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Signs of Recovery in Commercial Market
Published Wednesday, June 30, 2010 7:00 am

From a national perspective, NH continues to demonstrate its economic resiliency. Commercial real estate activity began to improve in the fourth quarter of 2009 and early 2010 when compared to the previous four quarters. The real question is whether this recent activity is an indication the economy is on a sustainable recovery path. Or, are we just seeing a burst of activity borne from months of near-complete inactivity? The answer is a little of both.

Labor statistics are one indicator closely followed when considering the health of the commercial real estate market. Recovery in the office and industrial real estate sectors is generally tied to job creation. And job growth typically leads to more residents, and an uptick in the residential real estate market. The health of the residential real estate market then provides a ready barometer for assessing the health of the commercial real estate market.

The relevant trends at the end of the first quarter were generally positive. Home and condo sales and prices were up in Q1 2010 over 2009. Leasing activity increased as well. Several commercial indicators also point in the right direction and current projects suggest that several industries are adding jobs. Medical office, medical-related manufacturing and certain sectors of high tech are adding jobs in NH. These jobs have yet to make up for the loss in traditional manufacturing, banking and retail employment in the region. Overall, however, the indicators do point to increased confidence and an atmosphere where companies are willing to consider investing in growth.

As the market recovers, landlords will become less aggressive in offering leasing incentives; hence, the window of opportunity for tenants to take advantage of the best leasing environment in decades will start to close. Grubb & Ellis|Coldstream Real Estate Advisors Inc. is tracking almost 12 million square feet of office space in NH, with a vacancy rate of 16.3 percent, down from 17.7 percent in the same period in 2009. The office markets, particularly in the central business districts, still languish as companies resist adding white-collar jobs. The office-leasing environment still favors tenants, but there is a limit to the amount of financial incentives landlords can afford to spend to retain and/or attract tenants. A continued strengthening of the office market, even if minor, will likely mean a sharp tightening of the incentives offered to tenants.

Industrial Market Strong

Industrial real estate appears to be healthier. The more than 55 million square feet of space in NH being tracked by Grubb & Ellis|Coldstream Real Estate Advisors has a vacancy rate of 11.1 percent through Q1 2010, down 2 percent year over year. In fact, few large blocks (50,000 square feet and above) of industrial space remain available in southern NH. Some industrial users in the Manchester and Salem markets, for instance, are having trouble finding available facilities that meet their needs. While this is not a call for spec building, the industrial real estate market should continue to stabilize in 2010.

The retail real estate market has had a difficult stretch due to cutbacks in consumer spending and the late boom in retail construction toward the end of the economic run-up.

There are, however, a few bright spots. The recently approved Super Wal-Mart in Manchester, the proposed Gateway Development in Hooksett, and plans for renovating the Bedford Mall are all signs that sales-tax-free NH remains a desirable place for retailers to locate.

For the most part, the investment real estate market has
been quiet since the beginning of the financial crisis. Capital markets and investors continue to exhibit extreme caution and owners of investment-grade real estate (or what was once investment grade) still see more value in their assets than do potential buyers.

Fortunately, this "value disconnect" is beginning to lessen and the margin between sellers' and buyers' perceived value is starting to flatten. With significant investor equity seeking investment-grade commercial real estate, activity will likely increase once the financial institutions start to favor real estate investments again. Unfortunately, that probably won't happen until 2011.

Value investing (purchasing distressed real estate) has also stalled. There has been little distressed asset disposition in NH. Owners and lenders have not altogether panicked-most owners have been able to hold on to their assets. But that is not to say NH owners completely avoided the commercial foreclosure market. Some redevelopment properties (such as Franklin Street Mill in Nashua and Tower Mill in Manchester) were purchased at the height of the market and now sit vacant. By comparison, however, NH fared better than most states.

Leasing Outpacing Sales

Leasing activity is clearly outpacing sales. Since the start of 2010, our firm is handling eight leases for every sale. Until the capital markets ease, this trend will likely continue.

Class A office properties built in the last few years, like Capital Commons in Concord and the Ananda Professional Building in Salem, continue in the initial lease-up phases. Others, like Portwalk in Portsmouth, have struggled to secure enough lease commitments to break ground. Some properties face uncertain futures. City Hall Plaza in Manchester has a lead tenant (FairPoint) in bankruptcy reorganization, meaning it will likely look to downsize its 50,000+ square feet of space. Any institutional-grade property with a large financial institution as its lead tenant may face the same situation.

Some encouraging signs of recovery as 2010 reaches midpoint include pockets of new construction in the office market like the Sanel Block in Concord, Brooks Properties new construction in Salem and medical office/clinical space at River's Edge in Manchester.

There are also some high profile rehabilitation projects underway. The extensive renovation of the Pandora Building, a 130,000-square-foot mill building on Commercial Street in Manchester, into Class A office space is nearly complete. The former Rockwell Automation facility, also in downtown Manchester, is being marketed for potential conversion to medical/office, entertainment, or a combination thereof. These are all positive signs for NH's commercial real estate market.

Also of note is the recent success in the Upper Valley region. New technologies in the medical and biotech industries have lead to a recession-proof economy (according to Forbes Magazine), and virtually no office and industrial vacancies.

The State's fiscal and political positions may put stress on the potential for sustained recovery. Although NH leads the region in recent job growth, our competitive advantages have clearly eroded. The implementation of the LLC tax, for instance, has significantly lowered NH's ranking as the best state in the nation for business startups. Investors have far less reason to choose NH over our bordering states and more reasons than ever to look to incentive-rich southern states and overseas. In addition, unlike in the past, there is little price differential between real estate values in southern NH and those in the Interstate 495/northern Massachusetts market; which means there has been little cross-border activity. These, and a looming budget shortfall, are troubling signs for the state.

The commercial real estate industry will benefit in 2010 from companies that effectively weathered the recent economic downturn and are now positioned to grow, consolidate, lease and/or buy. However, sustained improvement in every sector, except medical, is less certain. Macro issues such as inflation, energy costs and available capital, along with the local issues discussed, make it difficult to read the long-term crystal ball.

Bob Rohrer is president of Grubb & Ellis|Coldstream Real Estate Advisors Inc. with offices in Bedford and Portsmouth and is a past president of the NH Commercial Investment Board of Realtors. For more information, visit www.grubb-ellis.com.


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