affected by the sub-prime mortgage crisis, home building is off locally and most residential brokers are reporting slumping sales. It is certainly a buyers' market in this sector.
Commercial real estate is at an interesting juncture in Howard County. With 1.3 million square feet of new activity, an unprecedented amount of speculative office space is under construction. On the one hand, we will be flush with choices - companies looking to expand or relocate have a number of building and geographic options.
This inventory will place Howard County in a good competitive position in the regional marketplace. At the same time, developers may be required to carry the cost of this new space longer than anticipated and might even offer greater incentives to brokers and prospective tenants. In any event, our vacancy rate will be going up in 2008, as these new properties await tenants.
Currently, businesses in financial services, health care, and of course, government contracting, continue to be strong. New construction in the hospitality sector has been brisk and should not taper off in 2008. Several new hotels are planned and will be delivered during the next 18 months. New restaurants continue to come online and a number of national grocery chains will be starting/delivering new product during the year. So the overall outlook for Howard County's economy in 2008 is ... mostly sunny.

Linda Greene, executive director, BWI Business Partnership
2008 will likely be stronger for the BWI Business District than other locales, with the defense and intelligence activities and federal assets serving as stabilizers. Sen. Barbara Mikulski's "Team Maryland" congressional effort has secured strong federal investment to gird infrastructure as we brace for the impact of BRAC expansion and affiliated private sector growth.
The General Assembly special session will provide additional funds for transportation projects, notably MARC commuter rail. Three new evening trains have been announced, while transit-oriented development at the Savage and Odenton MARC stations is moving forward. At BWI Thurgood Marshall International Airport, 2007 passenger totals will exceed records set in 2006, but there is anxiety regarding fuel prices, possibly stifling the ability of airlines to add service.
The news on the hiring front from Manpower's recent Maryland quarterly survey of employers indicates that more than 85% are expect to maintain or increase hiring levels in early '08, while 13% foresee reductions or are unsure.
There is a flurry of construction or projects in the pipeline, including Arundel Preserve, with office, retail and residential near Arundel Mills; more of the same at Annapolis Junction Business Park, just west of Fort Meade; the third phase of National Business Park; and more industrial space coming online at Preston Gateway Corporate Park, also near Arundel Mills. Speaking of hotels, construction is underway on two more lodging establishments in the Corridor, with another five in the permitting process. On the health front, Lou Zagarino, a long-time veteran of the district and chairman of the partnership, noted that Baltimore Washington Medical Centers expansion of the new patient tower will be completed soon, adding, "Our long-term forecast is exciting, but we're cautiously optimistic about the next few years, as BRAC initiatives begin to be realized. There will be major steps forward, like groundbreaking for the Defense Information Systems Agency headquarters at Fort Meade."

Bob Burden, president/CEO, Annapolis and Anne Arundel County Chamber of Commerce
Anne Arundel County and Annapolis will enter 2008 well positioned for continued economic growth and opportunity. A significant factor underwriting the growth forecast is the considerable investment the federal government is making in the county with the BRAC consolidation. The investment will help the county and the broader region become more resilient to swings in the national economy that might have a greater national impact.
Annapolis and the county have recently seen considerable private investment in both commercial and residential development. Most notable were the completion of Park Place in Annapolis and the expansion of Westfield Annapolis Mall, the groundbreaking of Annapolis Town Center at Parole, the financial commitment to build Town Center Boulevard in Odenton and the expansion of BWI Thurgood Marshall Airport. The magnitude of these investments is a barometer of the opportunities on the horizon seen by investors.
While the optimistic local outlook has merit, there are some challenges also on the horizon, which both the private and public sectors need to be vigilant in addressing.
Foremost is the shortage of affordable housing in Anne Arundel County. If the county is to fully benefit from the BRAC initiative and other private investments made during the past few years, then it must have the ability to house an expanded, educated and diversified workforce.
A second concern is the apparent inclination of Anne Arundel County government to place an increasing share of the tax and fee burden on the business sector in an effort to meet citizen demands for public services. At present, only 17% of the assessable tax base in Anne Arundel County is attributable to the commercial sector. Added to this concern is the state government's recent inclusion of a tax on the technology sector of our economy. Such a tax on an important and emerging industry for the state does not make sense and lacks an understanding of the future economic engine that will drive Maryland's financial success.
A third source of apprehension as we look toward 2008 is the tightening of credit available to businesses and citizens throughout our nation, with talk of a possible recession on the horizon.

