The former Oracle office space at 150 Dow St. in Manchester. Courtesy photo.
Despite the claims by the CEO of embattled WeWork that engaged employees want to be at the office and only the disengaged want to work from home (and judging by the blowback he is receiving for those remarks), office workers are not exactly clamoring to go back to the office full time after more than a year of remote work. So it is not surprising that many businesses aren’t increasing their office footprints and that real estate figures show a glut of office space available.
Instead, NH commercial real estate firms, developers and construction companies are focusing on the market segments that are in high demand, such as warehousing, life sciences and multifamily. Real estate firms say existing leases are preventing more fallout from declining demand for office space.
Robert Rohrer, managing director and principal of Colliers’ NH offices, says NH is not affected in the same way as other states. “We typically don’t react the same way because of our size and the mix of businesses,” he says. “We are a little insulated, but eventually, some of it will impact our market.”
Rohrer says between the Millyard and the Elm Street central business market in Manchester, Colliers represented about 200,000 square feet of office space pre-COVID, and that hasn’t changed much. He says some of the towers have vacancies, but the nearby suburban market of Bedford is almost at full capacity.
“I wish I had a crystal ball, but I don’t,” says Rohrer. “I think there will be a return to the office but not as robust. There will be hybrid relationships between employers and workers, and we will see what it does to space needs and whether offices become more hotel-like on a broader scale. It is expected there will be a 20% reduction in the need for office space. But I think in Manchester it will be a 15% pullback.”
He says there will be a bigger push for remote work by employees in big cities who face an hour-plus commute. That is less of a concern in most NH markets where commutes are shorter. The average commute time in NH is 25 minutes, according to the NH Economic and Labor Market Information Bureau.
Downsizing
John Jackman, president of Jackman Commercial Realty in Manchester, says a federal mandate requires businesses continue to make lease payments so there is still cash flow. But if their lease is due to expire, tenants are looking to downsize. “If they were in 5,000 square feet and one-third of their workforce will remain at home, they are now looking for 3,000 square feet. We don’t know if this trend will continue—whether it will be six months, a year, two years or forever—nobody knows,” he says.
Typical office leases run three to five years, but leases for some larger spaces are longer. Whether the majority of those at the end of that cycle will now downsize and whether that trend will exist when those at the beginning of that cycle are set to renew remain big question marks.
“For the past 20 years, in my opinion, office was over supplied but stable; if a building had 80% vacancy, it had probably stayed that way for years. There was turnover, but it was stable. There was a lot of office space available, and the vacancy rates [were] 10% to 20%. Office hasn’t taken off like some other sectors of the industry, but you do have pockets in downtown Portsmouth and Bedford [that] are doing great. Manchester has the most office space in the state, and a ton of it is available,” says Jackman.
In its Q4 2020 NH Office Market Insight Report, Colliers International reports occupancy rates dipped to 90.5% in the state year-over-year, falling by 0.68%. Rents actually rose by 28 cents per square foot, or 1.5%, to $19.01 modified gross, but the report attributes that to new higher end space entering the market and expects rents to decline if the market sees little or no absorption over the next year. Absorption of office space, or new square footage leased by tenants, declined by 453,973 square feet year-over year.
The Colliers report also describes the work-from-home model as “evolving” as many NH employers wait until the pandemic subsides to gauge employee appetite for returning to the office. “While NH is in a wait-and-see phase, an immediate impact was seen with the occupancy rate slightly dropping as some companies vacated space. However, the impact was not as significant in 2020 as we believed it would be,” the report states. “In 2021, some companies will undoubtedly downsize or close NH locations, while others may expand to follow social distancing guidelines. As more companies make office decisions, we believe this will lead to lower occupancy rates in the market.”
Bill Riffert, realtor and associate broker at Bean Group in Portsmouth, says the future of office space is opaque. “It depends on what side of the table you are sitting on. Landlords are hoping with vaccines that people will start coming back to the office. Many [tenants] still have years on the lease, which will allow the landlords to ride this out,” he says.
600 State St. in Portsmouth, a Bean Group listing. Courtesy photo.
Riffert points out that companies have made significant investments to allow people to work from home, and it seems to be working for many. “Are they going to give up that investment to go back to having office space that costs more [and] has to have a maintenance crew? There is no definitive answer,” he says.
He says a tenant looking for 10,000 square feet of class A office space is in a strong position to negotiate. “It is not just the price per square foot; it is how the package is negotiated. Landlords will start offering more,” Riffert says. “There are a lot of empty offices out there. In business parks, there are not a lot of cars in the parking lots. There will be pressure on the market to offer more, perhaps in terms of fit ups. But if you are offering a fit up, you have to have contractors on hand and be aware of the materials shortages and the way the cost of lumber keeps skyrocketing.”
