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December 14, 2009 From the Ground Up

Riding the wave | Constancy beats cash in a tough market

By Justin Lamontagne

With all due respect to Gordon Gekko and his philosophies, greed is no longer good. Rather, I encourage my clients to heed the words of a new catch phrase I recently heard, “Flat is the new up.” While not as sexy as Gordon’s timeless quote from the movie “Wall Street,” it’s certainly a more accurate snapshot of the current state of commercial real estate in southern Maine.

Let’s reflect a bit on why a more conservative approach has become en vogue. Last year around this time, the stock market had crashed, banks slipped into crisis mode, home sales came to a screeching halt and “Black October” was a stark reality. As a result, property owners and landlords began adjusting their expectations (not to mention their budgets) and prepared for a tough year. And a tough year it has been.

Vacancy rates increased throughout the region. Lease rates dropped. Commercial demand — including office, retail, industrial and investment sales — slowed significantly. Landlords and property owners began to see their shining investments, many made in the previous five years, suddenly produce dimmer returns.

However, I would be remiss (and unemployed) if I told you it was all bad. There are indeed signs of improvement as we move into 2010. In January, my company will release our annual Office Market Survey, a comprehensive survey of all Class A and B office space in Greater Portland. Each building’s vacancy rate and asking lease rates are carefully calculated and charted. It serves as an excellent barometer of commercial real estate trends and the overall health of our market. (The 2010 OMS in its entirety will be available in late January and can be downloaded for free at www.boulos.com).

Interestingly, the preliminary results reflect a stabilizing vacancy rate. From 2007 to 2008, the overall rate in Greater Portland jumped from 6.21% to 9.05%, an alarming 45% increase. This year, however, the rate only rose 2% to an overall vacancy rate of 9.21%. It should be noted that a handful of larger transactions affected the rate positively in the second half of this year. Most significantly, MaineHealth’s purchase of 110 Free St. in Portland equates to an absorption of about 83,970 square feet. So, while we are still well above our historic averages of a 5% to 7% vacancy rate in Greater Portland, the data suggests we are at least trending toward a recovery.

Several significant investment sales made in the second half of 2009 also boosted our market. In July, 465 Congress St., a 67,000-square-foot office tower and adjacent parking garage in downtown Portland, was sold to a Bangor investor for $12 million. Three buildings that currently house the Portland Press Herald were sold to an out-of-state investor for $6.3 million. That same investor purchased the vacant 116,500-square-foot property at 300 Southborough Drive in Scarborough with plans to renovate and lease it out.

Staying flexible

Despite the good signs, property owners and landlords are wise to maintain a tempered confidence and expectation level. Where landlords were anticipating significant net profits, they are now happy to break even. Again, “flat is the new up.”

A number of property owners are promoting low “introductory rates” to attract new tenants. These are typically short-term, low-rent commitments that will escalate to market rates over the course of a lease. By offering these concessions, the landlord is assured of having his operating expenses and utilities paid for during this down period and a tenant can take advantage of a historically low lease rate offer.

Another popular technique is to “blend and extend” an existing tenant. My company recently represented a 60,000-square-foot office tenant that had two years remaining on their lease and an option to renew for another 10 years at a predetermined rate. The option rate was well above today’s market rates. Armed with the fact that there were a number of comparable alternatives out there, we presented the landlord with a proposal to renew for an additional 10 years today but at a lease rate at current market levels. We blended the rate and extended the term.

The landlord chose to accept the proposal to avoid the risk, time and costs involved with finding a new tenant. He was happy to solidify his building with a long-term, stable tenant and put his property in a better position for long-term financing. The tenant, of course, was happy to remain in their current building at a lower rental rate and to stabilize their real estate needs for an additional 12 years.

Commercial real estate owners that ride the wave, rather than flail ineffectively against it, will survive and ultimately prosper. The future is bright for those willing to respect their tenants’ needs and sacrifice today by temporarily accepting stability in lieu of higher returns. Sorry to disappoint you, Gordon.

 

Justin Lamontagne, associate broker at CBRE/The Boulos Co. in Portland, can be reached at jlamontagne@boulos.com. Read Justin’s column at www.mainebiz.biz.

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