Home Archived Articles The 2016 Forecast Increasing Sun, With Some Clouds

The 2016 Forecast Increasing Sun, With Some Clouds

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Despite its location next to the Nation’s Capital, despite its education level, despite its reputation as a high tech haven, Maryland hasn’t been listed among the states that have had an especially productive economy in recent years.

However, if last year’s news is an indication, the state’s economy is in the midst of an upward tick. Maryland started adding jobs at a rate that’s similar to that of the nation for the first time since The Business Monthly’s page one forecast in January 2015; despite some not always quite upward arrows on various charts during the past 12 months, recent jobs reports have been positive, even promising.

The even better news, for this publication and its readership, is that much of the news that was garnered from these positive reports has to do with what’s happening in the southern portion of the Baltimore Metropolitan Area, namely Howard and Anne Arundel counties.

Banking

Dan Schrider, president and CEO, Sandy Spring Bank

In 2016, Maryland banks will continue to be well-positioned to meet the loan demands of commercial and retail clients. During the past year, the lending activity among banks headquartered in Maryland has seen a 13.6% increase, compared to the national average of 1.9%. The business community in the region is expanding, with borrowers continuing to request loans for real estate and new equipment, as well as working capital lines of credit.

As most know by now, the Federal Reserve recently raised short-term interest rates for the first time since June 2006. While some consumers and businesses are still struggling, the rate increase is an indication that the economic recovery is taking hold. The fed funds rate impacts short-term rates that banks use to borrow from one another. However, the impact of this rate increase on consumer loans, for lines of credit, autos and mortgages, is likely to be modest. Banks will compete vigorously for client relationships, which will result in competitive terms and rates for borrowers.

While consolidation among banks through mergers and acquisitions is expected to continue, there are still more than 110 banks in the state, 59 of which are headquartered in central Maryland and serve retail consumers and businesses of all sizes. This is a great thing for our market, because it encourages financial institutions to offer competitive products, and it gives clients a diversity of choice when selecting an institution that will best meet their needs.

Yet while technology and mobile offerings gain momentum, there are still more than 1,600 retail branches across Maryland that provide valuable face-to-face interactions for clients who want in-person consultations with their bankers. Consumers should also expect to see modifications to the traditional branch structure and environment, as banks looks for ways to deliver a more consultative and innovative banking experience.

Commercial Real Estate Office

Karen Cherry, principal, Lee & Associates

Howard and Anne Arundel counties continue to be desirable locations for office tenants. The outlook for 2016 looks to be a continuation of much of what we saw in 2015. This is good news, considering that 2015 was a solid year for these two, among other submarkets.

In the Class A, amenity-rich submarkets, interest and demand will continue to be high. As was the trend in 2015, vacancy rates will tick downward throughout the year. As office tenants continue to re-evaluate how they utilize the space they lease, they are also placing more emphasis on the environment surrounding the office location. Employers want to attract, and retain, the highest-caliber employees by providing an efficiently laid-out work space located in an area where people want to work. Submarkets like Downtown Columbia and Maple Lawn have positioned themselves well to capture this new emergence of office user.

However, in the Class B product type and in submarkets, where amenities are not abundant, tenant demand will continue to be moderate. In order to redirect more of the activity to their particular building, owners will need to be savvy; submarkets with the vibrant amenities also bring a hefty rental rate and deals can be won by providing the low-cost alternative, or by creatively structuring an attractive package for the end user.

Investment opportunities will continue to be limited. We have seen office per-square-foot sales prices steadily increase, and they will continue to do so this year.

Industrial

James Caronna, principal, NAI KLNB

New warehouse and industrial building availabilities, ranging in size from 250,000 to more than one million square feet of space, continue to rise throughout the Baltimore-Washington, D.C., marketplace, fueled by the prolific e-commerce demand; that’s due to same-day delivery models, which are necessitated by retailers and other users that need access to the more than 6 million consumers in the immediate metropolitan region.

Construction starts remain active in Baltimore City and County, led by Duke Realty Corp., at Holabird; Chesapeake Real Estate Group, also at Holabird; and White Marsh and the re-development of the 3,100-acre Sparrows Point Terminal. Activity is also brisk in Howard County at the Baltimore-Washington Logistics Center, with the 160,000-square-foot lease for a new building housing G. Cefalu & Bro. Inc. and Capital Produce Co.

