Rising interest rates and inflation are starting to put a slight damper on the hot industrial real estate market in New Hampshire.

Vacancy rates for industrial properties, particularly warehouses and distribution centers catering to e-commerce companies, continued to hover near record lows of about 3 percent in the third quarter, while lease prices increased by 13.5 percent compared to the same period a year ago, according to a new third-quarter report by Colliers International.

Lease prices for industrial space has been climbing now for the past 14 quarters, driven largely by the pandemic- and post-pandemic-era rise in online shopping and the voracious demand for warehouse and distribution-center space by e-commerce companies like Amazon.

The only thing that’s kept lease prices from rising even higher has been the construction of about 2 million square feet of new industrial space since 2020, about 346,000 of it over the past year in New Hampshire, according to Colliers.

Yet for all the strong industrial-sector news and data, there are signs of a slowdown within the CRE subsector, according to data and industry experts.

Deals Fall Dramatically

The number of industrial property sales, for instance, has been falling of late, from 78 deals in 2021 and 73 deals in 2022 to 21 deals so far in 2023.

In its report, Colliers said the decline is “perhaps due to lack of inventory and rising interest rates” that have increased borrowing costs for potential buyers.

Still, the Colliers report noted that the average asking per-square-foot prices for industrial properties continued to rise in the third quarter, to $108 per square foot from $102 per square foot for the same period last year.

As for new construction, no statistics were available about the extent of ongoing and planned building projects, but industry players say construction has recently been slowing due to higher interest rates and construction prices in general.

Of those projects recently built on a speculative basis, some are sitting vacant due to the higher lease prices needed to pay off higher construction-related costs, officials say.

“There are still buildings going up, but fewer of them,” said Chris Healey, a partner at The Boulos Co. “It’s getting more and more challenging.”

Earlier this year, multi-state developer Trammell Crow, along with its partner Diamond Realty Investments, broke ground on a new state-of-the-art, 323,000-square-foot speculative facility at 50 Robert Miligan Parkway in Merrimack

Though a tenant for the new facility has yet to be found, Elisha Long, a principal at Trammell Crow, expressed confidence the speculative project will prove a major success after it’s finished by the end of 2023.

“We are actively marketing 50 Robert Milligan Parkway and engaged in discussions with several prospective tenants,” he said in an email to The Registry Review.

Developers Face Challenges

In the end, the new facility will be “competitive with the best products in the New England market,” he said.

But Long did acknowledge challenges for developers, noting higher interest rates and construction costs in general.

“The combination of the two, as well as general supply/demand market forces, are making the ability to execute on a project more challenging than before,” he said. “That said, we remain enthusiastic about the southern NH market and believe in the quality of the 50 RMP project and its location.”

Long added: “Lease transactions are down as tenants are being more cautious about spending given the current economic uncertainty, but we believe that a thoughtfully designed, well-located building such as 50 RMP will attract great tenants and perform well.”

Robert Rohrer, managing director and principal of Collier International’s New Hampshire office, agreed market shifts are making it less attractive to build new distribution centers.

“There’s a lot of stuff being proposed, but I do think it’s starting to slow down,” he said. “Maybe the market is just catching its breath.”

The demand for warehouse and distribution space remains strong. “We’re still getting calls, but it’s not as robust as it was a year ago,” he said.

For years, lease prices of around $7 per square foot before the pandemic were considered too low to justify construction of new industrial facilities in New Hampshire, said Roger Dieker, a partner at The Boulos Co.

But then lease prices started to rise during and after the pandemic, to the $10 to $11 range, and the construction-project proposals started popping up across the state.

“It finally got to the point where rents could support new construction,” he said of lease prices.

But higher interest rates and construction costs in general interfered with that supply-and-demand equation, Dieker said.

“After all these years, developers finally got the ball rolling on new projects, but then along comes the Fed with higher interest rates and inflation,” he said. “Things have definitely slowed down.”

Industrial Still a Bright Spot

Despite shifts within the market, the industrial and multifamily sectors are still performing considerably well compared to other CRE sectors, such as the office, life-science and retail sectors.

“They remain the two stars of commercial real estate,” said Colliers’ Rohrer.

Just about every geographic area of New Hampshire has seen strong industrial activity in recent years.

In the Nashua market, the industrial-property vacancy rate stood at 2.7 percent in the third quarter, with per-square-foot rental prices hovering around $11.75, according to the Colliers third-quarter report. With 20 million square feet, Nashua has the largest amount of industrial space in the state.

The industrial vacancy rate in the state’s second largest market, Manchester, stood at 2.5 percent in the third quarter, with direct rents at $13.07, according to Colliers data. Manchester has about 17.2 million square feet of industrial space.

In Portsmouth, the vacancy rate stood at only 0.9 percent in the third quarter, with rents in the $11.89 per square foot range. At 13.5 million square feet, Portsmouth has the third largest amount of industrial space in New Hampshire.