Pure speculation | Economic developers look to speculative building projects to lure new businesses to Maine

When Colby College agreed to invest a half-million dollars last month to help build a speculative office building in First Park, the Oakland-based business park developed by 24 towns in the Waterville region, supporters heralded it as the kind of boost the park needs to live up to its goal of stimulating the regional economy. "Colby's investment in this venture is an affirmation of our commitment to support local economic development initiatives and to do our part to help bring new jobs to the Waterville area," Colby President William D. Adams said when the investment was announced March 9.

It wasn't so long ago that a plan to build on spec would have been seen as a risky venture rather than a strategic economic development decision. Speculative building in both the residential and commercial sectors during the real estate boom of the late 1980s led to the real estate crash of 1993 and 1994, when banks and developers lost money on real estate that didn't move and the construction industry shed a third of its jobs. Since then, private developers have been reluctant to take on speculative commercial projects, and banks have been unwilling to finance them.

Nonetheless, at the moment there are a handful of spec buildings either under discussion or ready for construction across the state. But according to commercial realtors, this time around there is a crucial difference: None of the speculative buildings currently under consideration in Maine is being proposed by a private developer. Instead, it's economic developers, often backed by local and state funding, who are taking the plunge. Whether in Oakland, Sanford or Presque Isle, economic developers are acting on the belief that a business or industrial park full of empty lots ˆ— even if they're loaded with amenities ˆ— isn't always enough. To attract new business, they seem to agree, you just might need a building to sweeten the deal.

The rationale behind their strategy? "We had the notion that we needed a spec building to attract larger, out-of-state companies," says Paul Levesque, CEO of First Park, a $5.5 million business and technology park developed by the Kennebec Regional Development Authority using a combination of local, state and federal money.

Billed as "Maine's premier business and office technology center," the 285-acre development is loaded with high-tech communication utilities, including redundant fiber-optic cables and wireless networking equipment, that are available to each of the 22 building sites. But since the park's infrastructure was completed in October of 2001, First Park has attracted just a single tenant ˆ— Perry, Fitts, Boulette & Fitton, CPAs, which relocated to the park from Waterville in 2002. "Most companies," Levesque says, "are looking at existing buildings only."

And while there's a lot of vacant space in Maine, most of it is older, and doesn't meet the needs of the modern-day business world. That's why spec buildings built by economic developers make sense, says Jim Harnden of Portland-based commercial brokerage Ram Harnden. "Today, a lot of corporations are making their leasing decisions with short lead times," he says. "It takes four to six months longer to build" than to move into existing space. Besides, he says, when it comes to making a decision about office or industrial space, "It's like buying a used car ˆ— people like to kick the tires, see it, get an understanding of what it's going to be like."

Patient capital
That certainly seems to be the case in Presque Isle, where the Presque Isle Industrial Council has built one speculative building and plans to break ground on another this month. The first, says Larry Clark, executive director of the council, was built in 1988 and is now leased to two companies, Federal Express and McCain Foods. However, it took the council nearly six years to get its first tenant; Federal Express leased 10,000 sq. ft. in the mid-1990s, and Clark says McCain didn't lease the remaining 8,000 sq. ft. until 1999.

Even throughout that long delay ˆ— something a private developer would be highly unlikely, or unable, to tolerate ˆ— Clark considered the building an asset for the area. "We had a wholesale distributor from Philadelphia [Redlon & Johnson] looking to expand," he says. "Their interest to look here was because of the availability of that building. They came and looked; it wasn't in the right location. But once they got here, we found out what they needed in more detail, and helped them lease another building across town."

It's precisely that chain of events ˆ— though presumably with a shorter lag before tenants appear ˆ— the council hopes to replicate with its new venture, a 16,000-square-foot shell in the Skyway Industrial Park. Though the building is scheduled for completion by August, its floor and heating system will remain unfinished so they can be customized according to the eventual tenant's needs. "We've leased out everything we have," says Clark of the rationale for the project. "We need a building available for new businesses to look at and, hopefully, move into. It allows a business to put more of their money into machinery and equipment versus real estate."

Though the Presque Isle Industrial Council has the funds to pay for the $479,000 shell in a building fund it established in the mid-1980s, Clark says 49% of the money will come from a no-interest loan from the Northern Maine Development Commission, which will not need to be paid until the building is sold or leased. "We've earmarked money for a spec building," he says. "We've got the cash in the bank and we can afford to sit on a building for a period of time."

