A recent surge in commercial real estate sales revenue and a sense that clients are ready to negotiate deals again has created a sense of optimism within the Southern NH commercial real estate market. But with office vacancies still high, lenders more tight-fisted than ever, and little activity on the construction front, the real estate market is cautiously waiting to see how summer unfolds.
While current activity looks good, I can't predict for the rest of the year since we may now be seeing the results of pent-up demand, says Bob Anderson, president of the NH Commercial Investment Board of Realtors in Bedford. There's too much volatility with federal, state and municipal governments struggling to balance budgets and uncertainty in financial markets, he says. If something goes negative, we could turn around quick.
New Hampshire shows economic resilience with relatively low unemployment-an adjusted 5.2 percent, compared to 8.8 nationally in March, according to the NH Economic and Labor Market Information Bureau. New Hampshire has also ranked top or near the top in terms of median household income for the past few years.
New Hampshire has had better than average economic growth and commercial property sales, Anderson says. Commercial property sales rose 70 percent in the fourth quarter of 2010 compared to the prior quarter, according to the New England Commercial Property Exchange, which lists and reports sales in Maine, NH, Massachusetts and Vermont. The only state that fared better was Kentucky with 80 percent growth, he says.
Sales revenue for retail, office or industrial space is up slightly more than 300 percent in the first quarter of 2011, compared to the first quarter of 2010, according to the New England Commercial Property Exchange.
In the first quarter of 2010, nine properties sold for more than $1 million in NH, Anderson says, including the $1.25 Merrill industrial building in Hampton and the $3.75 million Portwalk retail and office building complex on Maplewood Avenue in Portsmouth, a redevelopment project involving an office-to-retail conversion.
Compared to robust levels of construction in 2007 and 2008, Anderson says there is little activity. Developers are not buying land or initiating construction, he says. Instead, people are looking at buying existing buildings and converting them since it is less expensive than building from the ground up.
Even though property is abundant in NH, Anderson says, It is harder to ferret out good opportunities for clients...Unlike three years ago, owners are hanging on to their property and may be more interested in leasing.
High Vacancies
The overall vacancy rate in NH for commercial office space in the first quarter of 2011 totaled 21 percent, remaining unchanged from the fourth quarter of 2010, according to data from Cushman & Wakefield, a global real estate company with offices in Manchester. Vacancies for Class A (the highest grade) office space rose slightly to 22.6 percent from 22.2 percent.
Nashua ranks highest among cities with an office market vacancy rate of 29.3 percent for this year's first quarter, up from 29.1 percent last quarter, Cushman & Wakefield data shows, followed by Manchester with vacancies totaling 20.3 percent this quarter compared to 19.8 percent last quarter, and Portsmouth showing improvement with vacancies of 18.9 percent, down from 19.7 percent.
Despite vacancies, Anderson is encouraged by the recent spike in activity, and says after seeing the market hit bottom in mid-year 2010, he expects a slow, steady return to pre-recession levels.
Materials Costs
What seems to be on everyone's mind, in the commercial real estate and construction sectors, is concern about the rising cost of oil and budget slashing at the municipal, state and national level.
Thomas Farrelly, a broker with Cushman & Wakefield, says in recent months more companies have been opting to lease rather than build, especially smaller tenants. But with contractors hungry for work, larger tenants have been taking advantage of lower costs of construction.
That could all change with an increase in energy costs, he says. Until recently, people were taking advantage of the low cost of building materials, he says, noting when the price of oil spikes, prices for steel and other building materials are affected. Developers want work, but they are cautious about making quotes since it's hard to predict materials costs, he says. Others in the construction industry say disruptions from the Japanese earthquake and tsunami in March are further impacting prices.
Despite NH's leadership nationally on many economic data points, Farrelly says he has not witnessed any material change in commercial real estate demand in terms of actual business transactions. We are still way behind schedule and after a challenging full three years of pain, I think a lot of people can't put off decisions any longer, he says.
Office Retooling
Regionally, NH's seacoast has been the most consistent performer for commercial office space, Farrelly says. The largest and most exciting project north of Boston is Portwalk, a mixed-use complex in Portsmouth, he says.
The 128-room Marriott hotel and conference center has been constructed, and the project is breaking ground on 36 apartments scheduled for occupancy in October. There is also 2,300 square feet of retail space in the Marriott and an additional 9,500 square feet of retail space available to deliver in this year's fourth quarter, says Jeff Johnston, principal for the developer Cathartes Private Investments in Boston. Streetworks in White Plains, New York, is the investor.
