Reading Tea Leaves

For Now, Class B Offices Enjoy Their Day in the Sun

Experts Debate Causes, Staying Power

Class A office properties are performing worse than class B ones in the Manchester and Portsmouth areas, but there are differing opinions about why, and how long that will last. iStock photo illustration

New Hampshire’s class B office buildings are enjoying a small resurgence amid ongoing work-place changes that are transforming the real estate needs of many companies.

The big question is: How long will the resurgence last?  Some have doubts it has much staying power beyond a few quarters or so. Others think it may be part of a longer trend of employers choosing lower-rent spaces as they grapple with remote-work issues and declining demand for office space.

Either way, there’s little doubt class A properties have taken major hits of late, with the statewide class A vacancy rate jumping by 840 basis points over the past 12 months, driven largely by major office closures in various submarkets, such as Liberty Mutual’s move last year to shutter its huge campus in Dover, according to new first-quarter data from Colliers.

Meanwhile, class A rents are overall down 0.8 percent over the past year, bucking a recent trend of office rents actually increasing in New Hampshire despite widespread market uncertainty, according to Colliers data.

Classes’ Performance Diverges

And two major office submarkets, Manchester and Portsmouth, are definitely seeing a bifurcation between class A and class B office space.

The vacancy rate for class A space in the Manchester area, the state’s largest office submarket, stood at 13.5 percent at the end of first quarter, according to Colliers’ first-quarter 2024 data report. Meanwhile, Manchester’s class B vacancy rate stood at only 4.5 percent as of the end of the first quarter.

In Portsmouth, the state’s third-largest office submarket, the class A vacancy rate stood at 19.7 percent in the first quarter, while the class B vacancy rate was hovering at 10.7 percent.

In the case of rents, Manchester’s class A rents actually decreased by 1.8 percent, to $23.19 per square foot, over the past year, according to Colliers data. But Manchester’s class B rents were up year-over-year by 7 percent, to $18.90 per square foot, as of the first quarter, according to Colliers. Similar comparative numbers were not available for Portsmouth.

Not all submarkets are seeing class A space on the slight decline and class B on the rise. If anything, it’s the opposite in some submarkets.

In Nashua, the state’s second-largest office submarket, the class A vacancy rate stood at 9 percent in the first quarter, while its class B vacancy rate has risen to a high of 18.1 percent, according to Colliers data.

Multifamily Conversions Don’t Explain Everything

Kristie Russell, the New Hampshire and Maine research manager at Colliers, said Nashua’s overall class A market has remained strong since the pandemic, compared to other submarkets, largely because of its close proximity to Massachusetts and its large tech-oriented workforce.

Nashua aside, the overall picture, Russell said, is an office market in which class A offices are struggling and class B spaces are doing comparatively better in terms of lower vacancy rates.

The class B sub-category’s stats are skewed somewhat by recent conversions of older office space into multifamily apartment units, including some major conversion projects in Manchester by Brady Sullivan, the large commercial real estate owner and developer.

But conversions don’t fully explain the yawning vacancy gap between class A and class B office properties in places such as Manchester and Portsmouth, said Russell.

“It’s a trend we’re seeing across markets,” Russell said of contrasting class A and B performances.

Russell emphasized that not everything is hunky-dory for class B properties, which continue to see negative absorption rates in some submarkets – with more class B space reportedly coming on the market soon.

“Some employers are still downsizing,” said Russell.

Meanwhile, Russell said she’s still optimistic about class A offices over time, especially if property owners lower rents to attract tenants or re-position assets into attractive mixed-use projects.

“We’re hopefully optimistic about class A space,” she said.

Tenants Hesitant to Move

Chris Norwood, president of NAI Norwood Group in Bedford, said he’s indeed seeing contrasting demand for class A and B properties in some submarkets.

But he questioned whether it really adds up to a general office-market trend in New Hampshire.

“It’s really a case-by-case, property-by-property, community-by-community issue,” he said, referring to differing performance levels of class A and B offices. “It’s not clear to me where the trends are going.”

He did agree that class B space appears to be benefiting from a number of things. Among them:  tenants choosing to stay in class B spaces, rather than move to another location and incurring high construction costs for tenant improvements.

“It’s just a theory,” Norwood said of cost concerns about tenant improvements. “I’ve seen anecdotal evidence of this.”

Christian Stallkamp, a partner and senior broker at Boulos Co., said he’s seeing the same anecdotal evidence of tenants hesitating to move to new locations due to high tenant improvement costs.

As for a bifurcated office market in general, Stallkamp, who specializes in Seacoast properties, said he’s definitely seeing contrasting property performances.

But they’re more about the general quality and locations of properties, not necessarily class A versus class B issues, Stallkamp said.

Russell, Norwood and Stallkamp all agree on one thing: New Hampshire’s overall office market is doing surprisingly well post-pandemic, at least compared to major metro markets, such as Greater Boston, where large swaths of class A and B properties are sitting empty due to the recent rise of remote working.

“New Hampshire is seeing a more steady and stable office market,” said Russell.  “New Hampshire is not nearly as bad off as Boston.”