NORTHEAST SNAPSHOT, DECEMBER 2007

Vermont

Although it is mostly known for its dazzling fall foliage and thriving tourism industry, Vermont is home to a thriving commercial real estate market. Changing just as the seasons do, Vermont’s office, retail and industrial sectors have all experienced growth this year. Chittenden County, which is nestled in the northwest corner of the state along Lake Champlain, is often the driving force behind the state’s commercial real estate market. Office

The greater Burlington area continues to buzz with activity. Office growth in Chittenden County is projected to reach 4.3 percent this year and 4.5 percent in 2008, a full percentage point above the 14-year average of 3.3 percent growth. This is the highest level of growth in the past 8 years. The anticipated growth in the office market will primarily come from expansions in educational institutions, government entities, asset management companies and the technology markets.

A comeback is occurring in the office market. Speculative developments are starting to happen again, and developers are confident that tenants will seek out their buildings when the projects start. Pizzagalli Properties is set to begin construction on a 30,000-square-foot Class A office building on Tilley Drive next spring in South Burlington. Pizzagalli also recently completed construction of a 52,000-square-foot Class A medical building, which was leased in its entirety to Fletcher Allen Health Care.

Technology Park Partners continues to add to the office market. The developer  recently constructed a speculative 72,000-square-foot Class A office building at Technology Park in South Burlington. Qimonda is slated to occupy 60,000 square feet early next year,  and the remaining 12,000 square feet will be absorbed by MBA Resources, which is slated to move in March 2008. Technology Park Partners is also constructing Building Two at Technology Park, a 54,000-square-foot Class A building with availability slated for next summer.

In addition, plans for more construction is on the drawing board, as several developers are close to acquiring final permits to construct Class A office product. Proposed projects in downtown Burlington, which will comprise 123,000 square feet of growth, include four speculative developments: a proposed 22,500-square-foot Class A mixed-use building at the base of Main Street, a proposed 66,000-square-foot Class A project on Cherry Street and up to two Class A 17,000-square-foot buildings are slated for the redevelopment of the Banknorth site.

The overall office vacancy rate in Chittenden is sitting at 7 percent, which is a half-point higher than 6 months ago and slightly higher than the 14-year average of 6.2 percent. The average vacancy rate in the suburban market is holding steady at 8 percent, and the rate in Burlington’s Central Business District (CBD) is a very healthy 4 percent.

Many companies are actively seeking space in Class A buildings, choosing quality over cost. In comparing vacancy rates for Class A and B buildings, Class A space displays stronger numbers. The vacancy rate for  Class A office space is currently 5.5 percent, while Class A vacancy in the CBD is only 2.8 percent. Class B vacancy rates, while still healthy, are slightly higher at 8.6 percent, and the suburban Class B vacancy rate is 9.9 percent.

Rental rates in the CBD are strengthening due to the lack of supply, but there is some expected weakness in the suburban market because of the new supply that has recently come online, causing a short-term weakening of rents as it is absorbed.

Class A office rental rates range from $16 to $23 per square foot in the suburban market, and from $18 to $23 per square foot in the CBD. Class B rental rates in the suburban markets are $10 to $16 per square foot, and $12 to $17 in the CBD.

Retail

The retail sector is also experiencing healthy activity as new retail centers are coming out of the ground and national retailers are taking space in the market. While this year’s retail growth is a projected 2.7 percent, next year’s forecasted retail growth is 6.2 percent, which is more than double the historic 3 percent annual average. Driving factors include the construction of a 121,000-square-foot Lowe’s in South Burlington, a Lowe’s in Essex that is being redeveloped into a 153,000-square-foot retail center, a planned 80,000-square-foot addition to the Pomerleau development in Milton and a new 11,500-square-foot drugstore on Shelburne Road.

The overall retail vacancy rate in Chittenden is currently a viable 4.8 percent, slightly down from 5.2 percent. The suburban market vacancy rate is nearly identical at 4.9 percent, while the vacancy rate is even healthier at 4 percent. Pockets of vacancy are within Spinner Place in Winooski, Maple Tree Place in Williston and Ireland’s project at Severance Village in Colchester.

Rents in both the suburban and the central downtown market are expected to remain stable. Downtown rents range from $20 to $35 per square foot, while rents in premium markets range from $18 to $22 per square foot, and $8 to $12 per square foot in average suburban markets, although some landlords are landing deals in the range of $12 to $16 per square foot.  

Industrial

The industrial growth in Chittenden is expected to expand less than 2.4 percent this year and 1.5 percent next year. The speculative contributors to the industrial market include the O’Brien Brothers Agency with a 50,000-square-foot building at Meadowlands in South Burlington, of which more than 50 percent has been leased or sold, and the Jeff Jimmo development of nearly 28,000 square feet at Exit 17 in Brentwood Park, of which more than 50 percent is leased or under contract.

Despite the new supply, the industrial market vacancy rate dropped this year. At 6.2 percent, it is well below the 14-year annual average of 7.5 percent. This decline was aided by the positive absorption of approximately 400,000 square feet of inventory that included such large facilities as Belden Wire and Cable and a former IBM building in Essex, the York Capacitor building in Winooski and the Specialty Filaments facility in Burlington.

As the vacancy rate falls, industrial rental rates are expected to strengthen. The rental rate ranges from $5 to $7 per square foot for average industrial space, and rates for higher class industrial space vary from $7 to $8.50.

—  Linda I. Letourneau is a commercial broker at Redstone Commercial Group in Burlington, Vermont.

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