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February 8, 2010

Closing the deal | Maine real estate professionals gathered at the annual MEREDA conference, hoping for better times in 2010

The annual forecasting conference by the Maine Real Estate & Development Association tried to put a positive spin on what was a lousy year by all accounts. The best news: 2009 is over, and some sectors have begun the slow road to recovery, including home sales, where volumes have begun to inch up while prices have at least stabilized since their yearlong, steady decline. The median home price today is $164,000 – roughly what it was in 2004.

Other sectors, too, have begun to get their sea legs after a year of tumultuous financial activity. Here’s a summary of some of the market sectors presented at the Jan. 28 MEREDA showcase in Portland.

Southern Maine industrial

While 2009 saw few real estate transactions in the industrial market – and an unusually high number of deals that fell through at the 11th hour – 2010 is off to a good start, according to Greg Hastings of Portland’s NAI The Dunham Group.

“We’ve seen some increased activity here at the beginning of the year, which is encouraging,” Hastings said. Among the reasons behind the virtual halt in industrial transactions, he said, were potential tenants’ increased price sensitivity and a resistance to change.

With more than 10% of the industrial space in the Greater Portland area currently vacant, it should come as no surprise that new construction has stopped. Equally unsurprising is the fact that the current market is highly favorable to tenants. To combat these trends, Hastings said, landlords will have to offer discounted lease prices, offer rent concessions of anywhere from one to six months, and offer tenant improvement contributions.

There is good news for landlords, Hastings said. The market as it exists today can only go up.

“Lease prices can’t continue at these rates forever,” he said. “With the number of significant properties that are vacant, there are tremendous opportunities for savvy investors.”

Southern Maine office

Forecasts for southern Maine’s office space market in 2010 may not be as positive as landlords and brokers want, but there are some encouraging signs, said Drew Sigfridson of CB Richard Ellis/The Boulos Co.

“In 2010, the worst is over in the office market,” he said. “Vacancies will start to fill slowly, and as a result, rental rates will stabilize.”

From 2008 to 2009, there was little change in the Greater Portland office market, Sigfridson said. In fact, there was only about a 30,000-square-foot difference between the sublease and direct markets.

While this year promises to be another challenging one, Sigfridson said, as the employment outlook and overall economic situation continue to improve, the trend of the last two years should turn around.

As in most real estate markets, landlords have been forced to resort to rent reductions and other concessions to attract tenants. The hardest hit sectors in 2009 were the downtown Class B (10.6% drop in average asking price from 2008) and suburban Class A (10.2% drop). A bright spot was medical Class B (2.3% increase), which was the only sector to post growth in average lease asking price.

With a number of significant vacancies in the Greater Portland area, a complete turnaround in the office market is years away, Sigfridson said. But, he added, at least there is light at the end of the tunnel.

“There are good opportunities in the market,” he said. “As vacancies increase and we continue make our way out of the recession – and we are seeing that – it’s a good time to lease and buy.”

Retail

Challenging times lie ahead for many of Maine’s retail markets, where a decade’s worth of growth is now taking a breather.

National retail vacancy rates hovered at 12% at the end of the year, while here in Maine, the rate closed at 10.8%, according to Mark Malone of Malone Commercial Brokers. That’s a stark rise from five years ago, when the national retail vacancy rate hit 8%, but Maine’s didn’t even reach 2%.

Malone said the trend in retail development these days is toward single tenant, stand-alone stores such as the Tractor Supply stores that opened in Augusta and Lewiston in 2009, food stores, pharmacies and banks. The Greater Portland area saw a nearly 11% vacancy rate in 2009, prompting declining lease rates, which reached a peak in 2006 of $18.50 per square foot and have fallen to $13.50 per square foot.

For 2010, Malone expects little new construction, as landlords focus on filling existing vacancies, which he forecasts could stabilize at 6% to 7% by year’s end in the Greater Portland market. Goodwill Industries’ move to the former Circuit City space in South Portland and Marden’s move into a former Walmart will lead the way.

