MARKET HIGHLIGHT, AUGUST 2006

NEW ENGLAND COAST MARKET HIGHLIGHT

Boston Multifamily Market

The Boston area multifamily market is seeing developers from across the country flocking to the area, bringing much-needed relief from the drought of available units. While luxury apartments reign supreme, new zoning laws are requiring towns to offer affordable housing solutions in an area known for the high price of real estate.

Boston has become a significant development market, with the area having approximately 5,500 market rate apartment units under construction and about 13,000 in the permitting pipeline. Almost all of the new projects are Class A properties.

All of Greater Boston has relatively high rents and high occupancy-rates. Rents range from $1,200 to $1,400 per unit for one-bedrooms and $1,600 to $2,500 for two-bedrooms. Occupancy is between 95 percent and 98 percent. The majority of development is taking place in the North Shore and South Shore submarkets. Both Peabody and Quincy, two of the major north and south towns, respectively, are expected to be two of the three fastest growing cities in the Greater Boston area.

Fairfield Residential is developing some of the most luxurious units at the intersection of routes 95 and 128 in Northern Massachusetts that are setting new standards in rent levels. Highlands at Dearborn features 446 units with condominium finishes and the most luxurious amenities, including a billiard room, a two-story atrium overlooking the pool, and a spectacular outdoor entertainment area featuring stone gas grills and fireplaces.

Because of zoning laws such as Chapter 40B — the state law that encourages development of mixed income housing — each town must allow for at least 10 percent of its housing stock to be affordable. Some towns are reaching their quota, and eventually there will be some restriction on development in these areas.

Developers from far and near are increasing their interest in the Boston market. Texas and California developers are firming up their roots in the area and entities such as The Hanover Company have started to make some inroads with four projects in the development pipeline. New partnerships, such as Criterion Development Partners LLC, were formed from local developers and Boston-based capital sources.

Investors interested in this market should keep watch on the Route 128 and Route 495 areas because rents this past year have experienced growth higher than 4 percent annually — an example of an area-wide trend of growing rents that is expected to continue. With high rental rates and low vacancies, the Boston area continues to attract new investors from across the country but may have difficulties meeting the need for more affordable housing as long as construction costs rise.

— Richard Robinson, principal, Apartment Realty Advisors, CCIM

New Hampshire Retail Market

The New Hampshire retail market continues to thrive. Development continues to push out from well-established retail hubs such as Portsmouth and Newington. As retail pushes into areas such as Rochester, Southern Maine, North Hampton, Seabrook and Epping, vacancy rates continue to remain stable at approximately 7 percent throughout the Seacoast area.

The Seacoast region is experiencing a sustained influx of relatively affluent people seeking more affordable housing, improved quality of life and a shorter commute to Boston. Retailers have followed — Target, Starbucks and Lowe’s Home Improvement Warehouse are appearing in places that were considered relatively rural only 5 years ago. This is clearly evident in the Route 101 corridor, which is the main thoroughfare between the New Hampshire Seacoast area and Manchester. 

The most significant development along the 101 corridor has occurred in Epping, which draws from a trade area encompassing a 20 mile radius, where nearly 400,000 square feet of retail, including Wal-Mart, Lowe’s and Walgreens opened in 2004 and 2005. The Wal-Mart is one of the top performing stores in New England. Additional development is in the works at the Route 101/Route 125 interchange where Waterstone Retail Development, in addition to several other projects in the area, has recently acquired more than 40 acres and will be developing a 300,000-square-foot power center planned to open in spring/summer 2007. According to David Delise of Waterstone Retail Development, Pinncon Construction will complete the project design and construction.

Seabrook, New Hampshire, has also experienced rapid development over the past 2 years. Being on the Massachusetts/New Hampshire state line, the absence of a sales tax and easy access from Interstate 95 attracts shoppers from Massachusetts. What once was a town filled with tattoo and fireworks shops is now evolving into a regional shopping destination, including Lowe’s, Staples, Wal-Mart, and other national retailers. Development continues with nearly 100,000 square feet of retail proposed and already being marketed adjacent to the newly built Lowe’s. A parcel of more than 45 acres has recently been acquired by DDR Seabrook LLC at the intersection of routes 1 and 107. Although plans have yet to be submitted, it is speculatively going to be developed as a big box retailer or power center.

