Home Archived Articles The Business Monthly’s 2015 Forecast: Scattererd Clouds, Increasing Sun

The Business Monthly’s 2015 Forecast: Scattererd Clouds, Increasing Sun

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It’s good.

The economy, that is. It might not be all good, but that’s rarely the case, anyway. But, generally speaking, it’s good. And, as some members of the media have been saying of late, slowly getting better.

How’s that?

The Great Recession was over too long ago to make it a big factor in a 2015 economic forecast, but since (according to some observers) the economy still hasn’t returned to its youthful vigor of the pre-economic downturn days, some economists factor it in, anyway.

Be that as it may. However, since different sectors are influenced by different factors that result in different forecasts, we at The Business Monthly herein present the views of professionals in a variety of fields who offer their respective low-downs as we enter 2015.

Banking

Mary Ann Scully, president and CEO of Howard Bank

2015 should prove to be a year of change for the banking industry. The economy is expected to improve — albeit more lethargically and less evenly than those looking for a return to pre-2007 normalcy. In light of this expected improvement, banks will have to do more to prepare for an eventual interest rate rise.

Most economists do not expect the rise to occur until as late as early 2016, given the persistent and worrisome low inflation, as well as the new Federal Reserve Board chairman’s valid concern with wage deflation and inequality. But, the rates will rise, and banks that are now long in their investment portfolios may experience losses, as those very low rate long-term bonds decline in value, unless they restructure accordingly.

Commercial lenders will see continuing strong competition, which should keep rates for borrowers from rising as quickly as some other financial instruments. The industry complains about the weaker underwriting now occurring, with higher minimum Loan-to-Value ratio, lower or no debt service coverage covenants and reducing or missing guarantees.

But as often happens in the banking industry, someone will always stoop. Savvy experienced borrowers understand the trade-offs of both missing experience and relationship value in these weak underwriting situations, but weak and/or unsophisticated borrowers may be tempted. Even strong underwriters will counter with price to preserve principal, so declining net interest margins will loom for all but the best funders.

Those banks that stayed the course in residential mortgage lending will see more improvement in demand, which should lead to higher revenues if the cost structure has been appropriately right-sized. Banks should see another year of lower credit losses, which will help profits.

Finally, compliance costs will continue to be frustratingly high, and this, combined with shrinking margins and access to new capital for only the strongest, will probably generate continued income for the investment banker representing buyers and sellers in an ever-consolidating industry.

Commercial Real Estate

Flex

Richard Williamson, senior vice president-Leasing, St. John Properties

Our forecast for the 2015 flex markets in Anne Arundel and Howard counties is for stability and steady growth, with a bit more optimism than we had going into 2014 due to the recent slight uptick in activity. In both counties the vacancy rate for flex is below the average vacancy rate for total commercial space.

Anne Arundel County’s flex market is primarily centered around BWI Thurgood Marshall Airport and along the I-97 corridor. We have definitely seen an increase in activity in this submarket.

We anticipate continued stability along the I-97 Corridor, from Glen Burnie to Millersville to Annapolis. The Annapolis market has been steady and solid.

We are even more optimistic about the growth potential for Howard County in 2015. As D.C. and Baltimore grow ever- closer together, Howard County is definitely the place to be for many companies.

Although we are seeing a steady uptick in demand for flex space, right now there’s not enough demand to warrant new construction. The market has stabilized, but there is still some extra capacity, and developers are waiting for that to absorb. So, while we don’t foresee much construction on the horizon in 2015, we are very optimistic as we head into 2015.

Industrial

Matt Laraway, executive vice president/partner, Corridor Real Estate Group

Anne Arundel and Howard counties look to lead the Baltimore-Washington Corridor with continued strong performance through 2015. With tenant demand remaining steady and the available land inventory continuing to decrease, we anticipate the market fundamentals to continue to strengthen — that, on the heels of a strong 2014.

Class A rental rates have recovered from pre-recession lows and have reached some of their highest levels ever, as is evidenced by leasing activity with Liberty Property Trust in their speculative project on New Ridge Road in Hanover; and Prudential’s build-to-suit with Coca-Cola at Preston Gateway North, also in Hanover.

We will continue to see absorption in new construction around BWI Thurgood Marshall Airport and will see several developers breaking ground in 2015 on Class A warehouse projects in both counties, with pro forma rental rates in the $6.75 to $7.25 (triple net) range. These rates continue to set the high-water mark for warehouse rents in the Baltimore-Washington region.