Small Business

Stephen Umberger, district director, Baltimore District Office, U.S. Small Business Administration
Small business is truly the engine that drives the economy in Maryland, representing more than 99.5% of all state businesses. In the coming year, the small business climate will be steady; but not vibrant. This is due, in large part, to the pending increases in corporate income tax, sales tax and technology service industries. The slowing national economy will also impact local businesses as corporate budgets and personal disposable incomes shrink.
But today's small business owner has greater access to capital. Financing programs are available at the federal, state and many local levels to start or grow a business. This opens the door for many individuals who may not be able to secure traditional bank financing. However, the Federal Reserve Bank has raised interest rates, making capital more expensive.
A lower rate and long-term repayment plan make the U.S. Small Business Administration's 504 Loan Guarantee Program an attractive option for entrepreneurs looking to make large equipment or real estate purchases.
A bright spot for Maryland entrepreneurs is the military's plan for BRAC. This is an excellent opportunity for small businesses in the Baltimore-Washington Corridor and Maryland's northernmost counties to market their products and services to these bases and to the households of military personnel. Workshops and seminars educating the public about BRAC are being held regularly by local economic development agencies, area chambers of commerce and the Maryland Small Business Development Center.
The world is becoming more global with each passing day. There is high demand for American goods and services and our dollar is a great value compared to other currencies. These factors combined with federal export assistance and financing programs, making exporting a viable option for small business owners.


Technology

Steve Walker, president, Steve Walker Ventures
We live in a region where technology is a vital part of our daily lives, whether we work for the government, industry or academia, or whether we develop technology or just use it. It's a place that has amazing potential for advancing technology.
But so far, we're lacking the critical ingredient that will make our technology blossom.
Imagine for a moment (because it's all true) that we lived in the richest state in the nation, that our region had more than 80 federal agencies and laboratories conducting more basic and applied federal research and development, with more technology transfer opportunities, than anywhere else on earth. Then add that ...
... more than 300 institutes and centers of research and development are in Maryland's public and private universities, with more tech transfer opportunities, the leading investor in early stage technologies in the U.S. for the past four years and state funding for 180-plus early stage companies with investments of more than $45 million.
But that's not all. So add 17 incubators working with hundreds of early stage companies, a history of angel investing by individuals and groups, and the largest professional science and engineering workforce in the nation. Got all that?
But despite all of these high points, our greatest obstacle to becoming an advanced technology powerhouse is the lack of follow-on funding for our successful early stage companies.
If only we had six or eight or more active regional angel investing groups - organized by counties, universities, industries, tech councils and friends - acting independently and in concert with other angel groups, preferably, each with access to the due diligence on companies funded by the Maryland Technology Development Corp. (TEDCO), the Department of Business & Economic Development (DBED) and our incubators, plus tech transfer results from our federal labs and universities.
That's what we need.
There is nothing more effective that we can do to improve this region's innovative and entrepreneurial spirit than to organize our incredible angel investing resources. The best thing the business community can do is join in. Talk with friends and associates about starting an angel group. Being an angel investor is easier than you think and it's a lot of fun.