The project is expected to receive LEED (Leadership in Energy and Environmental Design) for green building design features including use of regionally-sourced materials, energy efficiency and insulation.
Recent growth in office space is reflected by retooling approved projects, Farrelly says. In the case of Portwalk, Johnston says, the project was initially approved in 2008 as one large project to be constructed in 18 to 20 months, but by working with the city, Cathartes was able to retool by opting to build in phases more slowly.
Cathartes is also planning another mixed-use project consisting of two or more buildings on the two-acre site across from the hotel. Since it wasn't ready to jump into that project and the city has a need for parking space, Cathartes agreed to build a surface parking lot on its own nickel. The city leases the property and we provide 200 parking spaces in what's a win-win situation, Johnston says.
Outside of Portsmouth, activity is otherwise soft, Farrelly says, particularly in Manchester and Nashua, while Bedford and Portsmouth have had some absorption. And he says Concord, with a vacancy rate of 18.8 percent, has also been slow with the state government tightening its belt.
While education and health care are consistent performers in a down market, Farrelly says there are no identifiable hot spots.
Construction's Struggle
Gary Abbott, executive vice president of Associated General Contractors of NH, predicts that commercial construction and highway work combined will be at the same level or less in 2011 than last year. The market is tight with a lot of contractors bidding on a limited number of jobs, he says. Construction has been hit a lot worse than other sectors.
Abbot says the industry has benefited from stimulus money that doubled the size of highway work, but that was temporary for one year. I don't see companies hiring back those workers, he says.
Mark Holden, president of Associated Builders and Contractors for NH and Vermont, says while contractors are becoming more active, there is a need for sustained activity. Private investors like the rest of the industry are uncertain about the future so they are still on the sidelines, he says.
Construction projects now underway include some health care and school projects and a little public work, Holden says. That includes work at Dartmouth College in Hanover, the new $38.7 million Manchester Municipal Complex in Manchester, a few projects at the University of NH and ongoing work at Dartmouth-Hitchcock Medical Center in Lebanon.
Budget Worries
With budget negotiations underway in Concord, one concern is the governor's budget proposal for a two-year extension of a moratorium on state aid for school construction, Abbott says. If state aid is not there, that sector is out for [the] next couple of years, he says. The challenge is trying to come up with a new formula for school funding that is more effective.
He also expresses concern about the governor's recommended moratorium in hospital construction, Abbott says. The governor made that suggestion while discussing the need for a certificate of need process for hospital construction that would require a review by the hospital board, he says. This did not become part of the House budget, but the fact that it was a topic of discussion is a concern and this could translate to
less construction.
Supply Outstrips Demand
With the exception of multi-family housing, there is more supply than demand in the region's commercial real estate market. There is more than a million square feet of office space available for lease in Manchester, 1.7 million square feet in Nashua and 250,000 square feet in Concord, says Bill Norton of Norton Asset Management in Manchester, which does consulting and brokerage work for commercial real estate. I know of one engineering firm that needed 10,000 square feet and had 35 locations from which to choose, he says.
At an estimate of 250 square feet supported per job, Concord, for instance, would need 1,000 jobs to fit out its available space, while Manchester needs 4,000 jobs and Nashua, 7,000 jobs. With technology achieving ever greater efficiency, Norton says he does not anticipate the level of hiring needed to fill out available space. And while unemployment figures are dropping, Norton questions the accuracy of those figures since so many people have stopped looking for jobs or are underemployed.
For small business owners who know they will be around for awhile, now is a good time to buy as SBA loans are available, Norton says. If you are an investor, vacancies are up across the board and lease terms have been reduced to three years from five because of all the uncertainty, he says.
Amidst all the current doom and gloom, the good news is that New England still has many qualities that attract businesses. Our market has stabilized and there is a lot of intellectual brain power and good quality of life, Norton says. He also believes much of what is being witnessed now is a market correction. From 1998 to 2006, property was overpriced and properties were selling every other year, he recalls. Holy smokes, what were we thinking?
He predicts it will take awhile to get traction with the huge gap between buyers and sellers. If you own a building and have debt, you aren't going to want to lower the price, he says. Until that gap closes, you won't get the 10 percent return on your investment, but the law of economic physics will eventually fix that, he says. It's just taking longer than in the past.
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