Photo / Maureen Milliken
A building at 65 Pleasant Hill Ave., Scarborough, is under contract; industrial users are opting to buy, not lease.
July 25, 2018
Portland area industrial real estate sales are hot, but large leased space goes empty
Photo / Maureen Milliken
The industrial building at 6 Lincoln Ave. in Scarborough has had 36,000 square feet of warehouse space available since December.
By Maureen Milliken
PORTLAND — The tight industrial space market in the Portland area has loosened up slightly, but that’s not necessarily good news, according to a mid-year overview.
Justin Lamontagne, a partner/broker with NAI The Dunham Group, said sales of larger industrial space — 10,000 square feet or more — are better than they have been in a long time, but conversely, there’s an inventory of leased space and a lot of competition for tenants.
Lamontagne’s summer industrial market overview was published last month. NAI The Dunham Group does an annual Greater Portland industrial market survey and forecast, which came out early this year.
Lamontagne told Mainebiz Tuesday that since he did the overview in June, more large industrial properties have come on the leasing market.
Lease prices are at $6.50 a square foot, a 35% increase from 2012. But despite the fact there are more vacancies, lease rates haven’t shown any sign of dropping, Lamontagne said.
While in the overview last month he said he’s confident the space would get filled by year’s end, that’s changed enough in the ensuing weeks that he no longer feels that way.
“I can’t ignore the lack of activity and the sudden increase in comparable larger style industrial spaces,” he said. “We don’t have enough large tenants in this market to fill eight to 10 10,000-square-foot plus spaces.”
He said in the last two to four months, several large industrial spaces have become available and estimates the vacancy rate at 2.5%, up from 1.25% in December.
While that’s still relatively low, it’s a big six-month increase, he said, and there are a small number of potential tenants for that size space.
“When you see four or five [buildings coming available], the competition for those businesses is very heavy,” he said. “There are a lot of big, empty spaces out there.”
The change comes after more than 20 quarters of shrinking vacancy rates and rising lease prices.
The source of the downturn in industrial leasing is “the million dollar question,” particularly when sales of larger industrial space are doing so well.
While the medical marijuana and craft beer businesses that were snatching up space a year or so ago have slowed, those spaces are generally smaller than those going empty on the market.
Lamontagne said some businesses may be finding ways to do more with less space, and others may be opting to buy instead of lease.
Buying big buildings
As an example, Lamontagne said he’s been seeking tenants for 36,000 square feet of what he describes as “primo” space at 6 Lincoln Ave., at the entrance of the Scarborough Industrial Park, off U.S. Route 1 and a quick shot to Interstate 95.
The building has 22-foot-high ceilings, state of the art sprinkler system, central air conditioning, loading docks and a showroom. “It checks a lot of different boxes,” he said.
In six months, he’s done a lot of tours and has seen interest, but no takers.
The building’s tenants include a baseball training facility, one of the newer uses for that type of space. He said fitness centers and other similar uses are also leasing industrial space.
But Lamontagne said traditional industrial users are still the focus of the larger spaces.
Conversely, he said Class A buildings are selling for more than $80 a square foot, and he’s even seen some sell for $100 a square foot. Those prices, which are close to replacement costs, should boost new construction, but there isn’t a lot of land available.
For example, his firm has a pending sales agreement, set to close in September, on an industrial building on the other side of Scarborough, at 65 Pleasant Hill Road. The building has 1,600 square feet of office and showroom space, and 10,000 square feet of warehouse space on 18.88 acres. It was listed by NAI The Dunham Group for $1.15 million.
There were multiple offers on the building, he said.
The January annual survey found 18,638,496 square feet of industrial space in the Greater Portland market at the end of 2017, up from 18,260,479 in 2016.
The average industrial sale price in 2017 was $60 a square foot, which was an increase of $20 per square foot since 2011.
Lamontagne told Mainebiz Tuesday that all but about 30,000 square feet of the new construction added in 2017 has been filled.
“The new inventory to our market this year is primarily older construction, 20 to 30 years old” Lamontagne said. “So, generally, the added inventory from 2017 isn’t the main reason we’re seeing increased vacancy.
Construction window closing
Photo / Fred J. Field
Justin Lamontagne, partner/ broker with NAI The Dunham Group, has done a summer overview of industrial space.
The NAI The Dunham Group’s 2017 survey “quantified a disturbing trend in Southern Maine that could have significant impacts on our overall economy,” Lamontagne said in the January report. “The supply/demand ratio has tipped so dramatically that lack of real estate is a major barrier to entry into our market for new and growing businesses.”
Lamontagne said Tuesday that traditional industrial users still need space to store and ship goods. While industrial space isn’t as visible as office and retail, “it’s very impactful” to the economy, he said.
Lease rates and higher sale rates should spur new construction, but that’s not happening, he said. While he's still "bullish" on speculative and owner/user industrial construction, limited quality industrial land, rising interest rates and international economic pressures are dampening the market.
“That window could be closing and it hasn’t even been open that long,” he said.
Lamontagne said that a solution to the issue is to make it more attractive for businesses to locate in Maine.
He added, though, that the Maine also may have something to do with the most recent impacts on the leasing market.
“The other very real factor in all of this is that we are in the doldrums of summer,” he said. It’s typically the slowest leasing season, though the past couple summers have been busier than normal.
“Some of this drop in activity could very well be due to our lovely weather of late,” he said.
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