Commercial Real Estate

Owen Rouse, partner, Manekin LLC
Activity should begin to pick up during the first quarter of the year as defense and security segments unfold their 2008 plans that were forged last year. But this potential uptake of space may be mitigated by the firming of the current pipeline of proposed office developments that are planned to come online for the 2008/09 timeframe.
Look for continued interest in traditional locations, with good choices usually taking precedence over price points for tenants. Current landlords are sturdy financially, so fire sale leasing rates will not surface. Certain projects will telegraph the overall health of the market, such as the mega center at routes 32 and 1 and Trammell Crow's spec office building in Columbia Gateway Corporate Park.
Good real estate located 40 miles from the capital of the free world behaves differently (meaning in a less volatile fashion) than in the rest of the country.
In the industrial sector, rents will be increasing with slower delivery of new product, as available land constraints become the dominant driver in market activity. The weaker dollar will continue to strengthen the American export market with a six to nine month lag time. This will ultimately be felt in the industrial bulk distribution sector. Look for the northern bulk markets to firm and stair stepping rental rates in the Corridor. Again, good real estate located 40 miles from the capital of the free world behaves differently than in the rest of the country.
There will be no new flex west of I-95. Land prices have eclipsed the financial viability of new flex west of the interstate, which will put upward pressure on rental rates. Look for older flex to drift towards quasi-retail uses as traditional retail locations have priced themselves out of the reach of this class of retailer. The question now will be: Will older, low-clear industrial in the heart of the Corridor be redeveloped as a new class of flex?

Residential Real Estate

Carole Maclure, president, Maryland Association of Realtors (with Sage Policy Group)
Economic activity in Maryland has generally been improving, with the notable exception of the local housing market. During the past 12 months, 36,200 jobs have been added.
Though the state's economy is likely to slow in conjunction with the nation's numbers in 2008, labor demand remains strong, and it is likely that the state's unemployment rate will remain well below 5%. Personal income growth has actually been accelerating in Maryland during the past three quarters and the state already boasts the nation's highest median household incomes.
Unit sales in Maryland were off 33.4% in November 2007 compared with the same month in 2006. In Anne Arundel County, unit sales declined by 41.9% in that time period. Howard County also posted a decline of 26.8%. However, there is evidence of market stabilization in certain jurisdictions. Falling sales are to be expected at this point in the housing cycle and should be viewed as a natural aspect of the ongoing housing correction.
Despite the decrease in activity, the average home price in Maryland in November 2007 was $346,513, down just 2.1% from $353,801 in November 2006. There were jurisdictions that reported average sales price gains, which included Anne Arundel County. In Howard County, there was a 6.3% decrease in average sales price.
Though measures of core inflation remain more benign, surging energy, food, health and transportation prices will make it difficult for the Federal Reserve to cut rates aggressively from current levels. The implication is that 2008 likely will represent a transitional year in the housing cycle, as sales volume remains muted and the market awaits more vigorous activity in 2009 and beyond.

Banking/Financial

Robert Wasilewski, investment advisor Baltimore-Washington Financial Advisors
In our view, the economy has a better than one in three chance of going into a recession in 2008. We are focused on the Federal Reserve's actions on interest rates and the U.S. Treasury plan to rescue distressed homeowners.
The Federal Reserve has brought short-term interest rates down sharply from their recent peak of 5.25% and is expected to continue lowering rates until credit crunch pressures subside. Its hands are tied somewhat in this endeavor by a recent pickup in the inflation rate. The U.S. Treasury plan presented by Treasury Secretary Henry Paulson to freeze teaser rates and broaden refinancing opportunities should be beneficial assuming the investment community buys in.
At this point that is not a given, as the investment community holds securities backed by the problem mortgages. Both of these policies are intended to alleviate the scary situation of millions of mortgages resetting at higher rates in 2008 that homeowners can't afford. If a recession occurs, we expect that it will be short-lived and mild to the extent that the policies of the Fed and U.S. Treasury work.
Away from the sub-prime meltdown there are actually some positives. The global economy is expected to show decent growth in 2008 and the U.S. economy is expected to participate accordingly. The dollar appears to be stabilizing and energy prices are backing off a bit as well. Although corporate profits will soften somewhat over the first half of 2008, they should be picking up near year-end.
Columbia will continue to benefit from its exceptional location, business mix and low unemployment rate. It will, however, likely continue to see bigger home price declines than the national average and an overall stagnant real estate market for most of the year.
The magnitude of the home price declines in the county are due to the huge run-ups prior to 2006. BRAC is icing on the cake, bolstering economic activity as businesses increase capacity in anticipation of the influx of customers. An overriding factor for our area will continue to be a shortage of skilled workers. We continue to monitor the area's commercial real estate situation for signs of overbuilding.

