How’s the market? It is the most common question asked of any commercial broker in these trying times. Most often, the answer is “…depends.” Unlike retail and the mixed-bag office market, the industrial sector is thriving through the COVID-19 pandemic. Manufacturing, warehousing and distribution are proving essential. Sales demand for existing inventory remains at an all-time high. Bullish investors, both local and regional, are competing with end-users.
This consistent and competitive demand has driven average sales prices towards $80/SF with peak pricing well over $100/ SF. It seems the volatility of the stock market and the uncertain economic outlook is driving investors to bricks and mortar. And examples abound of industrial companies pivoting in a positive way to provide much needed services and products in account of this pandemic. No sector is better positioned to weather the COVID-19 storm and prosper post-pandemic than industrial.
Since 2011, vacancy rates in the greater Portland industrial market have been falling with the exception of a slight and short-lived jump in 2018 (3.5%). Today, our vacancy rate holds steady at 2.79% and that includes the only significantly large vacancy in all of Greater Portland, a 167,000 SF warehouse at 203 Read Street in Portland. That building is getting a lot of activity lately and, if leased, our overall rate will drop to a stifling 1.95%. Practically speaking, because most industrial end-users are looking for smaller units, that sub-2% availability is what tenants and buyers are already dealing with.
As of the writing of this article, there are only 11 industrial properties on the market for lease under 5,000 SF in all of York and Cumberland Counties. Of these properties still available, only three offer a loading dock or loading dock access. The takeaway is that the current available properties do not fit the traditional mold for industrial-style tenants in the market. They are funky, they are likely 3rd or 4th generation space, and overall, they tend to have poor office to industrial ratios.
Some might ask, why not market spaces as build-to-suit and build once you have a committed tenant? We find that the majority of tenants in this size range are not comfortable planning far enough in advance for a build-to-suit option. Most developers need eight to ten months to be able to deliver ground-up new construction, and these tenants can rarely, if ever, wait this long. We have been advising our tenant-clients to engage in the process as early as possible, because it could make the difference between a space that works and having to make a space work.
Additionally, tenants have a tough time “seeing the space.” A pile of dirt and some plans make it hard for most people to visualize a build-to-suit opportunity. So even if they have given themselves enough time to consider a build-to-suit opportunity, far more than not, they will choose a completed building that’s not exactly what they want versus waiting for new construction.
Justin Lamontagne, CCIM, SIOR, Broker/Partner and Sam LeGeyt, Associate Broker, of NAI The Dunham Group.
So what kind of properties does this market segment need? No matter the business, no matter the tenant, everyone should want flexibility within the design and utility. A mix of overhead doors and loading docks, flexible sizing, outside storage, adequate parking and, as always, good location will fuel a successful project.
We discussed this predicament with Senior Vice President and Regional Market Leader of Skowhegan Savings, Andrew Cook.
“Historically banks have been hesitant to lend on speculative developments for any commercial sector,” he said. “However, given the dynamics in the current industrial market, this is one sector where I think we would take a harder look, particularly for a quality borrower, location, and overall plan.”
Nationally, the industrial sector remains as healthy as ever. Vacancy rates remain historically low throughout most of the country where, unlike in Maine, speculative construction has kept up with demand. Tertiary markets, in particular, are seeing great new development as businesses are attracted by cheaper land, tax incentives and interstate connectivity to find employees. In fact, many manufacturing businesses are choosing labor pools over geography as the driving reason for plant location.
Every market indicator suggests that we need more industrial development and success will come to those who build it. But of course, the great caveat to all of this is COVID-19 and the still lingering long term ramifications. We’re still very much in this. It’s never been harder to make projections or predictions because there are so many variables and possible trickle-down effects that we have yet to consider. It would be irresponsible to say the industrial market is immune to the effects of this crisis. But so far it sure is putting up a good fight.
For their Annual and Mid-Year Industrial Market Reviews, NAI The Dunham Group, tracks nearly 20,000,000 SF Greater Portland market, including Saco & Biddeford. Visit dunhamgroup.com to see available properties.
Market Summary Sources: NAI The Dunham Group Industrial Market Survey and New England Commercial Property Exchange.
Contact Justin Lamontagne at justin@dunhamgroup.com and Sam LeGeyt at sam@dunhamgroup.com.
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