The new standard of e-commerce warehouse buildings specifies 32-foot clear ceiling heights, abundant employee parking and reinforced concrete flooring to handle the weight of sophisticated conveyor systems.

Another factor impacting warehouse activity and availability is the state of Maryland’s plan to award licenses to up to 15 companies to grow marijuana plants for use in medicinal applications, as well as an unspecified number of licenses for secondary uses, including the processing of oils. Functionally-obsolete warehouses with low ceiling heights and the bare minimum of loading docks and doors can fit this use, as the space is essentially transformed into an over-sized greenhouse.

This situation is creating a scramble among companies in search of suitable warehouse locations for growing and processing operations, although properties with institutional ownership are resistant to this type of operation, due to questions about long-term uses and the ability to finance these deals.

Flex

Dave Sciamarelli, senior real estate advisor, MacKenzie Commercial Real Estate Services

With a market position centroid to the fourth largest combined Metropolitan Statistical Area in the U.S., and an improving regional economy, continued steady demand paints a positive outlook for the flex market in Anne Arundel and Howard counties, at least for the first half of 2016. Though vacancy levels have steadily declined during the past four years, average asking rents have remained relatively flat throughout this period. If current demand holds, expect rents to increase slightly.

Small business growth, fueled by opportunity and access to major markets, close proximity to the Port of Baltimore and the ever-growing importance of global cybersecurity have acted as an employment driver, creating demand for flex product in these areas. Vacancies should continue to decrease in both counties’ primary pockets of interest — Fort Meade, National Business Park, Columbia and Annapolis. Areas such as the BWI Business District and the Route 1 Corridor also have performed well, due to air freight and interstate access, as well as from spillover from these surrounding pockets.

Both counties also have experienced increases in housing, driven in part by the multi-family sector created through transit-oriented developments; as this number increases, so will the need for area amenities. This demand has also had an effect on reducing flex vacancies, producing interest from quasi-retailers and other destination retailers requiring open space and high ceilings, at lower price points. These users tend to be less reliant on high visibility and the high traffic counts that are typically required by more generic retailers and include fitness, child care, entertainment and wholesale/showroom uses.

Retail

Owen Rouse, senior vice president, director, capital markets, Manekin LLC

Disruptors. Follow-ons. Copycats. These are just a few of the new ways the Internet is enticing us to rethink how we shop. Fortunately, we are in the third inning of a long game.

Mergers, acquisitions and outright displacements happen all the time in retailing. Remember Rustler and Ponderosa Steakhouses? Today, it’s Outback and Longhorn. Can’t grow fast enough? Merge. Just ask the folks at Men’s Warehouse and Jos. A Bank. Walgreens, CVS and Rite Aid: They’re now just Walgreens and CVS. Office Depot and Office Max? Merger pending. While the modern day retailer is not dead, it’s busy revamping its platforms. As online and mobile shopping grow, retailers are finding new ways to compete.

The point is that retailers are ruthless, and a brand will be killed off by its competitors or parent as soon as it begins to fade. Retailers will move a mile for a better location. Scaling up takes loads of capital, but if they miss the window, they’re toast.

For the consumer, look for new brick-and-mortar opportunities as landlords strive to fill vacancies from the retail dead. An Internet presence may be augmented by brick-and-mortar locations as e-retailers create additional brand identity and give customers a chance to touch their products. Some pop-up stores will become permanent as retailers strive to perfect omni-channel marketing, while stores are becoming fulfillment centers where customers pick up their goods. Some are trying to reward customer in-store visits by creating a better customer engagement strategy that integrates technology and service.

The upshot is that customers are the winners with new ways to shop, purchase and obtain goods. Brand loyalty will still resonate, but the choices can quickly become overwhelming.

Entrepreneurship

John Elstner, managing director, VenturePoint Partners

Many participants in Maryland’s entrepreneurial community agree that the lack of access to early-stage capital is the primary obstacle to the growth of Maryland entrepreneurship. But does the most recent data support those claims?

While still below its peak of 1999–2000, venture capital spending in Maryland is expressing a healthy upward trend. According to Money Tree, by PricewaterhouseCoopers, more than $290 million has been invested in 58 Maryland firms during the first three quarters of 2015, compared to a total of about $270 million for all of 2014; yet only $4 million of the 2015 year-to-date total was reported to be seed-stage funding, as opposed to $25 million in 2014.

