Investors and tenants are pouring into New Hampshire’s industrial real estate market, pushing vacancy to unheard-of lows and prices to unheard-of highs.
New Hampshire’s commercial real estate market may have to endure more pandemic pain before things get better in 2021.
Leading industry figures are cautiously optimistic that the state’s and the nation’s economies – and thus the commercial real estate markets across the region and country – should improve over the coming year as new COVID-19 vaccines are rolled out and the pandemic hopefully ebbs.
But there’s still a winter and a second coronavirus surge underway – and possibly a third surge ahead tied to the Christmas holidays – that could yet inflict deep harm on the economy and disrupt any recovery tied to a vaccination rollout.
And then there are long-term questions about just how much lasting damage has been done to the economy and commercial real estate markets, particularly the hard-hit office and retails sectors.
“At this point, it’s really difficult to forecast how things will go,” said Bill Norton, president of Norton Asset Management, the Manchester-based real estate advisory and brokerage firm. “On the plus side: We survived 2020. The vaccines are on the way. And, hopefully the expansion we’ve been seeing keeps up. But some economists are worried it’s not over. That there’s still tough days ahead.”
There’s little doubt that the New Hampshire economy, and its commercial real estate market, have bounced back, and somewhat impressively, since last spring’s dramatic lockdown and subsequent economic carnage.
The state’s jobless rate spiked to 9.2 percent in June due to the lockdown turmoil, but has since fallen back to 3.8 percent, according to federal Labor Department data for November.
Yet the November jobless rate is still off the pre-pandemic low of 2.6 percent, and many experts believe the current labor market is “soft,” with numerous people working part-time or at lower–paying jobs. Employment in the leisure and hospitality sector alone – which includes restaurants and hotels – is down by nearly a quarter since last March’s virus outbreak, government data shows.
“The pandemic is going to have an impact in the next year and well beyond,” said Robert Rohrer, managing director of Colliers International’s New Hampshire office. “The question is: How big of an impact?”
The Big Unknown
Statistically, the office market held its own in 2020, with the occupancy rate hovering at an impressive 91.15 percent in the third quarter, according to Colliers data. That’s down only 0.7 percent compared to the same period in 2019 – and, surprisingly, office rents were up 3 percent year-over-year. Colliers tracks about 23 million square feet of office space in New Hampshire, largely in the state’s six main submarkets of Concord, Dover, Manchester, Nashua, Portsmouth and Salem.
But those statistics can be deceiving. First, net absorption in the third quarter was a negative 314,500 square feet compared to the year prior, according to Colliers. In addition, the occupancy rate reflects leases signed and in place, not the actual number of people working in offices.
With so many people now working remotely – and staying away from offices – the big question is whether tenants will conclude that remote working is the future and decide to downsize their office space needs once their current leases expire.
“That’s the big unknown,” Norton said. “Some [firms] will decide they don’t need as much space. But not everyone is meant to work from home. Some offices will still be needed.”
Chip Brown, owner of Brown Commercial Realty in Lebanon, said he’s starting to see some office sublease space come on the market in the Upper Valley area. “But we’re not seeing a lot of it,” he emphasized. “The office market is holding up OK.”
Market-watchers are confident the retail and hospitality real estate sectors have suffered serious damage this year, with some predicting big-name departures from the space.
The Unequivocal Star
The pandemic lockdowns did have a positive effect on one commercial real estate subsector in 2020: industrial space. With so many people staying at home, e-commerce sales and home deliveries boomed here and elsewhere across the nation, increasing the need for warehouse and distribution-center space.
E-commerce companies’ demand for industrial space predated the pandemic, but the lockdowns turbocharged the sector to the point where the occupancy rate for industrial space in New Hampshire hit 95.1 percent in the third quarter, with average rents rising by 3 percent per square foot compared to the year prior, according to Colliers’ research.
In the Portsmouth submarket, the occupancy rate for industrial space hit an almost unheard–of rate of 98.3 percent, according to data.
“There’s virtually no product out there,” said Chris Norwood, president of NAI Norwood in Bedford. “There are a lot of investors and users trying to buy up space, but the inventory is very, very low.”
How hot is the industrial market? E-commerce goliath Amazon already has a tentative plan to lease 2 million square feet of a proposed 2.5 million-square-foot distribution center in Hudson.
Looking ahead into 2021, CRE experts see no reason why industrial space shouldn’t stay red hot.
How Bad Can Retail Get?
The lockdowns, public health restrictions like indoor capacity limits and consumers’ wariness of COVID-19 have devastated the retail and hospitality sectors, with restaurants, small shops, large retail stores and hotels shedding thousands of jobs in 2020.
No exact numbers are available, but some estimate that nearly a quarter of restaurants and small retail shops have either temporarily or permanently closed across New England since the onset of the pandemic last March.
And that means a lot of space on the market.
Norton said he knows of one real estate investment trust that started to slowly sell off its Granite State retail portfolio before the pandemic, only to see sales grind to an abrupt halt at the onset of the pandemic. The REIT has since had to sell off the remainder of its portfolio at steep discounts, he said.
“The demand just went away,” he said.
And similar scenarios are likely to unfold in coming months, with so much retail/hospitality space now sitting vacant across large swaths of the state and New England, industry officials say.
In particular, the restaurant industry is probably going to see a very slow first half of 2021, recovering only after enough people are vaccinated and public confidence is restored about dining out.
“There are a lot of institutional names that are gone – and more will probably not survive,” Norwood said of restaurant industry players.