Transportation

John Porcari, Secretary, Maryland Department of Transportation
Maryland will see progress during 2008 in the area of transportation as a result of Gov. Martin O'Malley's successful 2007 initiative to increase transportation funding. Additional state dollars will become available, allowing us to invest in our rail and road infrastructure, as well as BWI Thurgood Marshall Airport and the Port of Baltimore.
Our first priority will be to preserve the world-class system we already have followed by investment in new projects to address needs around the state. Enhancing Maryland's transit network will continue to be an area of emphasis for the O'Malley Administration.
In February, additional MARC service will begin on the Penn Line operating between Washington and Baltimore. Three additional trains, made possible by Gov. O'Malley's 2007 funding package, will be added to the weekday service. This will help alleviate overcrowding during the afternoon rush hour and provide additional late night service, particularly for BWI passengers destined for either Washington or Baltimore.
Major progress also is expected on the Savage MARC transit-oriented development project. A master development agreement will be presented to the Board of Public Works in early 2008. If approved, construction could begin in fall 2008 on the $200 million project that will include a quality mix of retail, office, hotel and residential space.
This year, mainline construction will begin on the Inter-County Connector that will eventually link the I-95 corridor and the I-270 corridor. We also remain focused on moving forward with improvements to the Baltimore-Washington Parkway, Route 175 and other key roads in the region. Addressing BRAC will be an important part of our overall strategy.
The State Highway Administration will conduct a study of intersections in the area around Fort Meade as we implement a high-low approach toward meeting BRAC needs. High projects are more expensive, longer-term improvements that will take time to build. Low projects will involve things that can be done to address needs in the near-term, like intersection improvements and more commuter bus service.

Education

Dr. Nancy Grasmick, superintendent of schools, Maryland State Department of Education
Maryland's K-12 public education system is the foundation upon which our state's economy is based. Thanks to the General Assembly's continued commitment to the students through support of the Bridge to Excellence funding plan, which brings additional revenue to every system in the state, the outlook for schools may well be the brightest it has ever been.
Achievement, as measured by standardized assessments, has improved for four straight years in each of the state's 24 school systems. Gains have been particularly gratifying among minority students and those receiving special services, such as special education. Improvement has been particularly noteworthy in both Howard and Anne Arundel counties, where test scores and graduation rates rank among the state's best.
The state's scores jumped across-the-board on the recent National Assessment of Educational Progress (NAEP), with gains outpacing national averages in every category. Maryland also leads the nation in growth in the number of students taking the rigorous Advanced Placement Exams and in the improvement of their scores. Much of the growth in achievement can be attributed to better qualified teachers. Anne Arundel and Howard counties have brought in some of the nation's best educators to work in their classrooms.
Education's role in strengthening Maryland's burgeoning technology and aerospace industries, as well as its importance in the BRAC process cannot be understated. We have launched science, technology, engineering and mathematics academies in systems across the state to help develop the next generation of technology literate students.
In addition, we have made particular investments in the counties affected by BRAC, including Anne Arundel and Howard counties, to make certain those localities can provide for the new influx of students and the needs of the military and related businesses. More than $2.5 million federal dollars flowed to Anne Arundel and Howard counties for that purpose in fiscal 2006 alone and more attention will be paid in the future.

Elder Health/Aging

John Parrish, executive director, The Erickson Foundation
Among the many challenges that more and more elders living in Maryland are likely to face during 2008 and beyond is the already broad, and still widening, gap in affordable housing, health and social services available to them. This is being driven, in part, by their limited income level and by other related considerations, like the increasing cost of mortgages or rent, food, utilities and fuel for transportation, just to mention a few.
There's a large, growing segment of older adults here who aren't poor enough to qualify for Medicaid and other public benefits, yet who cannot afford to pay out of their own pockets for options such as institutionally-provided long-term care at an assisted living or skilled nursing facility.
Unfortunately, more and more cannot afford the cost of private long-term care insurance, and have no (or limited) Medigap insurance coverage provided through traditional pensions or other employer-supported benefits. That is because many health care expenditures that are not fully covered by Medicare arise later in life.
More and more folks need access to home- and community-based services that provide high quality, more affordable alternatives to placement in long-term care institutions that generate high costs for themselves and their fellow taxpayers. There is also an increasing need to enhance the coordination of professionally-provided services, and the further preparation and integration of informal caregivers into formal health and social services delivery systems.
It may be true that the percentage of older persons living with chronic illness/disability has declined slightly during recent years. This encouraging trend is tempered by the fact that the absolute number of older persons living with such illness/disability is on the incline, nonetheless, given the ongoing surge in the number of elders.
With entitlement programs such as Medicare, Medicaid and Social Security already stretched (and more tension on the way), we urgently need to invest in higher quality, lower cost home- and community-based services that are increasingly coordinated on behalf of all Marylanders as they age.