While the tenant demand in Howard and Anne Arundel counties remains strong and the supply remains constrained, we predict that rental rates will continue to rise slightly through the balance of 2015. All of these strong market fundamentals continue to validate the market as a very desirable industrial market for the institutional investment community.

While the demand for assets is high and availability is low, we feel there will be continued cap rate compression, even further below what could be viewed as record lows, for core product in the submarket. There will continue to be significant capital pursuing opportunities in the submarket in 2015; however, it remains unclear how many opportunities will, in fact, be brought to market.

Office

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

Office owners should be afraid of commodity office space — that which lacks style and amenities, and is configured in such a way that any meaningful transformation is too costly (think small floor plates, obstructionist windows and slow elevators). Office tenants are constantly reducing their need for square footage and designing appropriate space, while increasing their need for special space; that includes meeting nooks, bench spaces that can be shared, and lighting and finish packages that appeal to the millennials that will occupy the spaces.

The risk of incurable functional obsolesce has never been higher. While locations such as Columbia Town Center continue to evolve and present opportunities that attract firms, office space needs to keep pace. That means owners need vision and capital if they want to be competitive.

The market for tenants is a barbell (see above). For the credit-thin occupier who is willing to settle for paint and carpet, there will be choices, which equates to some negotiating leverage; for the larger, credit-rich occupier that wants what it wants, rental rates are rising for well-located buildings owned by strong sponsors.

Competition for tenants will naturally increase at the top of the food chain, and there can be some negotiating leverage there, too. Interest rates are working in everyone’s favor, so hopefully the market-savvy owners are rushing to lock in low-rate debt during this part in the cycle.

From the redevelopment standpoint, while we’re not quite there yet, look for repurposing of good sites underneath obsolescent buildings that no amount of lipstick can improve. This may allow further retail development to creep into the landscape or an outright assemblage of site for a higher and better use.

Retail

Thomas Fidler, executive vice president/principal, MacKenzie Commercial Real Estate Services

The retail sector continues to sort through a vastly changing environment with consumer spending, explosion of food concepts, need for deep discounts, growing Internet sales and rising operating expenses.

In comparison to a national vacancy rate of 7.8%, the Anne Arundel and Howard county markets continue to experience healthy 4.4% and 5.1% vacancy rates, respectively. When that vacancy is further analyzed, the majority of the available inventory is product type that has most likely outlived its life as retail space or lacks the characteristics that most retailers require.

The discretionary spending levels of both Anne Arundel and Howard counties continue to be attractive to new retailers. Success stories, such as Waugh Chapel Town Center, The Mall in Columbia, Arundel Mills, Westfield Annapolis and Annapolis Towne Center, are strong examples of the product type that area residents prefer and support.

The proliferation of food users in the market is not a trend. With nearly 65% of all retail leasing in 2014 coming from food categories, both full-service, sit-down restaurants and quick-serve restaurants continue to dominate the landscape.

As consumers, we continue to struggle with time management, yet want quality food offerings. Our needs are being met by prepared, cooked meals at our area grocers; the healthy and quick offerings of various salad and wrap concepts; and rapid expansion of the yogurt industry to satisfy our sweet tooth.

However, the “pie” has not grown to support these numerous concepts; a brand’s piece of the pie just gets smaller. More competition does help with absorption of vacant space, but time will tell if these concepts have staying power.

The growth of Internet retailing continues to impact how retailers plan for store expansion, manage their current store portfolio and adapt in-store designs. Internet and the power to buy online will not diminish, as it has changed the way we as consumers have come to expect the satisfaction of convenience.

Entrepreneurship

Tanya Privé, co-founder/COO, Onevest

The enormous startup acquisitions that have materialized during the past couple of years have certainly subscribed to the escalating appetite for startup investing. With the latest wins, like WhatsApp being obtained for $19 billion by Facebook, Tumblr being acquired by Yahoo! for more than $1 billion, the Israeli navigation startup Waze that Google Maps acquired for more than $950 million and Nest Labs (which had no significant revenue and only two products), acquired by Google for more than $3 billion, it’s no surprise that investors, and fairly so, are intrigued.

According to the SBA, approximately 543,000 new businesses get started each month. Data collected from the last 15 years shows that entrepreneurship is now at its highest level, in terms of the number of businesses that are launched annually.

In support of a growing entrepreneurial spirit — and thanks to certain legislation passed through Congress in 2012, the Jump Start Our Business Act (or JOBS Act), intended to help funding of small businesses — various investment platforms make it accessible and easy to financially support startups.

Individuals who invest in startups provide capital to early-stage companies, which helps them develop and grow during the initial phases of the business. In some cases, this provides investors with the opportunity to have an impact on the company’s development and direction at an early stage. In comparison to other asset classes, startup investing offers the potential to earn high returns that are generally uncorrelated with the market.