Of course, the Money Tree report only reports the investments made by institutional investors and does not account for the other key components of early stage financing, including family and friends rounds, public and private research grants and angel investors. The sum of these other components is difficult to measure. What is clear is the sense that there are more viable startups than there is money to get them off the ground.

Luckily, there are three emerging developments that that should positively influence the growth of venture finance and entrepreneurship in our region in 2016.

First, the proposed SEC rules for equity crowd funding required by the Jumpstart our Small Businesses Act of 2012 will go into effect towards at the end of January. These potentially game-changing rules will allow small businesses to raise up to $1 million in equity financing through registered online crowdfunding platforms.

Second, there has been success around the nation in implementing angel investor tax credits to stimulate early-stage investment, and while the Maryland Delegation hasn’t yet acted to implement a common-sense measure to stimulate private investment in technology entrepreneurship beyond biomed, Del. Brooke Lierman’s 2015 proposal (HB 789) will enter its second year of discussion. Third, we are seeing a refreshing trend of collaboration among the state’s many ecosystem builders such as meetup groups, incubators and tech councils.

Finance

Phil Weiss, chief investment analyst, Baltimore Washington Financial Advisors

For much of the year’s first half, 2015 looked a lot like 2014, as returns were somewhat in line with long-term averages. However, as the year progressed, the Standard & Poor’s (S&P) 500’s performance became more uneven. On Aug. 24, the market tumbled, leading to the S&P’s first correction (a decline of 10% or more) in nearly four years. The market subsequently recovered from its lows, but it has yet to surpass its previous peak.

Looking forward to 2016, we are reminded that those who attempt to predict the markets for a living have about the same chance of being correct as we do of guessing a coin flip’s outcome. Forecasting what might drive returns is even harder. In 2015, the world was “awash in oil,” keeping earnings and revenue growth at bay. Considerable uncertainty about when the Fed would raise rates also weighed on the markets. Since we are not clairvoyant, our best guess involves looking at long-term performance: Historically, the S&P 500 rises about 80% of the time on an annual basis; it has delivered an average return of nearly 13% in the post-war era.

In the U.S., the Fed is expected to gradually increase rates in 2016; higher rates are a sign of economic strength. Historically, this combination of events has benefited the market. The biggest wild card appears to be whether or not prices will start to rise (inflation). There are also indications of wage growth, which could boost demand and push prices higher. Worries about Europe, Russia, oil price weakness and slowing growth in China — and the related potential implications on credit and currency markets — remain a concern.

Against this backdrop our 2016 forecast is up, not down, for the U.S. stock market. We think interest rates will move higher and market volatility will increase.

Health

Maura Rossman, health officer, Howard County Health Department

More Maryland residents have health insurance due to the Affordable Care Act, and as a result, health care spending has increased. In 2016, development of a more cost-effective delivery model will be needed to financially sustain the health care system. Changes will occur in how hospitals and medical providers are reimbursed and how they operate. Opportunities for communities to focus on population health management will drive the formation of new partnerships that leverage existing resources to improve the quality of health care services and patient satisfaction, and reduce overall costs.

The growth of Urgent Care Centers that provide 24/7 outpatient treatment will continue as an alternative to using emergency departments. The capacity for primary care providers to respond to the increased number and needs of patients will be stretched. Some physicians may choose to opt out of insurance networks and instead embrace direct primary care or concierge medicine.

Patients will be expected to take a more active role in their health by making behavioral changes that include better eating habits, getting sufficient exercise, refraining from tobacco use, drinking in moderation and obtaining preventative care. The use of technology, including electronic medical records, telemedicine, self-monitoring equipment and health apps, will make it easier for patients and doctors to receive and analyze individual health data in real-time.

Behavioral health issues will remain an increasing problem in 2016. Efforts to destigmatize mental health disorders, including depression and anxiety, will be needed to engage patients into care. Higher reimbursement rates and adequate provider networks will be critical to improving access to treatment. And opiate misuse and heroin related deaths will continue to impact Maryland. Expanded treatment and counseling services, targeted outreach to high-risk populations, such as incarcerated individuals, and prevention and education efforts for youth, will become important strategies to combat this issue.

The Legislature

Kathy Snyder, interim president and CEO, Maryland Chamber of Commerce

2016 should be the Year of Small Business. There are some signs of economic recovery for small employers, including the likelihood of continued low fuel prices throughout the next 12 months. Employment is increasing, interest rates remain somewhat stable, and Maryland is well positioned to become more nationally and globally competitive than ever.

