The state’s commercial real estate industry, particularly the industrial subsector, has seen a noticeable uptick in activity since the economy began reopening from its spring lockdown due to the coronavirus.
However, industry officials remain concerned about both the short-term and long-term prospects for the office and retail sectors, amid fears that the national economy remains fragile and that another virus surge could hit the region later this fall.
“There’s definitely more activity today, but there’s also a lot of caution,” Bob Rohrer, managing director of New Hampshire for Colliers International, said of the market in general since the late spring and early summer reopening. “There are still so many unknowns.”
Since the reopening of the economy started in late May, the same four commercial real estate officials say the mood has dramatically changed from April’s stunned pessimism.
“Somehow, the switch got turned back on,” said Chris Norwood, president of NAI Norwood Group. “There are more discussions and decisions being made. More people are coming off the sidelines. There’s a feeling that the worst, broadly speaking, may be behind us.”
Still, Norwood said, there are a number of short-term challenges ahead this summer that’s he monitoring closely, including what will happen if and when state and federal eviction and foreclosure bans expire – and what will happen if enhanced unemployment benefits expire for millions of jobless Americans.
“There’s still a lot of uncertainty out there,” said Norwood.
The Surprise Pandemic Winner
Heading into the early spring, the industrial sector – which includes warehouses, distribution centers, manufacturing and light-industrial properties – was on a tear.
According to Colliers International’s first quarter data, the industrial occupancy rate statewide stood at 94.7 percent by the end of March, with average rents hovering around $6.80 per square foot for the 67.3 million square feet of industrial space tracked by Colliers. That was driven by a surge in e-commerce business and a smaller bump in advanced manufacturing.
Sales and lease activities within the industrial subsector initially screeched a halt after the early spring shutdown – but it then came roaring back due to skyrocketing demand for e-commerce products and services during the lockdown, officials say.
As a result, e-commerce players quickly scrambled for new warehouse/distribution space to meet the surging demand for home deliveries of products. In addition, many hospitals, desperate to stockpile personal protective equipment (PPE) during the pandemic, also started hunting for space, CRE experts say.
And the demand for warehouse/distribution space hasn’t let up since the reopening of the economy.
“The industrial sector has been extraordinarily busy,” said Chip Brown of Brown Commercial Realty (BCR) in Hanover.
Other commercial real estate officials confirm that industrial activity, both on the lease and sales ends, has surged in general.
Offices: ‘The Great Unknown’
Like the industrial subsector, office properties had a strong first quarter in 2020, with the occupancy rate hitting 92 percent by the end of March, net absorption rising by 1 percent and average rents for all office classes hovering around $18.45 per square foot, according to Colliers International data.
Since most office tenants have multi-year leases, those numbers were not expected to change much in the second quarter, lockdown or no lockdown, reopening or no reopening.
But the big question is: Will unemployment remain high, thus tamping down demand and prices?
And will companies conclude, after the relative success and even popularity of work-at-home policies during the shutdown, lead to lower demand for office space in the future, regardless of how the economy fares?
“Everything is kind of frozen right now,” said Bill Norton, president of Norton Asset Management. “There’s some activity right now [within the office market], but most everyone is sitting tight to see where the market is going.”
Collier International’s Rohrer called the office market “the great unknown” within commercial real estate.
For the time being, most CRE brokers report there’s been no surge in companies trying to downsize via subleasing of space – at least not yet.
How Bad Will Retail Get?
While office space faces an unknown future, there seems little doubt about the future of retail and restaurant space as a result of the lockdown.
Rohrer is blunt: “We’re going to see a contraction.”
The trend was already evident before the lockdown, as retailers big and small struggled against upstart e-commerce rivals. The pandemic merely accelerated that trend, forcing several large, national retailers to declare bankruptcy this past spring.
As a result, shopping malls, already struggling to survive and adapt before the pandemic, are expected to endure even more pressure moving forward.
As for restaurants, the reopening of the economy is a welcome step, but restaurants, like retail stores, still face post-lockdown restrictions and consumer anxieties about eating out. And an undetermined number of restaurants simply have refused to reopen, calling it quits and shuttering their doors for good after taking devastating hits during the lockdown.
BCR’s Brown said he’s starting to field calls from some would-be restaurateurs, including some national chains, tentatively looking for space at now-closed restaurant sites, figuring they can land attractive lease deals from landlords.
But Brown said the problem is that no one knows if there will be another virus surge, forcing yet another temporary shutdown.
In addition, no one knows what type of restaurant model will work moving forward. Should all restaurants offer take-out service as a way of protecting themselves in the future? How many in-restaurant seats should restaurants have?
To Brown, there are many questions facing the entire commercial real estate sector moving forward, not just the retail and restaurant subsectors.
“People are rethinking everything,” he said of both tenants and landlords. “There has been and will be a lot of innovation coming out of all of this.”