The economic storm clouds that cast a shadow over the commercial, industrial, lab and residential real estate markets in the second half of 2022 will keep threatening the industry in 2023.
Forget about the Great Real Estate Crash of 2023. At least in New Hampshire, it’s not happening.
But the economic storm clouds that cast a shadow over the commercial, industrial, lab and residential real estate markets in the second half of 2022 are still here, experts say, and still looking threatening as we head into 2023.
The surge in interest rates may have leveled off a bit, but it still has scrambled the math on everything from how much homebuyers can afford to pay to the appetite on part of real estate investors for taking on new and now riskier projects.
The warehouse-and-industrial sector remains one of the strongest of the real estate asset classes, said Chris Norwood, president of CRE real estate firm NAI Norwood Group, which has developed new warehouse and distribution projects.
That said, he expects a continued cooling in all real estate sectors, even the multifamily market, as banks reduce their lending and developers and investors grow more cautious.
“There is no question that some uncertainty lies ahead with the Fed increasing interest rates,” Norwood said. “That is the single most concerning factor.”
Industrial Leads the Way
Demand for warehouse space was stronger than ever for the first half of 2022, with not enough space to meet demand.
That said, as the year progressed, there were warnings signs of a peak having been reached, with Amazon canning plans for a giant distribution center in Hudson amid a larger pullback by the online shopping behemoth on its brick-and-mortar spending.
Yet that did little to budge the vacancy rate in the state’s two largest industrial space markets, Manchester and Portsmouth. The amount of vacant warehouse and distribution space hovered at a miniscule of 0.2 and 0.9 percent respectively, Kristie Russell, research manager at Colliers’ Manchester office, told The Registry Review.
Looking ahead, Kent White, principal broker/partner at The Boulos Co., sees a leveling off of the superheated demand that has marked the New Hampshire industrial market, at least on the Seacoast.
Some of this may simply come from the impact that a cooling economy may have on consumer demand.
“I think we are going to see flattening of lease rates for industrial,” White said. “I think demand will not be a strong as we have seen it.”
For his part, Norwood also doesn’t see companies whose businesses require warehouse and distribution space just shelving plans either and will want to stay ahead of the demand curve.
“The end-user of industrial space is going to push the market in 2023,” he said.
Shakeout Ahead in Office Market
The New Hampshire office market held up well during the pandemic given the scale of the disruption, with the vacancy rate rising to 14 percent, up from roughly 7 percent before COVID-19 hit.
White sees that number edging up another couple percentage points to 16 percent by the end of 2023, with 84 percent of the market remaining under lease to various corporate tenants.
“New Hampshire has weathered the storm fairly well to date,” he said.
But he also notes that actual occupancy – as in actual human beings in offices – remains in the 30 to 50 percent range, as it has in other markets.
White sees changes coming in 2023 as companies try to settle on a more permanent balance between on-site and remote work.
Norwood sees the potential for companies in certain sectors like tech deciding to shrink their office footprint.
However, the lifeblood of the New Hampshire office market is smaller leases in the 5,000 to 10,000-square-foot range to law firms and other businesses.
“Every law firm is still probably going to have its own office,” Norwood said. “I don’t see those types of tenancies contracting.”
Rougher Waters for Multifamily
Developers of apartments and condominiums nationwide are reassessing their plans in the wake of economic turmoil of the past six months, observers say, and New Hampshire is likely to be no exception to that.
The combination of a big increase in interest rates, rising construction costs and lenders growing more cautious have led to new multifamily projects being put on hold or shelved in markets across the country.
That said, rents and prices remain high in New Hampshire while inventory remains low.
Interest rate increases have tapered off a bit and there are signs that even construction prices might not be increasing at the same pace, though labor costs remain high, Norwood said.
All that, in turn, could keep a number of multifamily projects moving ahead.
“I do think there is some positive potential for new construction, particularly on the multifamily side,” Norwood said.