In 2015, it’s likely that the future of technology-enabled investing is undoubtedly bright. For investors (who have been facing as many challenges as startup founders) and for startups, having a great product and the accessibility to make it come true are the key components to an assured path to success. There is no doubt that the new investment platforms will become the new standard for early stage private equity investing.

Financial

Phil Weiss, chief investment analyst, Baltimore-Washington Financial Advisers

After generating robust gains in 2013, the U.S. stock market delivered returns that were more in line with the long-term averages in 2014. As we look forward to 2015, the one thing we know about the market is that something we do not currently foresee will happen.

In 2014, it was oil, as prices fell about 50% from their mid-year highs to levels not seen for more than five years. Our crystal ball is a bit cloudy, so we are reluctant to guess what 2015’s unexpected event might be. Currently, the biggest risk is perceived to be that economic weakness in countries outside the U.S. could ultimately have a negative impact within our borders.

Domestically, economic growth strengthened as the year went on. This led to the Fed’s cessation of its bond buying program known as quantitative easing. Current expectations are that the Fed will end its Zero Interest Rate Policy and start raising rates slowly in 2015. A strong economy and the initial efforts to raise rates are usually positive for the markets. At the same time, a rising rate environment is also likely to increase market volatility.

Lower oil prices should leave consumers with more disposable income and also keep inflation benign. The U.S. stock market seems likely to benefit from such trends. On the other hand, there are concerns about Europe, Russia and slowing growth in China — and the related potential implications on credit and currency markets.

Against this backdrop our 2015 forecast is up, not down, for the U.S. stock market. We think interest rates will move higher and market volatility will increase.

Government

Gloria Larkin, president, TargetGov

The politics of Washington will continue to adversely affect government contractors in this region, not the least of which is the constant threat of another government shutdown. The core uncertainty inherent in every shutdown threat cripples contractor planning, business development and hiring.

Large businesses will not accept the financial burden of paying employees if they cannot remain billable on federal contracts, and small businesses find it impossible to bear the burden of the shutdown costs. The ultimate costs rest on the shoulders of every employee working on federal contracts as s/he gets laid off and every taxpayer who will have his or her tax dollars wasted paying furloughed federal workers who are prohibited from working.

Financial ratings agency Standard & Poor’s reported that last year’s 16-day shutdown costs delivered a $24 billion hit to the U.S. economy. Closer to home, every street in every neighborhood in this area has residents either employed by the federal government or contractors working for the federal government, and those who did not get a paycheck or two personally bore the brunt of the politicians’ grandstanding.

On the bright side, I foresee the reduction of lowest-price-technically-acceptable (LPTA) requests for proposals. Price will continue to be an important factor, because of the mandated budget cuts in civilian and defense agencies, but lowest price will be balanced with a more technically sound decision process in 2015, especially as strict LPTA contracts default and technical failures mount.

Another positive: Small business will continue to see growth from last year’s $83.1 billion awarded federal contracts through the increased use of set-aside contracts and those contracts getting larger in value. As federal agencies shy away from the perceived “high price” of the incumbent, new vendors find a door squeaking open to replace the previous vendors.

Green

Ned Tillman, Author of Saving The Places We Love and chair, Howard County Sustainability Board

2014 was a stellar year for the introduction of new technologies that helped us lower our energy consumption, improve our air, water, food and product quality, and manage our resources better. We’re seeing an increasing number of individuals and companies changing their practices to more sustainable ones.

2015 promises to be another year of progress on all fronts. The corporate sector is responding well to the increasing demand for more efficient, healthier, safer and more sustainable products. There will be more options from hybrid cars, to more efficient appliances and HVAC systems, electrical suppliers and healthier food (less sugar, salt, fat and preservatives).

Several people recently approached me to talk about enhancing their homes and their lives. They asked about whom to hire to insulate their attics, install rain gardens, provide rooftop solar and install electric charging stations for their next vehicle. I was surprised how all these approaches have become part of our lives.

The terms “high tech,” “green” and “sustainable” are becoming synonymous. A good example of this is the building industry, where 55% of new construction in 2015 will have innovations such as air-cleaning paint, smart-building and smart energy technology, often managed with micro-grids.

We will also see these changes around towns, as wider pathways for bikes and pedestrians are installed, where new parking lots and buildings will have rain gardens and bio-filtration systems, and where large solar arrays will be installed over parking lots, on rooftops and on vacant land. Regulations across the area are changing due to the wider acceptance of these new technologies. Get ready for increasing business opportunities centered around enhancing our homes, schools, businesses and communities.

