MARKET HIGHLIGHT, AUGUST 2005
NEW ENGLAND MARKET HIGHLIGHT
Portland, Maine, Retail
The retail market in the Portland area remains quite strong as we enter the second half of 2005. Vacancy rates remain in the low single digits, according to our market survey, and several new projects are moving forward.
Because of today’s demand from retail developments for large developable parcels close to roof tops and commuter routes, developers have focused the redevelopment expansion of older existing centers and vacant industrial sites — an easier route to follow rather than to start from scratch. Currently, the former Pine Tree Shopping Center in Portland — the former home of Ames & Shaws — is being renovated to include Portland’s first Lowe’s Home Improvement Warehouse. On Route 1 on Falmouth, Maine, just north of Portland, the Falmouth Shopping Center, built in the 1970s, is currently being remodeled, with the “New England village” look. An expanded Shaws anchors this center. Also in Portland, a former industrial site is being converted into a retail/residential development. This center will be anchored by Portland’s first Stop ‘n Shop.
Other major developments in the Portland area include a proposed Wal-Mart Super Center on the edge of Portland and Westbrook, Maine. In Windham, Maine, both a Lowe’s Home Improvement Warehouse and a Home Depot are planned. Two stadium-seating multiplex cinemas are planned for South Portland. In Portland’s Bay Side area, Maine’s first Whole Foods store is moving forward.
It is important and encouraging to note that not all of Portland’s retail activity is by national tenants in new or rehabbed centers with quaint parking lots. Portland’s Old Port area is thriving with a great mix of retailers, offering a wide variety of products and services in a historic district that could never be replaced by the best retail developers. Congress Street remains a healthy retail area as well. From Main Street in Scarborough to Route 1 in Falmouth, Greater Portland retail market looks encouraging for retailers and developer/owners, from Mom & Pop to Wal-Mart.
— Peter Harrington is a broker with Malone Commercial Brokers in Portland, Maine.
Manchester, New Hampshire, Multifamily
There has been much hoopla and rapt attention on the single family housing prices, not to mention speculation of a housing bubble. The last time housing prices corrected (1989 – 1993) it was a long painful process. Today, while single family home prices have risen exponentially, there is far less speculative building, at least here in the Northeast. What’s going on? Low interest rates — the continuing low interest rates allow buyers to purchase more house for the same monthly payment.
The same low interest rates have fueled wave after wave of refinancing, allowing home owners to tap the rapidly rising equity in their homes. This has been a prime driver of the consumer driven economic momentum of the last 5 years. Two questions: Are we experiencing too much of a good thing? And, what does this have to do with multifamily housing?
First, interest rates. Federal Reserve Chairman Alan Greenspan has been nudging the federal funds rate higher for nearly 2 years. He will most likely continue to do so as long as inflation remains a threat. But rates as whole, both long term and short term, are not rising to the degree expected, mostly due to the foreign investment and capital flows coming to the United States each month, averaging $80 billion per month. Foreign investors will take lower returns on their money in the United States for the safety and liquidity of our markets. More money to be invested in mortgage bonds keeps rates low. While rates have risen some, they are still lower then the Fed would like.
This affects multifamily housing in at least three ways. First, many tenants can afford to buy homes with 100 percent financing, adjustable rate mortgages, 40-year amortizations, interest-only loans and other lending products. Second, this trend has seen apartment vacancy rates rise from the 2 percent to 3 percent range to 6 percent to 7 percent range over the last 2 years. The rising vacancy rates have kept apartment rents level and even declining over the past year or so. The third factor is the insatiable demand for ownership has prompted significant conversion of apartments to condominiums. The Manchester area has seen many properties converted to condos. This has helped stabilize vacancy rates and rental rates to some degree.
In downtown Manchester, several new multifamily projects are coming to the market. In two instances, developers have converted burned and vacant five-story buildings into mixed-use residential successes. Market-rate apartments occupy the upper three levels of these buildings.
After a decade of idleness, a vacant lot on the corner of Bridge and Elm streets will provide 204 upscale apartment units by late fall 2005. This seven-story building, called The Residences at Manchester Place, will feature apartment units renting from $1,300 - $2,200 per month. This is the first major housing development to be built in the Central Business District for more than 30 years, and now there’s more to follow.
Along the riverfront, adjacent to a brand-new minor league baseball park, another 132 upscale condominiums and 45 four-level townhouses are being built. These units, as well as a new 125-room Hilton Garden Inn are expected to be available in 2006. Other projects on the drawing board for downtown Manchester include the conversion of old textile factories in the mill yard into residential units and hotel rooms.
The interest in downtown multifamily living has been fueled in large part by young professionals who see Manchester as an alternative to the higher cost of living in Boston. Further, they are drawn to Manchester’s active nightlife, the rebirth of the historic mill buildings as offices and colleges where they work and attend classes, many ethnic dining and shopping options within a short walk, and the city’s close proximity to a multitude of recreational opportunities throughout the state.
— William Norton, CRE, is the president of Norton Asset Management in Manchester, New Hampshire.
