Maine’s Industrial Market Outlook for 2024

By Jon Rizzo, SIOR | Partner, Broker

In my 2023 Industrial Market Outlook, I mentioned how the change from a macroeconomic perspective (rising interest rates and inflation) caused a significant slowdown in commercial real estate transaction volume for the second half of the year. There was a disconnect between seller pricing expectations and buyer reality in the capital markets, and we wondered when that disconnect would narrow and transactions would start to take off again. Did we see that transition in 2023?

I will start with a recap of leasing and sales activity for the past year, followed by our industrial sector outlook for 2024

Leasing

Supply vs. Demand. Supply, or lack thereof, continues to be the consistent theme in Maine’s industrial sector. The vacancy rate still hovers below two percent. The difference in 2023 compared to recent years is that while demand was still present, tenants were being a bit more analytical in their decision to lease space. From Q2 2020 through the end of Q2 2022, if an availability hit the market, it would typically be leased within 60 days. Since Q2 2022, larger square footage availabilities (greater than 40,000± SF) were generally available for a longer period before being absorbed. Smaller availabilities transacted much more quickly, as the tenant pool is greater in our market for those spaces. That market remains incredibly strong, and from all indicators, will continue to remain so.

While deals may take a bit more time to execute, this is still a landlord’s market. Lease rates are holding strong due to the lack of supply. New construction has slowed because of the rising cost of capital and materials. Speculative building is essentially non-existent.

With that said, the “flight to quality” theme is alive and well. If a company is looking for a relocation or expansion, new construction remains a viable option if they are willing to pay for quality. There are a lot of benefits to a build-to-suit option. Frankly, the delta between lease rates for existing product and new construction remains nominal for tenants who can offset that gap with other efficiencies in a custom designed building.

Sales

In 2023, we saw industrial investment sales come to a screeching halt. For owner-users looking for product to purchase, there was limited inventory available. Investors could not make deals work based on the current interest rate environment compared to seller pricing expectations. So, that buyer reality versus seller expectation disconnect that we saw in the second half of 2022 did not resolve in 2023.

For the deals that did transact, how did they pencil? From what I observed, it took creativity. There had to be either creative financing or a compelling story. Was the seller willing to hold paper at an advantageous interest rate? Was there a mark-to-market opportunity with below-market lease rates and rolling leases? If so, let’s move the deal forward. Otherwise, the deal does not make sense.

What can we expect this year?

2024 Outlook

The debt markets will be a big piece of the puzzle in 2024. If financial institutions continue to tighten their lending standards throughout the year, as we saw in 2023, it is going to be a tough road. Commercial lenders seem to be in a bit of a bind; they want to make deals work but the approval process is not as straightforward as it was, even six months ago.

Construction costs appear to be stabilizing and perhaps coming off the highs that we have seen over the last couple of years. This could mean an increase in new inventory to the market based on new construction projects, but I do not foresee that being enough to soften the demand vs. supply disconnect that we have experienced over the last four years.

Leasing activity started to pick up in Q3 and Q4 of 2023 and is likely to continue to be strong. This is a good sign. However, with vacancy rates hovering around two percent, where will these tenants find a home? We have seen tenants expanding their search radius. There used to be substantially more options when getting outside of Greater Portland. That is no longer the case, which shows the strength of those secondary markets. Will this drive tenants to more tertiary markets? I believe new construction will be the preferred alternative to tertiary markets if tenants have time to wait. But it underscores the fact that proactive planning, well before lease expiration dates, is extremely important. In conclusion, I think the big question in 2024 is, will sellers’ pricing expectations finally meet the buyer’s reality? Stay tuned for updates.

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