But, with most businesses in Maryland having fewer than 20 employees, we need to be very careful about making public policy mandates. While well intentioned, some may have costly impacts on the small business community.

With the start of the Maryland General Assembly session, legislators will debate key issues impacting a small employer’s bottom line. One example is mandated paid sick leave. Larger firms usually have some type of paid time off or sick leave for its employees. Last year’s bill would have required all companies with nine or more employees to provide seven days of paid sick leave to be used at the worker’s discretion.

The Maryland Chamber of Commerce (MCC) and a coalition of other organizations successfully made the case that, at a cost of $728 per employee, this mandate could prove very costly to a small business who is already facing increased health care and other operational costs; when one person is unable to work in a small business, options may be limited on how quickly that work can be done. As costs increase, the small employer may have to reduce other workers’ hours or benefits. Such a policy does not help increase jobs for Marylanders. Rather, it hinders that opportunity.

The MCC and its Competitiveness Coalition have led discussions for the past three years about positive initiatives that could help small employers thrive in Maryland. Innovation, entrepreneurship and workforce education are policies which we have enthusiastically supported in the past. Mandated employee benefits do not.

Nonprofits

Beverly White-Seals, president & CEO, Community Foundation of Howard County

Realizing an improvement in the quality of life in any community requires a collaborative, multi-sector approach — the “three-legged stool” — where government, business and the nonprofit sector work together for the benefit of all.

When this stool is balanced, our community continues as a thriving place to live and work. Maintaining this balance, however, has seen significant challenges during the past decade, especially with recent federal and state budget cuts in a region so reliant upon government spending. In the shadow of these budget cuts and the push for lower taxes, population growth is continuing and our community is aging, resulting in an increased demand for human services. The offshoot of this is that the government leg is relying more and more on philanthropy for added support.

The Philanthropic Outlook for 2015/2016, prepared by the Indiana University Lilly Family School of Philanthropy, projects that although contributions from all sources of giving (individual, foundation, estates and corporations) are expected grow, annualized average rate of growth in total giving has still not reached pre-recession levels.

Personal income is directly related to how much individuals/households have at their disposal to give. Because of this linkage, projected increases in personal income is expected to positively influence total giving in 2016.

Businesses and corporations have increasingly leaned toward a market-driven approach to giving rather than needs-based giving by using philanthropy as a marketing tool to increase public goodwill. Although this marketing approach to giving may still result in significant charitable donations, it may not focus on the most significant unmet needs within a community.

We each need to do our part to make sure our three-legged stool stands balanced and strong to bear the weight of community needs.

Retail

Cailey Locklair Tolle, president, Maryland Retailers Association

The retail sector has, and will, continue to see major changes in the coming years. Wage and labor law modifications, online sales increases, rising shoplifting theft and technological advancements all mark major areas of concern for the industry.

Labor laws have been an increasing focus recently, layering on additional costs to businesses ranging from predictive scheduling to minimum wage increases and paid sick leave mandates or taxes. In reaction to these laws, retailers have had to cut employees or hours and remove benefits to try to keep their doors open. As many have noticed, there is a growing interest in automated checkout to help with these ballooning costs in addition to raising product costs.

Online shopping is impacting brick-and-mortar sales. According to research, 81% of shoppers conduct online research before buying, and 61% of customers review product ratings before making a purchase. However, many shoppers will avoid entering into an online transaction if they believe the return process is complicated, there is not free shipping or shipping is not fast enough; also, many have concerns about credit card fraud. This holiday season, estimates point to online shopping rising between 6–8%, marking the highest online sales ever, as retailers continue to add this component to their businesses and more web-based stores open.

Shoplifting theft continues to be a major issue for retailers, costing them more than $200 million a year in Maryland and more than $30 billion in the United States. Retail theft ranks at the top of the list for the fastest growing crimes, as it is most frequently a common source of income for organized crime operations.

Finally, technological advancements and issues are moving rapidly, giving retailers plenty to keep up with. In-store mobile tech advances, privacy concerns, product data, e-commerce, shipping, identity fraud and more are helping retailers transform business, but may cause issues, as well as new laws and regulations.