That's the primary reason why speculative building is in the hands of economic developers instead of the private sector ˆ— it requires patient capital. And according to Don Schjeldahl, a site-location specialist with the Austin Company, based in Cleveland, the investment of that capital sends the right message to a prospective new tenant ˆ— the community is committed to economic development, new business is wanted and, most importantly, the community can work together. "Often, if a community doesn't have a spec building, they never make the first cut," he says. "It gets you on the radar screen." (See "Marketing Maine," below.)

Carol Epstein, president of Bangor-based Epstein Commercial Real Estate, agrees with that sentiment, noting that industrial users in particular only want to look at existing buildings. Still, though she says that speculative building can work when a developer ˆ— public or private ˆ— speculates on something the market wants, she's not entirely sold on the technique's value. "It's wonderful to speculate, but we're sitting on hundreds of thousands of square feet of vacant space" in the Bangor region, she says. "My concern, instead of building brand new, is to find a way to get that space put in play."

According to Epstein, the Bangor-area vacancies are predominantly driven by the decline in the paper industry. Schjeldahl, who specializes in helping small to mid-sized manufacturers relocate, says the domination of available space by those older mills may be part of the problem in attracting companies to Maine. "We've seen over the last 20 years that building specifications have changed," he says. "In the mid-70s, buildings had a 12-foot clearance height, and multi-story buildings were obsolete. Since then, the clearance heights have increased, [and] the base-spacing" ˆ— the distance between structural supports ˆ— "has gotten bigger. Now, a lot of projects require 28- to 30-foot clearance heights in a building; not so much because it's needed now, but to keep from locking yourself into an old technology."

"Roll it over, sell it and do it again"
The concept of economic developers and municipalities building on spec isn't a new one for Maine, according to Peggy Schaffer, policy specialist for the Department of Economic and Community Development. In 1973, Schaffer says, the state created a half-million dollar fund, called the Community Industrial Building Fund, and re-funded it with an additional $300,000 in 1980. In all, 11 buildings ˆ— including a spec building built in Brewer in 1975 and sold to Brewer Automotive in 1978 ˆ— were funded by the program before it was rolled into the Rural Development Authority. "Most were built in the 70s and 80s and were sold to out-of-state businesses that would not have come here otherwise," Schaffer says.

But even some proponents of speculative building wonder if the facilities really do attract companies from away. Rick Stanley, president of the Sanford/Springvale Chamber of Commerce and Economic Development and the Industrial Development Council, says his group has discussed a spec building in the past, and may consider it again this summer. Either way, he says, local businesses are the equivalent of low-hanging fruit when he's recruiting companies to the area. "They understand the business economics of the region," Stanley says. "You don't have to go through the education curve. It's easier to sell to local businesses."

Tom Dunham, president of NAI The Dunham Group in Portland, agrees with Stanley's assessment that it's easier to attract local business than new, out-of-state businesses with a spec building. "In my experience, spec buildings typically attract a business within 15 to 20 miles," he says.

Despite that evidence, Levesque says the goal of the new speculative building at First Park is to lure out-of-state firms to the area, a result Steve Collins, a Colby spokesperson, says the college would like to see. "The economic health of Waterville and the region are important to Colby ˆ— important to attracting students, to attracting faculty members," Collins says.

With Colby's investment and $1.5 million of additional loans and investments, the preliminary design work on a 20,000-square-foot building is already underway. When it's completed in the fall, Levesque hopes to attract a financial or technology company that will be able to take advantage of the park's communications infrastructure. According to Levesque, the nature of the space itself will be more attractive to firms from away than it will be to Maine-based businesses. "This is class-A space," he says. "It's more expensive than local businesses are willing to pay. There's room for about 100 employees, and there aren't many local businesses like that, so it's self-selecting."

Collins agrees, noting that the college will leave the details of marketing the building to Levesque and the First Park staff. "We have no huge desire to micromanage this," he says. "We're confident they'll put up the kind of building to suit those priorities and to get out-of-state companies to look at it." But he also points out that Colby alumni are aware and supportive of the investment ˆ— something that may help attract a viable tenant.

Levesque says he knows that First Park won't solve all economic woes of the Waterville area. "It's not a panacea; we know other things have to be done. But without First Park, there's no chance of being a major player," he says. "We've created a new market segment; we're trying to attract business that wouldn't normally come into the Waterville area." And if the plan works, Levesque says, "We'll roll it over, sell it at a profit, and do it again."