NORTHEAST SNAPSHOT, JANUARY 2006

Greater Portland, Maine Office Market

Dan Greenstein Partner Vice President CB Richard Ellis/ The Boulous Company

The Greater Portland office market consistently has enjoyed a relatively low vacancy rate over the past several years and continues this trend with a current vacancy rate of approximately 5 percent. Even with “gray market” available sublease space, the total vacancy rate still averages 7.5 percent. By comparison, the downtown office vacancy is approximately 7.8 percent while the suburban office vacancy is only 3 percent.

Over the past 12 months, the office inventory has increased by approximately 319,000 square feet. All of this development has occurred in the suburbs with the majority of buildings constructed in a range of 10,000 square feet to 50,000 square feet. Although most of the new construction has been absorbed, the primary drivers of demand for office space in Greater Portland are from the healthcare industry and the non-profit sector. This demand is rounded out by general organic growth of existing businesses looking to either upgrade their space or expand their presence in Greater Portland.

New construction has been concentrated in the suburbs south of downtown Portland in what is known as the Maine Mall area. Perhaps the most ambitious redevelopment project was the conversion of a former psychiatric hospital, Spring Harbor Hospital, into a 62,000-square-foot, Class A suburban office building. Although redeveloped speculatively, Aetna has signed a lease to occupy most of the space. Also tenanted during 2005 (although officially added to the inventory in 2004) was one Class A downtown Portland office building consisting of 70,000 square feet, which is anchored by the accounting firm of Baker, Newman & Noyes, and Bangor Savings Bank.

Although Greater Portland enjoys an extremely low office vacancy rate, lease rates have remained relatively steady with Class A buildings' lease rates typically ranging from $18.50 per square foot to $25 per square foot on a modified gross basis, while Class B buildings range from $13.50 per square foot to around $17.50 per square foot on a modified gross basis. Interestingly, although new construction costs are approximating $150.00 per square foot for single floor suburban office buildings (not including land costs) we have not seen a commensurate increase in lease rates. As such, there is little speculative office development in Greater Portland, as most new construction is done on a build-to-suit basis.

During the past year, significant transactions included a 55,000-square-foot, one-story building located at One Thomas Drive in Westbrook, which is leased to Idexx Corporation, an NASD biotech firm. Also, Sappi signed a lease for 48,000 square feet at 179 John Roberts Road in South Portland, which was a former bank operating center converted to Class A office space. On the sale side, three downtown Class A office buildings comprising 463,000 square feet (26 percent of the total downtown Class A office market) sold during 2005. These included One and Two Portland Square, which was sold to RREEF by Boston Capital, and 511 Plaza, a nine-story, 130,000-square-foot office building.

Currently, with respect to office property sales, there is generally little to no inventory in the market for owner/users and/or investors to purchase such properties. However, relatively low interest rates are fueling strong demand from local office users to purchase both downtown and suburban properties. This has been evidenced by properties that originally have been offered for lease and languished on the market for number of months with no takers. In a number of instances, the “for lease” properties have been offered for sale, and within 30 days have been placed under contract on a sale basis. Typically, the sale properties have ranged in price from $100.00 per square foot to $150.00 per square foot with few exceptions. Many of these properties have been 10- to 25-year-old suburban buildings.

Looking towards the future, the Greater Portland office market should continue to enjoy an extremely low vacancy rate with new construction adding perhaps 3 percent to 5 percent per year to the total inventory. Our marketplace does not have a concentration of any one industry and as such, doesn't experience the “high highs” during boom time, or the “low lows” during recessions. I predict that office tenants in the 2,000-square-foot to 10,000-square-foot range will continue to dominate the market with only a handful of leases of 50,000 square feet or greater being absorbed in any 1 year.

— Dan Greenstein is a partner/vice president with CB Richard Ellis/The Boulos Company in Portland, Maine.

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