Shedding Deals
Michael Reed, president of Stebbins Commercial Properties in Manchester, says when the pandemic hit, he had roughly $9.5 million of transactions under agreement, and, in about two weeks of the economy shutting down, they were all terminated.
“That was an immediate effect—the buyers, investors, my end-users of property were all uncertain,” says Reed. “There was real trepidation about this market, when it was going to come back and what it was going look like.”
He says as landlords started to get calls from tenants asking to get out of leases, he encouraged them to find a way to hang on to the tenants. “I was encouraging them not to lose them because it will be a long time before you can backfill that space,” says Reed. “I told them, ‘Abate the rent, keep them in the lease and put it on the back end; adjust the rent so they can survive and put it on the back end to recapture later.’”
While he expects workers to continue to move back to an office environment, his deals have not come back. Building owners thinking of selling have yet to get their rents back up to where they should be, so they can’t command the prices they want, Reed says. “An investor is not going to come back and pay the same amount because part of what drives the price is the income the building generates,” he says.
Hope on the Horizon
However, Reed envisions a time when demand will pick back up, explaining it seems many people got depressed just being at home and want to be back among their colleagues. He estimates it may be another year before offices fill up again.
“People are starting to come back to the office, but they are spreading out and giving each other more room,” he says.
Chris Norwood, president of NAI Norwood Group Bedford, agrees it is still too soon to tell. But as state COVID-19 restrictions relax and people are vaccinated, many will return to their offices, he says.
“Of the people I talk to, 90% physically want to be back in a work environment,” says Norwood. “There is a subsection that want to retain some part of the work-from-home model.” He says, hybrid workers who come into the office occasionally still need some sort of business home base. “There is a lot of subjectivity to it, but for new employees how do you give them a sense of the culture of the firm? In the HR world, there is a concept called proximity to leadership, where you have a chance to have a casual conversation in the breakroom, but you don’t get the same benefit without those impromptu opportunities.”
Chris Pascucci, managing director of SVN The Masiello Group in Bedford, says many offices are still empty, and no one is making snap decisions. “If your lease isn’t over, you still have the office. Nobody is making changes or remodeling because we still don’t know where this will go. Hope is out there that we will get back to normal as opposed to the ‘new normal’ that we’ve been hearing for so long.”
Pascucci says there has always been a glut of office space, but there has not been a huge amount coming on the market. “I speak to the landlords we represent, and they tell me businesses are not making moves yet. It is still too early to tell,” he says. “For the business owner, the virtual part is working, but there are some things it cannot give your company: the atmosphere, the in-person collaboration sessions, the social and small talk, the motivation, the mentorship, the teamwork environment. They had to give that up early in the pandemic, so their intent is to get people back because you lose a lot in this virtual setting.”
Norwood says the big question is whether the square footage will really drop. “The size goes down when employees work from home, but they also lose their cubicle. New Englanders like our space. The hot desk concept works very well for some industries, but some of us want our family pictures and our own paper and pens,” he says. “While it is very employee and industry specific, I don’t believe we will see much of a reduction in the square footage requirements.”
Norwood says furniture manufacturers and landlords are keenly aware of the need for flexibility in spaces. “Can I have cubicles on wheels and have the flexibility in our furniture to accommodate a smaller workforce most days and occasional larger gatherings?” He says some newer design concepts include shared desk space and lockers where employees can store personal items.
While firms begin to call workers back, they are understanding their feelings and concerns, says Pascucci, but making it clear that at some point, either at herd immunity or certain vaccination levels, they want people back. “You need that collaboration. I sit on way too many Zoom meetings. You can never replicate sitting across from someone at the table, the nuances, the body language. You may get the work done, but if a company has a specific culture, you cannot maintain it through little boxes on a Zoom screen, IM and email,” he says.
Joe Campbell, president and director of business development at North Branch Construction in Concord, says it seems the overall industry trend is moving away from the traditional office environment. As for his firm, they have learned they are more efficient together.
“Our current plan calls for us to transition back to the office by June 25. We have clients who have the same philosophy. Community Bridges in Concord purchased a building and will renovate 20,000 square feet into an office. We are set to start on it later this year.”
Campbell says his company has grown so much that they are actually out of office space and looking to potentially repurpose other space or put an addition on their headquarters. “I just hired three people that I don’t even have offices for,” he says.
Other businesses are embracing remote work, Campbell says, such as Lincoln Financial Group in Concord, which occupied a five-story office building that is now for sale after the company decided to keep people remote post-COVID. “The company made a major shift, and now there is a lot of talk about what the [building] could become. It will be interesting to see what happens,” he says.