Southern New Hampshire Office & Industrial
Both the office and industrial market in areas surrounding Manchester and Portsmouth in Southern New Hampshire are expected to remain status quo in 2005, with little change anticipated, according to Mike Harrington, RPA, who is a broker with the CB Richard Ellis office in Manchester, New Hampshire. Construction activity has slowed considerably in the area, due partly to rising costs. “There has been a general increase in costs for concrete, for steel, which I think everybody is finding across the board,” says Harrington. “Then there is also an increase in the cost of land, which has been driving up the prices to do construction as well, that has to do with the approval process. The approval process in most towns throughout Southern New Hampshire has taken longer to accomplish, and the costs associated with bringing those ground-up projects through to completion have been a lot more expensive.” Where the market is seeing construction, according to Harrington, has been in the retail/entertainment and multifamily sectors. “For Manchester, where we’re seeing a huge amount of construction is in apartments and condominiums, and also entertainment venues,” says Harrington. Projects that fall under this category include the Fisher Cat stadium, which is a double-A baseball stadium completed in the spring, a hotel that is being built adjacent to it, and on the seacoast, luxury condominiums that just went in the ground about two months ago. Harrington notes that Manchester is well on its way to becoming a destination city with strong entertainment and retail, helped by the proximity of the airport, which has become an alternative to flying into Boston. With a relatively low cost of housing, especially compared to Massachusetts, many smaller companies are beginning to find the market desirable.
As with much of the Northeast, investment sales activity continued at a brisk pace in 2004, and well-located properties will continue to be a good investment in 2005.
In 2004, the Manchester office market showed slow but steady improvement, and in 2005, the market is predicted to remain flat. Overall vacancy rates in the Interstate-93/Route 3 corridor office market decreased slightly in 2004 and remain stable through the beginning of 2005 at just over 16 percent, and the downtown market has seen declines in vacancy rates over time. After a busy year of construction in 2004, which saw more than 460,000 square feet delivered (mostly owner/user and build-to-suit activity), construction has remained flat in 2005, with virtually no speculative building or build-to-suit projects delivered so far this year. Retrofitting and renovating buildings has been more popular than ground-up construction, although Harrington notes that in downtown Manchester, most of the buildings have already gone through that cycle.
“Where we have seen a bounce-back is in the downtown Portsmouth office market,” says Harrington. On the seacoast and Portsmouth, vacancy rates dropped significantly in 2004, moving to 12.5 percent by the end of the year from 17 percent in 2003. Part of this decline can be attributed to the reclassification of a large property, but the market has improved beyond that. Vacancy rates are expected to drop further and rental rates increase in 2005 in this market, especially for the smaller user looking for 1,000 to 5,000 square feet.
Asking rental rates in both markets stabilized in 2004, and are expected to remain flat at 2004 year-end average levels, or increase slightly through the end of the year. Asking triple-net lease rates at the end of 2004 in the I-93/Route 3 corridor office market ranged from $8.00 in Hooksett and Amherst to $14.00 in Bedford, with an average of $10.62. On the seacoast, the average triple-net asking rents ranged from $6.50 in Rochester to $15.00 in the Portsmouth/Pease area, with a market average of $10.55.
One category of industrial space that has been doing well in Southern New Hampshire is the warehouse/distribution segment. Harrington ties this trend to housing construction, both multifamily and single family, and retail projects. The housing boom and overall construction and renovations has spurred related industries, such as suppliers of plumbing equipment, doors and windows, and lumber, to seek out larger space. “That’s really driven that market to a higher level — decreased vacancy rates — and you have very few choices for anything above 28 feet clear ceiling heights in the Manchester market right now,” says Harrington.
A trend that has had considerable impact on the industrial market of Southern New Hampshire is the outmigration of large companies from the area, such as Sanmina, Cisco and Teredyne. “There still are smaller, entrepreneurial manufacturing companies that remain in the state,” says Harrington. “What’s happening is those buildings are being retrofitted for smaller users, and then the smaller users are infilling them. Before, where you might have a 60,000-square-foot building that has one tenant, it’s now being filled with three 20,000-square-foot users. And that’s really where the market is, the 10,000- to 20,000-square-foot user in New Hampshire—the smaller, entrepreneurial user. And defense-related industries are still a huge component of the industrial segment in our market in southern New Hampshire.”
Harrington expects vacancy rates for industrial properties to decrease slightly in 2005. In the I-93/Route 3 corridor, overall vacancy rates saw a slight decrease in 2004 to 15.7 percent, and the seacoast market remained flat at about 14.3 percent. 2004 continued to remain a tenant’s market for industrial properties, with the exception of distribution space in Manchester, which saw positive absorption in 2004 and continues to do well in 2005.
Industrial development, much like in office, saw new construction in 2004, almost all for owner/users and build-to-suit, and in 2005, very little activity has been seen and construction is not expected to pick up for industrial until vacancy rates decrease in Southern New Hampshire and northern Massachusetts. One exception to this is a new 180,000-square-foot high-bay warehouse currently under construction on Holt Avenue in Manchester.
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