I’ll start with a summary of the 2022 half-year review, which isn’t too different from 2021. I am pleased to report that the overall health of the southern New Hampshire commercial real estate market remains strong with few exceptions. Market sectors that continue to outperform are industrial, apartment buildings and doctor’s offices. Non-grocery retail and the professional office continue to lag behind in the market.
The industrial market in southern New Hampshire is experiencing high demand for high rack storage and flexible manufacturing space. Tenants looking to rent space and occupiers looking to buy or build space continue to keep vacancy rates below their historical averages, putting upward pressure on NNN rents and building values. This trend is expected to continue through late 2022 and early 2023.
I recently attended a real estate consultants meeting at 160 Federal St., Boston. (Our first combined in-person/Zoom meeting since the pandemic. I’m confident this is a sign of a new normal as opposed to just Zoom.) Our guest speaker’s focus was an update on Boston’s industrial sector. I would like to compliment Chris Skeffington, EVP at CBRE, who presented the information. He has provided an excellent high level overview of the Boston industrial market which I have summarized below.
1. Demand for industrial space in Boston is 5 times supply
2. Southern New Hampshire is considered a suburb of Boston
3. Southern New Hampshire does not have enough inventory to meet this demand
4. Vacancies are at an all-time low
5. Rents are at historic highs
6. Proximity to the Boston market is critical as demand for direct-to-consumer shipping increases. The “windshield cost” is the economic driver to keep the distribution as close to the population base as possible.
New Hampshire continues to benefit from its proximity to Boston, which is now more accessible than ever from a travel time perspective due to the widening of the I-93 corridor. The four-lane expansion of I-93 that was completed during the COVID-19 pandemic, running north/south from Manchester to the Massachusetts border, was money well spent by the state of New Hampshire because it significantly reduced travel times and the south of New Hampshire made a viable alternative to distribution into the more populated centers of Massachusetts.
As for the office market, we are beginning to see cracks in what has been a fairly strong preforming market during the pandemic. During the pandemic, tenants continued to pay rent despite space being vacant, and they were not returning space as quickly as some had predicted. However, with the start of three- and five-year lease terms, tenants are now adjusting to a post-pandemic world. This will most likely reduce their office footprint as work from home (WFH) or a mix of WFH becomes a reality for certain employees.
It’s still unclear how much the WFH trend will affect long-term office space demand, but one thing seems certain: companies are reluctant to force employees back into the office for fear of losing key employees. Recently, Starbucks CEO Howard Shultz, a pro-return to office advocate, decided in an interview at the New York Times’ Dealbook policy forum in Washington DC not to mandate a return to the workplace. Recognizing that there is a generational gap in today’s workforce, they decided to offer eligible employees of the company flexible options that include remote and hybrid positions.
We see this trend playing out locally as employers re-evaluate how best to run their business and manage/retain employees. Unfortunately for office landlords, this could take years to settle, leaving them with above-average vacancy rates and a drop in NOI for the foreseeable future. Some landlords are responding to weak office demand by taking proactive steps to reduce their risk by converting some of their office space into housing. For example, Brady Sullivan Properties received approval to convert eight floors of its 20-storey Class A office tower in central Manchester into 155 apartments at market prices. They have also slowly converted some of their downtown office space into residential buildings. In addition to office conversions, lower quality C/D buildings will be demolished in favor of much needed multi-family housing development. The weakness in the southern New Hampshire office market is expected to continue into 2022 and well into 2023 as supply exceeds demand. Changing demographics coupled with the WFH trend begs the question: have we reached office peak? I believe we have.
Mike Harrington, CRE, CCIM, is a Broker/Principal with Harrington & Company, Manchester, NH