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Hot CRE Market has Companies Angling for Space

Fresh off their 2018 championship, the Boston Red Sox are once again the best bet to win the World Series in 2019.

Expect the same kind of championship performance from New Hampshire’s commercial real estate market this year.

With Red Sox broadcaster Dave O’Brien waiting for his turn at the podium, Bob Rohrer was determined to present just a brief summary of the annual market review prepared by the Manchester office of Colliers International. He knew even a roomful of real estate brokers and construction industry reps would rather listen to a sports celebrity talk about baseball.

After all, what was there to say? The report’s conclusion said it all: “The success of 2018 will continue in 2019.”

Occupancy of industrial space in the Granite State rose about a full percentage point last year to nearly 95 percent. Office space occupancy also rose, reaching about 90 percent. Demand continues to grow.

“It seems incremental, but that’s a monumental amount when you consider we’re already close to full occupancy,” Rohrer told the group gathered at Noah’s Event Center in Bedford on Wednesday.

While that news underscores a hot economy, it’s getting tougher for companies to find room to move in the Granite State.

“We’re at a very high occupancy rate, and that’s going to start to create some issues in terms of growth because there’s still a differential between the cost of construction and the ability to build for tenants,” Rohrer said after his talk. “If you look at activity on the construction side, they’re straight out, and the costs are high. All of that activity is basically in renovating existing space and adding additions for users for their own buildings.”

Rohrer, managing director of the local Colliers office, talked about three of his company’s biggest recent deals during the presentation, including BAE Systems, which plans to expand into Manchester at 3000 Goffs Falls Road, near the Manchester-Boston Regional Airport. Finding a couple of hundred thousand square feet for the state’s biggest manufacturing employer presented a challenge during a period of such low inventory, he said.

“They also needed a competitive financial package. That’s because, as you might expect, a company like BAE is being recruited and marketed by many locations across the country,” he told the group.

The state’s Business Finance Authority is buying the Manchester property, formerly the home of Anthem Blue Cross and Blue Shield, for about $31 million and will lease it to BAE over the next 10 years. The deal calls for BAE to purchase the building at the end of the 10-year lease.

Smaller companies with less clout could have difficulty finding what they need. Fellow Colliers International broker Dan Scanlon recently closed on a 25,000-square-foot building for a Tennessee company expanding into New Hampshire. MetalMax, a metal fabricator that makes roofing and siding, wanted to be near the airport but ended up settling for a building in Concord.

“We looked at another building in Manchester, but we just couldn’t come to a deal with the particular owner. There’s just not enough inventory for what they wanted to buy,” Scanlon said.

Gone are the developers who back in the ‘70s built “cookie cutter” industrial buildings that could be divided in two to accommodate more than one tenant, Scanlon said.

“Nobody’s been building that kind of product for ages. Users will put up buildings but developers, speculators, are not doing what happened back in the ‘70s,” he said. “It costs too much money, and they would have to charge double what the current market rent is to cover the cost of construction of a new building.”

A buyer’s market could make it more challenging for young companies trying to grow.

“Now we’re even hearing on the leasing side, that the pendulum appears to be moving toward the landlord side, where landlords can be more picky about the tenants they accept,” Scanlon said. “And they’re doing that not only in the types of uses that their tenants have, they’re looking closer at their financials. So a startup is going to have a real hard time with the conventional space that is out there. Landlords will pass on them.”

Demand for space has yet to drive up leasing costs to the point where it would make sense for developers to construct new buildings.

“Construction costs have continued to climb year after year, and it is getting more challenging to make the economics of deals work,” said Preston Hunter, vice president of Bedford-based Eckman Construction. “We’re seeing more clients looking at renovation projects as well, but there really isn’t very much inventory.”

“I think certain project types are more difficult to find,” he said. “For instance, warehouse space is really challenging, but when it’s renting for $7 to $9 a square foot we can’t possibly make the economics work to build it new. Eventually I think you’re going to get to a point where there’s a critical mass of demand, and the rents are either going to go up or folks are going to be forced to build new.”

Eckman’s current projects include an athletic and wellness center at the Derryfield School and a welcome center at St. Anselm College, one of the company’s longtime clients. Eckman also will be working on two apartment projects in Portsmouth later this year, including a 250-unit development that will also feature commercial and retail space.

The company is also one of several contractors vying to take on the retrofit of the building BAE will occupy in Manchester.

“That’s an example of a project that I think will have great ripple effect in our community,” Hunter said. “We haven’t worked with BAE before, but when you have a big project like that in your backyard you have to knock on some doors.”