Christian Stallkamp / March 7, 2023
2022 has proved to be another challenging year for the Seacoast Industrial Market. Vacancy rates remain extremely low, construction pricing remains high, and economic indicators are ambiguous. The consensus in the commercial real estate industry is that these challenges will continue into 2023 for the industrial market.
The Seacoast industrial vacancy rate hit 2.1% at year-end 2022, just a slight decrease from the 2021 vacancy rate of 2.3%. As of this writing, there are only two industrial options of 50,000± SF or greater for lease in the Seacoast. Of these two options, both pose challenges based on their location and configuration. Interestingly, if we back out the largest vacancy in the market located at 121 Technology Drive in Durham which is 269,965± SF, we are left with a vacancy rate of a mere .6%. This demonstrates the Seacoast industrial market has reached subcritical mass.
In the past, market rents did not support what developers would need to charge to cover the cost of land/acquisition and construction. Today’s market rents are now in the double digits, so the gap between landlord costs and the rental rates that can be achieved, is shrinking considerably. However, unpredictable construction costs, increasing extended permitting periods in municipalities, and rising interest rates, continue to deter developers from building on speculation. Additionally, the lack of available developable land on the Seacoast is a significant factor in sidelining developers. Land that is available is expensive and tends to have challenges associated with it such as ledge, wetlands and other site constraints, which push up the per square footage cost, pricing these options out of consideration. Developers are being forced outside of the Seacoast. In fact, the developers that have built on speculation in other New Hampshire markets, have been rewarded with long-term leases and quality tenants.
Industrial tenants continue to demand high-bay space with a minimum clear height of 28 feet. The high clear heights provide businesses the ability to palletize more product and use advanced picking technologies to maximize the space and lower costs.
Updated loading docks with tight seals and building efficiencies that lower the occupancy cost such as LED lighting and solar power, have been part of the lease negotiation discussions in 2022. These features are especially desirable in light of the recent increases in the cost of electricity and gas.
Another challenging trend for developers and industrial users looking to expand is the long lead times needed for many of the integral elements of industrial buildings such as HVAC, roofing products, and electrical components. This situation is made worse by labor shortages in the sub-contractor market. To illustrate this point, it is now commonplace for electrical transformers, an integral component to a manufacturing facility for 3-phase power, to take 5-7 months to be delivered.
Economic headwinds are putting pressure on the market, therefore we expect industrial lease rates to plateau. The days of $5.00 to $6.00 per square foot, NNN lease rates are well behind us. Demand for industrial product will remain strong. A reversal of years of cap rate compression has begun with the increase in interest rates.
As previously mentioned, the lack of available land will continue to present a challenge for developers; however, there are a number of existing projects that are permitted and approved. If some of these projects move forward, industrial tenants will at least have some options that don’t exist today.
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