Tight Market Could Insulate Against Recession Risks

State Industrial Market Could Defy National Expectations

Distributed Risk

Not enough industrial inventory in the state’s commercial real estate market means New Hampshire is not likely to see a recession-induced drop in demand for industrial product, market-watchers say.

New Hampshire is likely to buck a national forecast that predicts a significant slowdown in the industrial real estate sector between now and mid-2021, local market-watchers say. 

A report by NAIOP issued last month projected the U.S. industrial market would experience a drop-off in demand during the second half of 2020, citing the recession and COVID-19 fears and the inability of some industrial properties to be adapted for ecommerce.  

Industrial space absorption will drop sharply in this quarter to negative 141 million square feet, and not rebounding to positive levels until the second quarter of 2021, the report said. 

Considering the industrial sector is a bright spot in New Hampshire – with rents reaching the $100 per square-foot mark – this would be a dramatic reversal. But while demand may slacken thanks to different factors, requirements for industrial space in the state won’t contract dramatically, said Christian Stallkamp, senior broker at the Portsmouth office of The Boulos Co. 

“Our industrial market is still really tight in terms of available product,” he said. “To illustrate this point, normally, there would be four to six options of anywhere from 25,000 to 50,000 square feet. However, currently there is only one 25,000-plus-squarefoot building available for lease in Portsmouth that is a solid option for an industrial user.” 

Chris Norwood, president of Bedford-based NAI Norwood Group, called the current market steady to strong due to low vacancy and general interest activity. 

“I disagree with NAIOP’s report as we are already into the second half of the year and we’re still quite busy on the industrial sector,” he said. “I’ve been out on tours with tenants ranging from 10,000 to 40,000 square feet and the reality is there’s not space for them to fill. So, there’s no activity, but it’s not for lack of trying.” 

James Prieto, director of real estate for Nashua-based Granite Commercial Real Estate, said things have been steady in the southern part of the state for a long time, with per-square-foot rents around $7, triple net, for warehouses and non-specialized industrial properties. 

“Now, we’re starting to see an uptick as companies are looking in Southern New Hampshire for opportunities that may be a little more economical than the Boston market,” he said. “Our occupancy rate has been at around 95 percent for quite a long time.” 

Location Matters 

The hottest areas for industrial deals and new construction in recent years have been in New Hampshire’s three southeastern counties, driven largely by their proximity to Boston-bound highways, as well as growth in the manufacturing sector  

“The border communities with close proximity to Massachusetts are experiencing demand,” Stallkamp said. “There are a lot of functionally obsolete industrial buildings out there with low ceilings and a lot of high column spacing. This prevents companies looking more for high-quality industrial warehousing from growing into them. Most tenants want to see 28-foot clear ceiling heights and some of these older buildings are only 14 to 16 feet.” 

Norwood agreed that anything with a tall clear height has been gobbled up, with lower bay, second-generation space more difficult to find. 

“As you look at industrial availabilities, there are a good chunk of them within the Route 3 Corridor in Nashua/Hudson and that’s nothing too indicative other than that market did have a lot of construction from back in the ’80s and ’90s, so there’s a lot of inventory,” he said. “In the [Interstate] 93 Corridor, Salem is pretty tight, Manchester is pretty tight, Concord is obviously a much smaller market, but that is tight as well.” 

Is Product Coming? 

Compared to Boston, New Hampshire’s Seacoast industrial market is tiny, with only 175,000 square feet compared to Boston’s roughly 17.5 million square feet. That lack of product should mean a continued rise in demand as there’s little new construction on the way. 

“It’s a tight market and new product isn’t coming on board because there is a lack of available land along the [Interstate] 95 corridor and also because of the high cost of construction,” Stallkamp said. “The delta has started to shrink from what tenants are willing to pay to the true cost, but it’s still not there. Tenants have the perception that they want to pay $6.75 triple net [per square foot], while new construction is in the $10 to $12 range. This big gap creates a challenge for investors.” 

He also points out that while looking outside the I-95 corridor might seem like an opportunity to put up some new industrial buildings, especially since there is land available, companies have run into issues of getting that ground-up construction appraised.  

That has meant some companies have had to go out of state to look for industrial product. 

“In order to justify new construction, the base rental rate has to get higher than it is,” Norwood said. “To justify a brand-new, 50,000 to 100,000-square foot facility, rates need to be Cadillac prices and I’m not sure the market is ready for that, unless you are an owner/occupant or you have such a demand for something specific, that it justifies part of your business plan.” 

Prieto noted there’s a proposed industrial development project in Hudson right now anchored by a pair of Amazon distribution facilities with a third pad available for another tenant. At 2.6 million square feet, it would be the largest such facility to come online in quite some time, he said. 

“That would be beneficial and a positive project for the community, and might bring in other industries as well, which feed off of that product,” he said.  

He also believes some of the state’s older properties could be redeveloped for industrial use. 

“Now is a great time for communities outside of the urban core to assess their warehouse and industrial needs and offer some different flexible zoning to allow for an increase in industrial projects,” Prieto said.