A renaissance in New Hampshire’s manufacturing sector is driving up rents close to the point that development of new industrial real estate makes financial sense.
After years of decline, the state’s industrial sector is undergoing an impressive resurgence, driving down vacancy rates in old manufacturing facilities and warehouses and pushing rents upwards slightly in the south of the state.
The vacancy rate hit 5.4 percent in the first quarter of this year in the six main submarkets in southern New Hampshire, the lowest within recent memory, industry officials say.
The vacancy rate in Portsmouth, the second largest submarket with 12.8 million square feet of industrial space, is now at just 2 percent, or about as close to full capacity as it can get, according to data from Colliers International.
“I’ve never seen it like this before,” said Andrew Ward, an associate at Colliers International whose commercial real estate firm tracks nearly 55 million square feet of industrial space in the submarkets of Concord, Manchester, Nashua, Salem, Portsmouth and Dover. “The market is very tight.”
It’s so tight that leases rates, which have been stagnant for years, are now showing signs of inching up, hitting $7 a square foot in some submarkets, according to industry experts.
Industrial Loans Perform Well
Local bankers are seeing the industrial resurgence as well.
Joseph Carelli, president of Citizens Bank-New Hampshire & Vermont, said industrial loan activity in northern New England increased by about 7 to 10 percent last year at Citizens – and loan activity is expected to be even stronger this year, assuming the economy holds up.
“We’re having one of our best years ever,” said Carelli, whose bank also does some business in Maine.
The driver of the industrial sector’s expansion is tied to the generally strong national and state economies, the arrival of so-called “advanced manufacturing,” which relies on more sophisticated automated and robotic equipment, and the surge in the e-commerce industry’s often voracious need for warehouse and distribution center space.
While the industrial market isn’t anywhere near where it stood in its glory days, the expansion is an improvement from years past. At 70,100 employees in 2018, the state headcount in manufacturing is down from 100,000 in 1990 and down from the hundreds of thousands employed when the state’s numerous mills and factories were running at full capacity in the 19th and early 20th centuries, according to U.S. Bureau of Labor Statistics data.
Employment in the manufacturing sector today is at its highest level in 10 years and up about 5,000 jobs since it hit its downturn bottom in 2013, according to BLS data.
“The good news is that it’s not declining,” Paul Falvey, CEO of the Bank of New Hampshire, said of manufacturing jobs. “It’s increasing. It’s not huge, rapid growth. It’s more modest growth.”
As a result, he said his bank’s loan activity within the light manufacturing and warehouse/distribution center categories is seeing “solid performance,” though not nearly as strong as loan activity in other commercial sectors, such as in health care.
Citizens Bank’s Carelli said industrial loan activity generally falls into three areas: lines of credit, construction for expansions and equipment purchases.
Equipment loans are mostly used for advanced manufacturers purchasing highly sophisticated computerized machinery and robotics – equipment that doesn’t need as many employees to operate. Even though modern advanced-manufacturing facilities employ fewer workers, there’s still a great need for skilled employees. It’s a need that isn’t being met, Carelli said.
The e-commerce sector’s voracious need for more warehouse and distribution space is leading the revitalization of the industrial sector from Dover to Nashua.
Older Properties Ill-Suited for Modern Needs
Carelli said he knows of three projects in which employers are building additional manufacturing space on their properties to accommodate business growth.
Roger Dieker, first vice president at CBRE, said New Hampshire’s industrial sector needs more space.
“Overall, the market is the tightest it’s been in many, many years,” he said.
One major problem for the sector is that existing industrial properties tend to be old, usually built in the 1980s and earlier, and can’t always accommodate the needs of modern manufacturers and e-commerce shippers. Ceilings are too low or bay doors are too small or there’s not enough truck docking spaces, observers said.
Still, businesses are snapping up whatever available space they can get, old or not, and Dieker said rent prices are starting to creep up as a result. Over the past 15 years or so, rents per square foot have generally run between $5 to $6, but Dieker said some tenants are now signing renewal contracts in the $7 range.
Consequently, prices are “getting very close” to levels where new construction of facilities make financial sense.
“You have some developers ready to do some build-to-suit projects,” Dieker said.
Collier International’s Ward agreed lease prices are starting to inch up, albeit slowly, after years of stagnation. But he’s not sure they’re high enough to justify much new construction, especially with the cost of construction increasing so fast each year.
“The gap between returns and costs is huge,” he said. “We’re not going to see any speculative building, I know that.”