“Those two items alone will drop the vacancy rate to about 9%,” said Malone.

Malone said it’s possible that factors are lining up for a perfect storm for investment chaos as commercial mortgage-backed security notes come due in the next few years.

“Vacancy rates are higher, lending standards are tougher, property is worth less … Some owners are just barely covering the mortgage,” he said. “Banks are going to look and see if (the retailers) meet standards and if they don’t, borrowers will have to come up with a lot of cash, or you’re going to see properties go to market as distressed sales.”

On the bright side, Malone said a lot of well-financed investors are sitting on the sidelines, waiting for the right conditions and properties before entering the market.

Central Maine

The central part of the state had plenty of commercial activity through the year and signs of upcoming activity as well.

The Lewiston-Auburn area continued to develop its reputation as a logistics center with some notable transactions and tenants in industrial parks, including a new 60,000-square-foot warehouse for Kellogg Snacks in Auburn, according to a presentation by Chris Paszyc, a broker with CB Richard Ellis/The Boulos Co. But it has 300,000 square feet of newly vacant space that will take a while to absorb, said Paszyc. Its retail sector got a boost when TD Bank announced plans to take 60,000 square feet of vacant space at the Auburn Mall in a 10-year lease arrangement.

In the Augusta area, the state continues to be a major player as the Maine Office of Innovation seeks a 45,0000- square-foot space and the taxation bureau searches for a 55,0000-square-foot home. One of the greatest factors affecting real estate throughout the region will be the planned new MaineGeneral campus, a $322 million hospital project.

“We anticipate that if the [certificate of need] is approved, that it will create opportunities around both the old campuses and the new planned campus,” he said.

Bangor

In the Bangor market, the industrial sector recorded the most dramatic changes, as vacancy rates nearly doubled from 7% in 2007 to 13.1% in 2009. Brewer is steeling for a major departure as precision auto parts manufacturer ZF Lemforder prepares to close and vacate nearly 180,000 square feet of space in two locations this summer, according to Bev Uhlenhake, a broker with Epstein Commercial Real Estate in Bangor. That will shoot the city’s vacancy rate to more than 21%, up from 5%.

In the office market, the vacancy rate has remained consistent since 2007, coming in at 6.2% at the end of last year, with a number of medical offices shuffling to new space. The retail sector has been mixed, with the Bangor Mall suffering the closure of national big-box chains Linens ‘N Things, Circuit City and the departure of Home Depot into a new building on Stillwater Avenue. But there’s a new Lowe’s slated for Bangor and six new retail operations have gone up in the last year in the Broadway area.

Outside of the mall area, strip malls have remained at a steady 7% vacancy rate since 2007, a stark contrast to Greater Portland’s strip mall vacancy rate of 17.8% in 2009.

Hospitality

Tourism is often cited as Maine’s biggest industry and it’s likely tourists will lead the hospitality industry in its rebound.

Sean Riley of Maine Course Hospitality Group in Freeport said occupancy rates are expected to remain flat in 2010, good news for an industry that saw a 9.1% drop in occupied rooms on a national level between 2008 and 2009, and 7.6% here in Maine.

But those drops have stabilized in the later quarter of 2009, said Riley. Declining room prices ($94 is the average), should spur business and hoteliers can expect to see a modest rebound as the 2010 tourist season unfolds.

“Leisure travelers will bring us out of this, followed by business travelers,” he said. “Maine is so hugely leisure-based that this may be the turning point.”

Riley said the hospitality industry is cyclical, like many other retail sectors, and that the number of new hotels in the national pipeline declined from 1,400 in 2009 to fewer than 1,000 projected for 2010. That should stabilize occupancy rates and encourage the performances of existing hotels. The hotels that survive and revive are the ones who don’t scrimp on taking care of guests.

“It’s just getting back to basics,” he said.

 

Compiled by Mainebiz staff and contributing writer Derek Rice.

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