Sharp differences in New Hampshire’s office submarkets are starting to emerge as a result of the pandemic, with some areas doing far better than others amid continued uncertainty over what tenants plan to do with their office leases in both the short- and long-term future.
On average, the statewide office market for all classes of office space seems to be holding up surprisingly well, with the overall vacancy rate hitting 10.2 percent by the end of the second quarter, according to new data from Colliers International.
That’s up 2.1 percent year-over-year, but it’s not nearly as bad as some had feared during the early months of the pandemic in 2020, when lockdowns and business restrictions were fully in place. Office lease prices leveled off in the second quarter, to $18.94 cents, and asset prices also seem to be holding their own, according to data and industry experts.
Net absorption year-to-date was minus 220,000 square feet, described as a worrisome but not alarming figure.
But diving deeper into submarket and office-class data shows a slightly different picture, with the Portsmouth submarket doing particularly well and others not so well, particularly in the class A office category.
‘Seacoast Is on Fire’
With a total of 4.5 million square feet of office space, the Portsmouth submarket had an overall vacancy rate of 5.8 percent as of the end of the second quarter, with the class A vacancy rate hovering around 11 percent, according to Colliers data. Lease prices in Portsmouth remain the highest in the state, with class A space hovering in the high $20s and low $30s per square foot.
“The Seacoast area is on fire – with lots of activity,” said Thomas Farrelly, an executive director at Cushman & Wakefield.
But the same can’t be said of other office submarkets.
The Concord submarket, with a total of 2.5 million square feet of office space, is taking it on the chin, at least statistically, with an overall vacancy rate of 14.5 percent, with the class A vacancy rate at 18 percent. Indeed, Concord has seen 195,000 square feet of negative absorption.
In Nashua, the overall vacancy rate is 11.8 percent for its 4.5 million square feet of space, with the class A rate at 11.4 percent. Nashua’s current absorption rate is a negative 79,599 square feet, according to Colliers data.
In the Manchester market, the data is mixed. With a total 8.3 million square feet of space, the state’s largest office submarket has a vacancy rate of 7.9 percent. But its class A vacancy rate is 15.1 percent. Manchester, which has a huge amount of converted mill-to-office space, has actually seen a positive year-to-date net absorption of 38,000 square feet.
Delta Creates Hesitancy
John Jackman, president of Jackman Commercial Realty, said the state’s office market, taken has a whole, is at “the bottom of the list” when it comes to performance during the pandemic, compared to other commercial real estate classes.
Some areas, such as Portsmouth, are indeed doing well. But he said the data he’s seeing, and what he’s hearing and observing, is that employers are generally still skittish about bringing their employees back to offices, despite widespread vaccinations.
The recent emergence of the Delta variant may be exacerbating matters, but the bottom line is that many employees now prefer remote working – and employers don’t seem to be in a big hurry to get them back into offices.
Jackman said he’s convinced the “office market will never be the same” as a result of the pandemic.
Chris Norwood, president of NAI Norwood Group, agreed the rise of remote working has clearly changed the demand for office space. But he’s not so sure the office market is in deep long-term trouble.
Describing himself as “normally pessimistic” when it comes to real-estate trends, Norwood said he’s “surprisingly optimistic” today about New Hampshire’s office market.
“There has not been as big a softening as we initially thought would happen,” he said.
Conversions, Quaintness Aid Submarkets
Some suggest that ongoing conversion of office spaces into multifamily housing and mixed-used developments may be masking what’s actually going on within the office market.
They point to recent announcements by commercial real estate firms, such as Manchester’s Brady Sullivan, that they’re planning to convert some offices into housing in New Hampshire.
Indeed, Brady Sullivan recently proposed turning some office space at 670 Commercial St., in the Jefferson Mill, and at 1000 Elm St. in Manchester into residential units.
But Charles Panasis, director of commercial real estate at Brady Sullivan, said both conversion projects were planned before the pandemic.
“We do a lot of mixed-use projects,” he said. “We’re always adapting. We don’t get skittish about things. We just keep plowing ahead.”
He noted that Brady Sullivan has also been active signing office leases during the pandemic, including a recent lease renewal with Bank of America/Merrill at 900 Elm St. in Manchester.
Others tend to agree that conversions can’t fully explain why the office market is statistically holding up relatively well in most submarkets, in terms of vacancy rates, lease prices and asset values.
Cushman & Wakefield’s Farrelly said the Portsmouth market is clearly benefiting from the fact it’s such a quaint and attractive area for both companies and remote workers, attributes that have become especially desirable during the pandemic.
“People are trying to enjoy where they both live and work,” he said.
Robert Rohrer, managing director for Colliers New Hampshire, said the data clearly shows that the office market has generally softened in New Hampshire, more so in some submarkets than others.
But the overall picture – as measured by office vacancy rates, absorption, lease prices and property values – shows that tenants, at least for now, are not giving up on offices entirely.
“There’s no huge sublease market yet,” he said. “There are still plenty of unknowns, but I think the office market is doing pretty well.”