Health Care

Charlotte Kohler, president/CEO, Kohler Health Care

Health care in 2015 will be more challenging than 2014, whether you are a patient or a provider. The challenges will continue as hospitals and physicians create larger organizations, together or separately.

For example, an internal medicine practice in Columbia changed its name about a year ago and then became part of a “health system.” As a patient, it may be the small changes that alert you: prescriptions that your doctor would renew over the phone now require an office visit. Or it may be the total change in the staff. Physicians whom you have seen in the past may be changing, even though the name of the practice does not change immediately. The consolidations, many times, will increase the local service available, and we will see more medical office space in the region as we go through 2015.

Why these changes and will they continue? Continued increased regulations and the costs of meeting those regulations are forcing physicians to rethink their ability to be a single practice. However, some practices are combining by specialty. In the Baltimore-Washington region, we have seen the combination of gastroenterology, orthopedics and urology into “mega groups,” for instance.

Many years ago, we saw the consolidation of radiology practices. These combinations will continue. It is still difficult to get a timely appointment to see a physician, and there will be continued growth of the “non-physician provider” as nurse practitioners and physician assistants are often called to meet the growing needs at a time in which many physicians are moving into retirement. Urgent care centers will grow to meet these needs.

The absorption of independent hospitals in the Howard and Anne Arundel county markets is substantially done. The few remaining independent hospitals are already aligning with one of the major systems. The impact of “Obamacare” is an undercurrent, but not the entire reason for all of these challenges.

Legislative

Scott Dorsey, chairman, Maryland Business for Responsive Government

Given the mounting budget deficits and Maryland’s slow economic recovery relative to many competing states, we hope to see an air of modesty in the legislature this year.

As clearly demonstrated on the morning after election day, the taxpayers’ collective tolerance for increased tax-and-spend policy is limited, at best. Similarly, business owners really can’t absorb any more onerous regulatory policy that curbs job creation. So we expect the legislature to lay low, to some extent, and allow Maryland’s recovery to truly take hold and lift up all of our citizens.

Of course, the so-called “rain tax” was a significant issue during the elections on the county levels and in Annapolis. Look for moderation on that statute, as well — we don’t expect the legislature to dig in its heels on this issue. Instead, they will likely turn the issue back to the local jurisdictions, where local and county officials will decide whether they want to impose such a tax.

Finally — and this is more of a plea or a holiday wish than it is a forecast — Maryland Business for Responsive Government looks for the legislature to adopt a Hippocratic Oath-type mentality of “first, do no harm to the economy,” as it considers legislation. Last year, non-partisan studies by both the federal Congressional Budget Office and our sister organization, Maryland Foundation for Research and Economic Education, clearly demonstrated that raising the minimum wage in the amounts and timeframe that they did would do harm to the economy and hurt the very people they were trying to help. But they did it, anyway.

This year, we look for moderation and a stronger dialogue for the good of the state.

Small Business

Steve Umberger, district director, Small Business Administration/Baltimore District Office

The SBA Baltimore District Office saw record-setting numbers in fiscal 2014, with 499 Maryland entrepreneurs receiving financing valued at more than $192 million. These numbers are proof that lenders are lending. That trend will continue through 2015, provided that entrepreneurs continue to do their homework.

Lenders want to see a solid business plan with a well-thought-out plan of action. In addition to the approximately 100 national and community banks that we work with across the state, credit unions are taking a more active role in business banking. Local government loan programs and the Video Lottery Terminal (VOLT) loan fund will continue to be viable sources of small business financing in the coming year.

Also key for 2015 are apprenticeships, widely considered “college without the cost.” As a nation, we have dwindling numbers of skilled laborers, including welders, plumbers and carpenters. Apprenticeships are an excellent path to entrepreneurship, offering unique training and skill sets that can’t be taught in a classroom. That specialized, on-the-job training, combined with any of the small business management and training programs at the federal or state levels, can create a solid foundation for business startups.

Exporting also will be big in 2015. Thanks to advancements in technology, global markets are now accessible to all businesses, not just the “big guys.” We fully expect to see a surge in exporting as small businesses seek new opportunities around the globe to increase sales and improve their bottom line.

No-cost counseling and low-cost workshops are available in every county across the state through our resource partners, the Maryland Small Business Development Center, SCORE – Counselors for America’s Small Business and the Maryland Capital Enterprises’ Women’s Business Center. The SBA has various programs available to help the entrepreneurial community. Visit us online at www.sba.gov/md for more information.