New Hampshire’s office market can’t seem to make up its mind where it wants to go: on a downward spiral as seen in other regions of the U.S., or a slow-but-steady recovery from recent pandemic-related woes.

The available statistical and anecdotal evidence could point to either scenario playing out.

According to third-quarter data from Colliers, New Hampshire’s office market has been in a sort of holding pattern this past year, with the statewide vacancy rate rising only modestly, from 10.5 percent in the third quarter of 2022 to 11 percent during the same period in 2023.

Meanwhile, average asking prices for rents slightly increased during the same time period in prior years, from $20.34 per square foot in 2022 to $21.05 in 2023. Asking sublease prices saw a similar small gain over the past year, from $20.05 last year to $20.17 this year.

The modest vacancy and price changes prompted Colliers’ New Hampshire research manager Kristie Russell to describe the state’s office market as “relatively flat” over the past year in her third-quarter report.

Conditions obviously differ from submarket to submarket in New Hampshire, such as the Manchester office market (a vacancy rate: 8.2 percent) outperforming the Portsmouth office market (vacancy rate: 14.5 percent).

Yet the Colliers data, on the surface, paints an overall picture of a stabilizing office market in the Granite State, following the rise of remote work and the falloff in demand for office space across the country due to the COVID-19 pandemic. Put another way: New Hampshire seems to be holding its own compared to other regions around the country.

“It’s been resilient despite all the negative headlines you see about [the office markets] in places like Boston and San Francisco,” said Chris Norwood, president of the NAI Norwood Group in Bedford.

But resilient doesn’t mean the absence of problems, as the Colliers report, Norwood and other industry players make clear.

Large vs. Small

One area of major concern is that larger companies continue to downsize or entirely leave buildings, putting their remaining space on the sublease market.

“The state seems to [be] catching up with the national trend of more office space for sublease over the past year,” the Colliers report said.

Indeed, class A office space saw a 3.9 percent bump in its vacancy rate in the third quarter, compared to the same period last year in New Hampshire.

The Salem, Portsmouth and Concord submarkets have been particularly hard-hit year-to-date due to major downsizings.

In the Salem submarket, ADP has announced it is shrinking to 27,000 square feet and leaving its current 113,000-square-foot building, contributing to an overall 28.2 percent office vacancy rate in Salem’s relatively small market of 1 million square feet.

“The subleasing started as a trickle, then a flow and now it’s a deluge,” Bill Norton, president of Norton Asset Management, said of the tens of thousands of square feet worth of sublease space that’s recently come on the market in Concord. “The bigger chunks of [vacant] space are much harder to fill.”

Norwood agreed with Norton that large vacant spaces, caused by downsizing by larger firms, is at the core of today’s office-market woes.

“The footprint for smaller firms hasn’t changed much,” Norwood said. “But the footprint for larger firms is where you’re seeing trouble.”

Conversions Mask Decline

Another concern is how recent conversions of office properties into residential dwellings may be distorting how the office market is actually doing.

In Manchester, Brady Sullivan, the giant commercial property owner, has pursued a number of conversion projects on Elm and North Commercial streets, most notably turning the old Citizens Bank building into residential units.

Those and other conversions have removed hundreds of thousands of square feet from the office market, keeping overall vacancy rates lower than they might have been.

“Manchester is holding up partially because square feet have been taken off the market,” said Robert Rohrer, managing director of Colliers’ New Hampshire office.

Then again, other submarkets without as many high-profile conversions seem to be doing OK.

In Concord, the vacancy rate stood at 7.8 percent in the third quarter, well below the state average. The Concord area has 2.4 million square feet of office space, according to Colliers data.

In Nashua, the office vacancy rate is running at 12.7 percent, higher than the state average but still not a devastating figure.

“We’re not in a panic mode there,” Rohrer said of the Nashua office market.

Refinancings: ‘The Big Unknown’

Yet another worry is how the statewide office market will fare if many building owners can’t make their finances work due to higher interest rates and tougher loan conditions.

So far, banks have been relatively patient flexible in terms of refinancing loans amid higher vacancy rates and other challenges facing the office market, industry officials say.

But some worry that banks may have reached the limits of their patience and flexibility – and will start demanding tougher terms for struggling properties.

Eleven of the the Federal Reserve’s 19 top policymakers indicated this month that they believed the central bank will cut its benchmark interest rate in 2024 by 75 basis points. But it’s unclear when that might happen and some senior bankers rushed to cool financial markets’ exuberant reaction to the release of those forecasts. One, Federal Reserve Bank of Atlanta President Raphael Bostic, even told the Reuters news service he doesn’t expect any rate cut to happen until the second half of the year.

Norton noted that approximately 10 percent of all buildings go through refinancings every year – and 2024 will tell just how forgiving banks may or may not be when refinancing loans.

“It’s going to be a problem for some,” said Norton. “Interest rates have risen higher, so loans are more expensive.”

How the roll-over market plays out in 2024 will be key, said Christian Stallkamp, a partner and senior broker at the Boulos Group.

“That’s the big unknown of next year,” he said of refinancings trends in general.

Stallkamp said some building owners may well get hit with more expensive loans, with interest rates having risen to 7 percent and up from their historic lows a few years ago.

“It’s going to be a big adjustment for some owners,” he said.

And those refinancings could also play a role in sales activity next year.

Currently, there’s not many office properties for sale in New Hampshire – and sale prices have held up rather well partly as a result.

“Investment sales have slowed significantly,” said Stallkamp.

But the demand by tenants looking to buy buildings has actually increased, as companies opt for the financial benefits of owner/occupant buildings, he said.

In the end, Colliers’ Rohrer said he’s encouraged by national trends of more employers demanding that employees return to offices for work – at least on a hybrid basis.

But he said the future is still cloudy: “With the office market, I guess I’m still neutral.”