Southeastern New Hampshire continues to be a hotspot for retailers and investors. An expanding population, convenient highway access, the absence of sales tax and proximity to major cities such as Boston and Portland will continue to facilitate retail growth throughout this vibrant region.

— Vanessa Rozier, retail broker, NH MA, The Kane Company, Inc., retail services group

Greater Portland Industrial Market

With vacancy rates around 3 percent compared to the national average of 8 percent to 10 percent, the industrial real estate market in the Greater Portland area of Maine is active. Sales activity has started to slow due to a lack of available inventory, rising interest rates, and high asking prices. However, the slow down in sales has been offset by rising lease activity. Larger spaces above 20,000+/- square feet are most in demand. Lease prices for larger buildings range from $3.75 per square foot to $4.50 per square foot triple-net leased. Smaller spaces are fetching $5 per square foot to $6 per square foot triple-net leased.

Land prices in Greater Portland are pushing beyond $125,000 per acre, and with developable land in short supply, prices should continue to escalate. High land prices have pushed a number of companies to Lewiston/Auburn, which is a marked shift from the past interest in Biddeford/Saco industrial land.

Speculative development is slowing due to market forces. Escalating building material costs, higher regulatory fees, rising interest rates and land prices are all reasons for the change. Rising asking prices will invariably slow sales for higher priced units, reducing profits for the newest projects. Higher regulatory costs are driving demand for larger developed properties. In certain cases, developed properties have been grandfathered from newly enacted environmental regulations, which have saved some developers quite a bit of money.

Investors looking for Section 1031 exchanges have driven sale prices upward over the past year. The safe harbor from capital gains taxes is creating more demand than the supply of properties for sale. Purchases by owner/users are contributing to the shortage.

High sale costs and pricing have made leasing space more popular. Lease prices are trending downward; however, because of a healthy supply of space, lease prices should continue to decline for a while as competition heats up to fill the empty space.

Lastly, there is some positive news from the recent purchase of an 114,000+/- square-foot manufacturing building in Biddeford by the Sterling Rope Company. This company’s expansion is countering the exodus of national manufacturing companies out of state. This large purchase has pushed Sterling Rope to offer some of the building for lease. The redevelopment of this property adds 45,000+/- square feet of high bay warehouse space to the current inventory. Rising lease activity will, hopefully, find another growing company to take this space.

— Industrial Team at NAI The Dunham Group in Portland, Maine.

New England Coast Office Market

The suburban office market has experienced much growth in recent years with the success of various development projects. Although the total square footage under construction in this market has decreased since 2001, new development is currently on the rise with about 1.4 million square feet currently under construction.

The towns of Waltham and Burlington, Massachusetts, are key markets to track in the near future when it comes to new development. Their excellent highway access as well as proximity to Boston makes them excellent locations for firms of all sizes. Waltham is of particular interest, as it seems to be bucking the trend in office building developments. The redevelopment of the former Polaroid site at Reservoir Woods by Davis Marcus Partners is leading speculative office development in Waltham and the greater Route 128 market. Improved business activity is raising the absorption rate in this area. Other developers to watch in Waltham include Boston Properties, which is permitting a new development on Prospect Hill, and Duffy Associates, which has completed a new office building development on Waverley Oaks Road.

The Burlington market typically follows the successes of the Waltham market. The town has long been the home of the Burlington Mall, a major regional shopping center, and has seen the recent development of a new 190,500-square-foot lifestyle center called Wayside Commons at the intersection of Wayside Road and Route 3 at Route 128. Also in upcoming months, Nordstrom will be moving into the Burlington Mall and a Border Café will be built in Northwest Park. These retail-focused developments will greatly aid the Burlington office market in providing an amenity-rich location with competitive rental rates for office users.