Health

Marty Wasserman, executive director, MedChi/The Maryland State Medical Society
This year will be a planning and development year from the physician perspective. Just as 2007 concluded, the contentious dispute between the doctor's malpractice insurance company and the new insurance commissioner was resolved, with both sides claiming victory.
The physicians will benefit by not having to pay more money for liability insurance in 2008, but those costs remain exorbitant. Obstetricians pay nearly $110,000 [annually] for their coverage, an amount that is 50% of the total reimbursements they receive in "global obstetrical fees," according to spokespersons from Capital Women's Care, the largest obstetrical group in Maryland.
The malpractice subsidy legislation, passed in 2005, will sunset this year. But there is little likelihood of major improvements in that arena - although efforts might be initiated.
What will gain traction is the report required by the Governor's Task Force on Health Care Access & Reimbursement. The report is due in June and charged with reviewing a number of topics related to helping assure that the environment between insurers and providers is not eroding quality, access and safety of medical care for Maryland patients.
It could (and should) have a major impact on recognition and resolution of the problems unique to Maryland because of the monopoly-like practices of the insurance companies - only two control close to 90% of the market and take unfair advantage of the physicians in their networks.
In the immediate future, the Physician Workforce Study, performed jointly by the Maryland Hospital Association and MedChi, will be released on Jan. 7. This study will review current availability of physicians in the five health planning regions (Capital, Central, Eastern, Southern and Western) and will review 35 medical specialties.
In addition, because the hospital medical directors throughout the state were consulted, there are additional alternative scenarios based on these qualitative observations which make this study unique.
Political fireworks are not anticipated this year, but Maryland physicians continue to be concerned about the environment in which they practice. This is particularly true of physicians in the "safety net" specialties of primary care, emergency medicine, general surgery and obstetrics.
It will be worth following the three areas of liability insurance, reimbursement and workforce availability throughout 2008 to observe how well physicians are being treated in the wealthiest state in the country.

Nonprofit

Peter Berns, executive director, Maryland Association of Nonprofit Organizations
In 2008 and beyond, Maryland's nonprofit organizations will face an increasingly competitive and complex environment. The number of nonprofits will continue to grow at a fast pace and employment growth in the nonprofit sector will outpace for-profit employment growth, as it has for more than 15 years.
However, newer and smaller nonprofits will find it increasingly difficult to succeed, with growth more likely to come from medium-sized and larger, more established organizations. Government funding, a major revenue source for many nonprofits, will be extremely tight as local, state and federal governments grapple with substantial budget deficits.
In response, many nonprofits will move aggressively to increase earned revenue and to ramp up fundraising for charitable support, leading to greater competition for all. The economic downturn, precipitated by the mortgage crisis, may have a delayed effect on nonprofits' income, but an immediate impact on the demand for a wide range of social services.
A major shift in the leadership of the nonprofit sector will also continue to escalate. Expect many long-time executive directors, members of the baby-boom generation, to move on. To succeed, individual nonprofits will need to distinguish themselves from the masses based on performance and accountability.
Clearly, the days of saying "we're nice people and we do good things" are over. Nonprofits increasingly will be called on to demonstrate that they are worthy of the public's trust and that they are actually making a difference.
And statistics alone will not suffice. Nonprofits will need to match quantitative data demonstrating their success with compelling, real-life stories illustrating the impact of their work.
Watch for more nonprofits to invest in building their own capacity. Organizations that join membership organizations are much more likely to grow and less likely to go out of business, suggesting that even small investments in organizational development can make a difference in sustainability and success.