Speculative Industrial Development Picks Up in Southern Maine

by Taylor Williams

In Southern Maine, we have an inventory problem. An inventory shortage, that is. During the recovery, there has been a steady flight to quality in all sectors including office, retail and, most strikingly, the industrial market. For the seventh consecutive year, the Greater Portland industrial market vacancy rate has dropped. We are now hovering close to a 2 percent total vacancy, which is grossly inhibiting end-users and growth.

Justin Lamontagne, NAI The Dunham Group

Justin Lamontagne, NAI The Dunham Group

Throughout 2017, we worked with buyers and tenants that struggle to find suitable relocation and growth opportunities. Multiple offers and off-market sales have become commonplace, which frustrates end-users. We are coaching our clients to remain patient, flexible and communicative in this fluid and competitive market.

Accordingly, the limited inventory drastically increased both lease rates and sales pricing for industrial style space. Sale price trends, in particular, deserve a closer look. In 2011, at the tail end of the recession, Class A and B industrial buildings were selling in the $40-per-square-foot range. Sales were almost exclusively going to owner-user businesses who were bullish enough to bet the economy would turn. Today, those businesses are competing with a smaller inventory pool, and against investors looking to diversify their portfolios. Quality industrial buildings are now averaging near $60 per square foot and we have seen peak pricing at $70 to $80 per square foot.

As Greater Portland thrives, secondary markets like the mid-coast, York County, Lewiston/Auburn and Augusta, are primed to take advantage of the spill-over. Several of our Portland-based clients are expanding their geographic search requirements to account for the lack of product nearby.

The bright side is the resurgence in new construction, adding much-needed inventory. And that trend will continue into 2018 as speculative industrial projects are being built and marketed in Saco, Gorham, Scarborough and South Portland. I estimate nearly 200,000 square feet of inventory has been added this calendar year, which is material for a market with only about 18 million square feet total.

New projects do, of course, require higher lease rates, which the market is starting to support.  I expect lease rates will continue to climb for at least another year or two. And the added inventory will finally slow our plummeting vacancy rates. Anecdotally, our industrial clients still prefer to buy existing buildings when possible. We have advised them to be ready to jump when opportunity arises and be willing to pay a premium in order to win a deal. I predict sales price per square foot will again rise, and the gap between existing and new construction costs will continue to shrink.

A caveat to all of this is the still unknown impact of recreational cannabis cultivation This industry continues to evolve rapidly, and municipalities and state regulators are doing their best to keep up. Many towns have put moratoriums on any new grow/manufacturing spaces. All of them have questions and concerns with retail sales and “social clubs.” Regardless of where this all shakes out, there is no doubt that Maine’s commercial real estate landscape will be impacted.

Maine is busy and vibrant; we’ve had years of organic growth and absorption. However, the limited inventory is inhibiting to business growth and relocation, which makes it hard to call this market “healthy.” We hope that the new development will continue and the real estate pressure on current end-users will ease.

— By Justin Lamontagne, CCIM, SIOR, partner at NAI The Dunham Group. This article first appeared in the December 2017 issue of Northeast Real Estate Business magazine.

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