Vacancy rates in the suburban office market have increased since 2001 but have trended down over the past 3 years. Rates have remained fairly low and have been relatively stable in 2006, with the current vacancy rate at about 13 percent. Average office rental rates are on the rise with the current rate at $21 per square foot. Rental rates have remained relatively stable since 2004, prior to which they were dramatically higher and reached $33 per square foot in the first quarter of 2001. *                                                           

* Statistics provided by CoStar Group

— David Gilkie, senior vice president and Anna Tustison, marketing associate of Nordblom CORFAC International

Boston Retail Market

Boston’s retail landscape has historically been defined by the Back Bay’s Newbury and Boylston Streets, as well as Downtown Crossing. With the completion of the Big Dig nearing and the elevated MBTA lines and Central Artery now underground, Boston is about to experience a shift in focus to the Waterfront area. This government-financed project has spurred expansive economic development in the region, from residential condominiums and hotels, to proposed new office towers. And, unlike past projects, developers are now working with designers and architects early on in the process to integrate and position retail more effectively along the Rose Kennedy Greenway.

The Big Dig created a void in the Central Artery’s retail landscape where J. Pace & Son’s market in the North End North, which had been in business over the past 4 decades, was forced to close its doors because of parking congestion and noise. The Boston landmark recently re-opened, which is a positive sign for the area. Washington Street and the North End will be some of the main beneficiaries upon completion of the Big Dig. Developers and investors are beginning to flood the market with luxury condominium conversions, with Battery Wharf and 44 Prince Street being the most recent examples. Recently, construction began at Lovejoy Wharf —Hoffman Building to create 260 new luxury residential units and integrate 40,000 square feet of ground-floor retail and a pedestrian-friendly environment with an extension of the Harborwalk. Across the street, Trinity Partners will begin construction on a new mixed-use development known as Avenir, which will include 250 residential units and 31,000 square feet of retail space. This project will be the first of several developments in the Bulfinch Triangle that will add approximately 1,500 new residential units over the next 2 years.

The focus of Waterfront retail has always been Faneuil Hall and Marketplace Center. Recently, Clarendon Properties purchased the adjacent Marketplace Center and is in the planning stages for a re-orientation of the retail space to more effectively focus on the new Rose Kennedy Greenway.

Panera Bread is planning to open its first downtown Boston location at 200 High Street along the Rose Kennedy Greenway, featuring substantial outdoor seating — which is a sign of stability and expansive growth from a retail perspective.

Moving further south, Equity Office Properties is planning a complete renovation and redevelopment of Russia Wharf, which will include 65 luxury waterfront residential units, a 31-story office building and 650 underground parking spaces.

The completion of the Central Artery will also allow significant development to occur in the South Station area. A development team led by Hines Interests LP recently received approvals for a 40-story office tower, which will also include a predominantly glass tower designed by Cesar Pelli, a 200-room hotel, residential condominiums, 1,000 parking spaces and significant retail space. This project has been in the planning stages for 9 years — with the first phase of construction to begin sometime next year. The project will cost an estimated $800 million and will also include the expansion and revitalization of the bus and subway terminals in South Station. All in all, the city is hoping for an approximate addition of 200,000 to 250,000 square feet of retail space from the completion of the Rose Kennedy Greenway.

Within the past few months, Mayor Thomas Menino has proposed a 1,000-foot tall office tower to be built on Federal Street. The city recently issued a request for proposals for 47,738 square feet of city-owned land in Winthrop Square that is presently a four-story parking garage. In addition to changing the landscape and skyline of the city, this project will truly show the health of the Boston market. While it won’t be directly on the Rose Kennedy Greenway, the new tower will bring a significant retail presence to an area that until now has been predominantly offices. Larger existing office buildings along the Rose Kennedy Greenway, such as International Place, 125  and 99 High Street, will be spending additional dollars to reorient their retail. Before the Central Artery was moved underground, this section of downtown Boston suffered with significant vehicular congestion and a lack of life and vibrancy. With the project nearing completion, Boston will return to a truly pedestrian-friendly neighborhood that is conducive to retail.

— Ted Chryssicas, senior vice president, Meredith & Grew, retail services group.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.