Office Sector

A Tale of Two Submarkets

State’s Office Sector Grapples with Questions 

City of Manchester, New Hampshire from Rock Rimmon Park in the Fall

Manchester’s office market has benefitted from aggressive office-to-residential conversions by Brady Sullivan Properties, but its office vacancy rate is now headed up. iStock photo

New Hampshire’s office market will probably have to get worse before it gets better, according to leading industry indicators. 

New second-quarter data from Colliers shows statewide office vacancy rates rising slightly, to 11.1 percent from 10.7 percent during the same period in 2022, after several quarters of relative stability on the occupancy front. 

Statewide, office rents held steady, around $21 per square foot in the second quarter, though asking prices fell slightly in key submarkets, such as Concord and Portsmouth, according to data provided to The Registry Review. 

In total, the statewide second-quarter office data can be viewed two ways: that of a surprisingly stable market in the wake of the recent COVID-19 pandemic or that of a fragile market showing signs of weakening heading into the second half of 2023. 

Robert Rohrer, managing director and principal in Colliers, said he sees some hopeful signs that the office sector is recovering a bit from the pandemic-era rise in remote working, such as recent lease deals that have helped fill vacant spaces in some buildings across the state. 

But most office-market activity has involved companies downsizing their space needs, not expanding their space needs, Rohrer said. 

“I’d describe the market as more stagnant than stable,” he said. “There’s some activity out there, but a lot of firms are downsizing. And the vacancy rate rises as a result. Overall, the [statewide] market is still struggling. This is going to be a slow recovery.” 

No Building Boom, Less Debt 

Nationwide, many commercial real estate observers are nervous about falling office-building values in the post-pandemic era – and the economic impact of those lower values when many construction loans come due in 2024. 

In terms of debt, Rohrer said New Hampshire’s office market is in relatively good financial shape compared to other areas of the country, including Boston’s office market, where vacancy rates are now hovering near 20 percent. The reason: Unlike Boston, the Granite State didn’t undergo a major building boom immediately prior to the pandemic, Rohrer said. 

The real challenge facing New Hampshire’s office market is not debt and falling values per se, but rather the coming end of office leases in 2024, Rohrer said. That could lead to further office downsizing – and further stressing struggling office properties. 

Kristie Russell, Colliers’ New Hampshire research manager, said the state’s office market has been buffered somewhat by not having as many national tenants dumping space. 

But she agreed that 2024 is going to be a challenging year for the overall statewide office market, due largely to the coming end of many tenant leases. The big unknown is how much space those tenants will need – and how much they’ll rely on remote-working. 

“I do see more space coming on the market,” she said. “There’s a lot of uncertainty, but there’s definitely a shift coming.” 

As for office submarkets in New Hampshire, the story varies from region to region.  

Portsmouth: So-So Numbers 

Statistically, the Portsmouth submarket doesn’t look to be faring so well.  

With the third largest amount of office space in the state at 4.5 million square feet, the Portsmouth area’s vacancy rate hovered well over 14 percent for a while after the pandemic ended.  

But the vacancy rate fell by 0.7 percent in the second quarter, compared to the first quarter, and by 1.8 percent year-over-year, according to Colliers data.  

Portsmouth’s vacancy rate is now hovering around 12.5 percent, which is still above the state’s average vacancy rate but clearly headed downward. 

Portsmouth’s rents haven’t fared as well over the past year, down year-to-year by $1.33 per square foot, to $24.89. 

But those rents are still the highest in the state, reflecting the underlying strength of the Portsmouth market, known for its coastal quaintness and thriving downtown.  

“It’s not as strong as it was before the pandemic, but Portsmouth is still doing very well,” said Tom Farrelly, executive managing director of Cushman & Wakefield in New Hampshire.  

“Portsmouth is the most desirable market in the state. So many out-of-state people came up to New Hampshire’s coastal area during [the pandemic]. The area is thriving.” 

Among the more prominent Portsmouth-area deals in the second quarter was FedPoint, a federal benefits administrator, signing a seven-year renewal for 53,660 square feet of class A space at 100 Arboretum Drive in Newington, according to Colliers. 

Manchester: Looks Can Be Deceiving 

Statistically, the Manchester market, which has the largest amount of office space in the state at 8.39 million square feet, is doing a lot better than the Portsmouth, with a vacancy rate of only 8.4 percent.  

But its office vacancy rate crept up 1 percent, quarter to quarter, and is 0.5 percent higher year-over-year, according to Colliers data. That’s not much of a jump, but the rate is definitely headed in the wrong direction. 

Manchester’s vacancy rate has also been kept artificially lower by major office-to-residential conversions in the city, most notably projects speared headed by Brady Sullivan Properties. Among Brady Sullivan’s planned or underway conversion projects is 1228-1230 Elm St., a 5-story office building that the firm eventually intends to turn into 110 resident units. 

Among the notable Manchester deals in the second quarter was the relocation of Lamont, Hanley & Assoc. from its longtime 16,555-square-foot home at 1138 Elm St. to 17,250 square feet of Millyard office space at 186 Granite St., according to Colliers. 

Meanwhile, Dean Kamen, the famed Segway inventor who later founded the nonprofit Advanced Regenerative Manufacturing Institute (ARMI), and business partner Robert Tuttle bought the 400,000-square-foot 150 Dow St. earlier this year for $23 million.  

Formerly the home of Dyn (later bought by Oracle), 150 Dow had about 100,000 square feet of vacant office space, but Kamen and Tuttle announced in April that the available space would be converted into a biomanufacturing and training facility for ARMI.