Small Business

Stephen Umberger, district director, Small Business Administration (SBA) Baltimore District Office

The SBA Baltimore District Office reported another fantastic year for small business lending during fiscal 2015, with 630 Maryland entrepreneurs receiving financing valued at more than $236 million. The numbers speak for themselves. Lenders are lending, but as expected, they favor the prepared. Lenders want to see a solid business plan, a well-thought out plan of action and repayment ability. We fully expect small businesses to continue to fare well with financing in the coming year.

We also expect the “shop small” trend to continue well beyond the holiday season and throughout 2016. While consumers are bombarded with promises of quick-click solutions and options, many are seeking the personalized service and unique products that come from neighborhood stores. Small businesses have the unique ability to cater to their customers and offer them a true “feel-good” shopping experience, versus an impersonal transaction. Never underestimate the power of word-of-mouth advertising and how far great customer service can carry your business.

While online sales can be impersonal, it’s a reality of our modern world that can’t be avoided. As such, small businesses need to balance their brick-and-mortar and online identities. They need to embrace technology by optimizing their online and mobile presence and by signing on to accept mobile payments such as Square, Apple Pay or Google Wallet. Technology also can be a key resource in the day-to-day management of the business, be it accounting, tracking inventories or forecasting sales.

Visit us online at www.sba.gov/md or call 410-962-6195 to learn more about how we can help you through our counseling, training and lending programs or government contracting assistance.

Technology

Tami Howie, executive director, Chesapeake Regional Tech Council

During the past year, a wealth of investments were made in the tech industry. Although companies stayed away from initial public offerings (fewer than 30 tech companies went public), many companies turned to the private sector to raise funds. In either event, record-setting investments were made. For example, Uber raised $2.5 billion and Spotify raised $525 million. In our region alone, Tenable Network Security, headquartered in Columbia, raised $250 million from private financing.

Whether through an IPO or private investors, the message is clear: Tech is a land of investment opportunity. Every business, whether in retail or real estate, is dependent on the innovations, and protections, that the tech industry provides. I believe 2016 will be a year of even greater investment in our industry — whether through IPOs or private investors.

The more capital raised, the better for the stability and growth of our industry. Also, the more opportunity for consulting, development, manufacturing and general tech support in our region.

As with all companies, tech companies need to invest in themselves today to benefit from next year’s capital investments. One way or another, the capital is coming. It is up to management to expand in business development, research and development, and personnel in support of these investments. We will see a significant growth of cybersecurity- and business technology-focused investments during 2016, and this focused capital will further increase the need for personnel (both in development, sales and tech support) in our region.

Again, the capital is coming. It is up to our region’s businesses to maximize these investment opportunities during 2016.

Transportation

Gerald Cichy, president, Strategic Transportation Solutions

2016 will see continued state, local and private sector efforts at improving and expanding the transportation network serving Howard County, the BWI Business District and Northern Anne Arundel County, as well as the Baltimore-Washington corridor.

Work is underway at finishing the widening of Route 29 in Howard County. Recent studies have looked at what additional transit services can help reduce congestion to Fort Meade, the National Security Agency, The National Business Park and Arundel Mills. Pairing improvements on Route 32 and Route 100 with HOV (High Occupancy Vehicle) or HOT (High Occupancy Toll) lanes continue to be an option under consideration to better accommodate east-west travel.

The study of the Baltimore-Washington Parkway demonstrated the engineering feasibility of widening the parkway while retaining “parkway characteristics” and ensuring adaptive environmental management. During the study, the National Park Service indicated that the Washington, D.C., portion of the Suitland Parkway had been transferred to the District of Columbia government. This could be an option with the Maryland portion of the BW Parkway, allowing the addition of HOV/bus/HOT lanes to help fund the widening.

The Maryland Transit Administration (MTA) continues to improve and add MARC Commuter Rail services in the corridor between Baltimore and Washington, on the Penn and Camden lines, along with weekend service on the Penn Line. MTA also provides local transit funding, and commuter bus service into Baltimore and Washington areas.

As reported, an exciting development in November 2015 was the U.S. Department of Transportation award of $27.8 million in Federal Railroad Administration funds to support efforts by private sector investors to bring a Maglev system to the U.S. Northeast region, starting with the Baltimore-Washington connection. The Northeast Maglev LLC (TNEM) has led the effort to bring the Japan Superconducting Magnetic Levitation (SC Maglev) system to the corridor.