At DEW construction, which has offices in Keene and Manchester, spokesperson Stacey Bevins says it has no office projects currently underway. The firm just completed a project in Vermont, but the space has not been rented yet. Like many construction firms, DEW is focused on housing, where demand is high, says Bevins.
Conversions and Creative Reuse
According to CBRE, while vacancy rates have increased in the Greater Boston suburban office market, the life sciences market continues to be a bright spot, as momentum behind office to lab conversions strengthened.
Joe Friedman, president of Brooks Properties and president of the NH Commercial Investment Board of Realtors, says there is definitely a pause in the office market, but there is demand for flex space and distribution spaces and life sciences spaces.
He expects there will be more conversion of some large retail spaces. Friedman says shopping malls have the same great access as a distribution center or warehouse. “There is also talk of using malls for doctor’s offices. They are not well designed for residential, but space is space if someone has the creativity and money to do it. “
Campbell says there are potential developments in Manchester repurposing office space into housing. “These efforts really make the most sense as housing is what is most needed. Sometimes there are hurdles and additional costs as you are changing the use and how the building is viewed from a code standpoint, as there are requirements for sprinklers, fire alarms and egress. There is typically some added cost but still less than a brand-new building,” he says.
“While we won’t know until the fall where the world really shifts to, flex space gives businesses the ability to have less office space overall. I think that trend will really take off, but the pushback I hear is people like to have their own space with family photos,” Campbell says.
NorthPoint Construction Management in Hudson is involved with a project to replace offices with warehouse space. “It’s a potential teardown of an existing 200,000-square-foot office building to put up warehouse space in Central Massachusetts.
It’s a complete gut and teardown,” says Gary Thomas, NorthPoint president. “Warehouses are going up everywhere. It is not just Amazon; there are a lot of other supply warehouses. Companies are saying, ‘We can do this on our own without having to reduce the price to give it to Amazon. We can warehouse and ship it ourselves.’”
He says the pandemic may drive companies to do more manufacturing in the U.S., and they may look to stockpile inventory to protect against future outbreaks. “A company near us makes HVAC filters and because of COVID, their warehouse needs are through the roof. They want to run three shifts but need the space to warehouse the products,” Thomas says.
Preston Hunter, vice president of Eckman Construction in Bedford, says a project that started pre-COVID in Manchester was adjusted midstream to eliminate office space. “It was mixed use, mostly residential, some commercial space, and it included office,” says Hunter. “Around March 2020, while we were under construction, the owner realized we would have a hard time filling the commercial spaces. The tenants just were not there.”
He says they redesigned space earmarked for office and converted it into apartments, went back to the planning board and were approved to build 10,000 square feet of apartments. “That is the alternative developers are looking at as there is so much demand in the housing market,” he says.
In Portsmouth, another similar mixed-use development includes a building with retail and a restaurant on the second floor, but due to density requirements and other zoning restrictions, the owner could not change it. “The way the zoning laws are set up, there is a maximum number of units based on the size, and it was already maxed out. But in Manchester, they had additional parking and room within the density so it worked,” Hunter says.
A rendering of a West End Yards mixed-use development project in Portsmouth. Courtesy of Eckman Construction.
The Manchester Planning Board approved a use change and a site plan for Brady Sullivan Properties for the proposed renovation on the first and fourth floors of the Jefferson Mill to create 38 additional residential units. The building has traditionally housed businesses.
Reuse is definitely a consideration, says Jackman, who heard that Boston skyscrapers were quickly being converted to residential. However, the return on investment isn’t a given, despite the need for more housing in NH, he says. “I have had a lot of clients ask about whether they can reuse their office buildings. A quick check with an engineer or an architect sometimes reveals that it is not worth it for the amount of money they would make versus the cost to convert from office to apartment,” Jackman explains.
He says owners of larger complexes are trying to attract tenants by including different amenities, such as a daycare, cafes, gyms and pubs. “But for a typical New Hampshire owner of a small building, they cannot do that, so they fix up the landscaping and lobby,” Jackman says.
Riffert says office isn’t the only real estate segment struggling. Hospitality and retail have taken some big hits. He says Portsmouth wants more housing downtown, and there may be hotels being converted into micro units. And while some of the lower-end retail, such as strip malls, have suffered, they tend to provide services people can’t find online, like coffee shops, computer repair and hair salons, and have weathered the storm better than the big malls, he says.
“While you do see some attempts at creative reuse, many spaces were not created for that. If you decide to reuse a strip mall, you have to deal with zoning and planning,” says Riffert. “Does a strip mall actually lend itself to having a tractor trailer pull up to the building? You are also highly dependent on town and abutters.”
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