A commercial real estate comeback for Portland?
Since 2008, office vacancy rates have seen a steady rise in downtown Portland but a new report by NAI The Dunham Group calls 2012 "the year of the turnaround."
A survey of the greater Portland office market shows signs of a rebound after five years of declining vacancy and lease rates, but some brokers are still skeptical that the market has achieved meaningful growth.
The "Greater Portland Office Market Review," released by commercial real estate broker NAI The Dunham Group dubs 2012 as "the year of the turnaround" in the local office market, citing a rise in lease activity, a slight decline in vacancy rates and a renewed interest in investment property sales as buyers begin to take advantage of historically low interest rates.
"Over the last year or so, we've seen businesses feeling more confident, and it all starts with consumer confidence," says Justin Lamontagne, an associate broker at Dunham.
Lamontagne says the start of the economic downturn was marked by smaller and shorter term leases. That trend is fading, according to Matthew Barney, a broker with Malone Commercial Brokers.
"I would say there has been a turning tide," Barney says. "It seems like more tenants are earnestly looking, and while it still takes a long time to get a deal done, the energy has shifted and there is a more positive tone."
Drew Sigfridson, principal at CBRE | The Boulos Co. and president of the Maine Real Estate & Development Association, says that while he "generally agrees" with the report's assessment, he has seen similarly rosy outlooks fall short as of late.
"I've said for the past couple years... that we are starting to emerge out of a five-year slump. But at the end of the year, when you look at the numbers, they haven't really played out," Sigfridson says.
Sigfridson agrees that consumer confidence has been on the rise in the last couple of years and low interest rates "help give some predictability in the marketplace," but he stops short of proclaiming 2012 the year of the office market comeback.
"A lot of companies we work with are doing well and are holding off on expansion. But at a certain point, even with increased efficiency, you do need to expand," Sigfridson says. "Maybe this will be the year, but I don't see that real definite impetus to say that [it] will."
According to the report, there is currently over 3.1 million square feet of available office space in Cumberland County, with 600 office listings in greater Portland alone.
The 2,000-to-4,000-square-foot tenant remains the norm in greater Portland, with larger space in the 5,000-to-50,000-plus-square-foot range taking longer to fill on average; typically around nine months.
"The market is somewhat bifurcated. At the smaller end, your 3,000-square-foot tenants have been slow coming back. It's been herky-jerky," says Tim Soley, president and owner of property management and development firm East Brown Cow Management Inc.
But Soley does not wholly agree with the report's findings, saying that the market for larger office tenants has been on the rise for the last couple of years.
"Two years ago, larger tenants became much more aggressive about growth, and interest rates made it far more possible to complete some of those larger deals," Soley says.
Downtown Portland has the highest rate of office vacancy at 13.5%, while the Falmouth-Yarmouth corridor takes claim of the lowest vacancy rate at around 6%.
While leasing has seen a slight uptick since 2001, the report found that the quantity of available inventory has mitigated that uptick's impact on vacancy rates.
In a relatively small market, Barney says, a single tenant can make a big dent on overall vacancy rates, as in the case of law firm Pierce Atwood, which in 2011 moved from its Monument Square offices into a 100,000-square-foot waterfront space on Commercial Street.
With many tenants shifting locations in recent years, Sigfridson says he takes caution when looking at the impact of those moves on vacancy rates.
"There has been a shifting of tenants [in Portland], but not a lot of growth," says Sigfridson. "Until you have a substantial growth in employment, you won't have vacancy rates fall in a substantial way."
Sigfridson credits some of Portland's high vacancy rate to an older stock of available office space.
"As pricing has come down across the board, some tenants have relocated into newer, more efficient buildings, so that leaves you with some older buildings that stay vacant and are tougher to fill," he says.
Costs associated with locating an office downtown, such as parking, have turned off some tenants, but Sigfridson think that the Portland market is still attractive to a certain type of renter.
"I think there is still a desire by a lot of companies to be in downtown, urban environments," he says.
The reports colors greater Portland as a renter's market, with small- to medium-sized property owners dropping lease rates by $1 to $3 per square foot and offering up to a year of free rent to secure quality tenants.
"In most circumstances, particularly in Class B buildings, the tenant is in control of the deal, [but] can still expect to be required to personally guarantee leases, provide full financials and often pay hefty security deposits," the report states.
Soley says he's not seen such steep concessions from property owners looking to keep a space occupied, but that those considerations have become a reality of the market.
"I've never given away as much as they are talking about, but yes, there are market concessions that's a typical reaction to the market," says Soley.
Larger property owners, especially those marketing Class A space, have been able to get ahead of the curve, and have already started demanding more from prospective tenants, including increased security deposits, participation in build-out costs and longer lease terms.
"My vacancy rates are higher than in 2005 and 2006, but have started to come down in the last two years," Soley says. "Not in a linear fashion — more like two steps ahead, one step back."
For prospective investors, the report paints a bleak picture of the local market, citing a "complete lack of quality investment properties" for sale over the last several years as sellers are hesitant to part with real estate given the absence of alternative means of investment.
Cap rates for investment properties can range from 7% for single-tenant net leased and multi-family properties to 12% for suburban multi-tenanted properties.
"Investors want to put their money into something more stable than the stock market, and real estate has been a conservative, safe play," says Lamontagne. "The returns are lower, but safer."
The recent mortgage crisis has made the investment property market even more lucrative, according to Lamontagne.
"It's somewhat difficult to receive a mortgage in this market; the rates are great, but the process has never been more stringent," he says.
For that reason, Lamontagne says, "one of the hottest investments are multi-family buildings, those are moving more than any other market sector."
The report cites technology, health and wellness and medical offices represent some of the strongest sectors of the local market, with technology specifically lauded as "one of the only sectors where growth is the norm rather than the exception," according to the report.
Health and wellness commercial operations like nutritionists, personal trainers, yoga studios and boutique gyms have seen a sizable boom in recent years, though the report notes that landlords are often wary of the longevity of such businesses.
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The Greater Portland Office Market Review, by Thomas Moulton and Katie Allen, NAI The Dunham Group
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