Kent White / March 7, 2023
It is impossible to discuss the office market today without considering the past three years since COVID -19 effectively “paused” the office market. During 2020 and 2021, there were many predictions of doom and gloom for the office market. In some parts of the country, especially in larger urban markets, these predictions have come true. Fortunately for the New Hampshire Seacoast, the overall office market has weathered the coronavirus storm better than most, although not without some challenges and changes.
The office vacancy rate increased from 10.9% in 2021 to 14.8% in 2022. For context, the pre-pandemic vacancy rate was 7.3% in 2019. Although this is roughly a 100% increase, it’s not nearly as bad as many people might have predicted. Furthermore, this year’s increase over last year can be a bit misleading. 200 Domain Drive in Stratham, which is currently the corporate headquarters for Timberland, has 246,000 square feet available for lease. If this one building was removed from the vacancy totals the Seacoast office market effectively only increased from 10.9% to 12.1%.
The low vacancy rates tell one story and continue to help frame a healthier picture than most predicted. However, there still are signs that the market isn’t out of the woods yet. Demand for office space continues to be low. Companies are still feeling the aftershocks of the pandemic and are reluctant to make longterm lease commitments. Many larger companies have also been unwilling to downsize even though these companies are not occupying their entire space. They continue to navigate how working remotely and or hybrid/hoteling will impact their longterm working model and how much office space they will need before making any permanent decisions about their space.
The Pease Tradeport is home to many local, regional and national companies from a variety of industries and it’s always been a good indicator for trends in the whole New Hampshire Seacoast office market. The Pease vacancy rate in 2022 is very similar to the overall New Hampshire Seacoast rate coming in at 13.8% compared to 10.3% in 2021. One thing our office has been tracking since the start of the pandemic are the occupancy levels versus vacancy rates at Pease. Tracking how many employees are actually working in their office day to day can be challenging given the lack of available information. However, we found that looking at the number of cars in parking lots can be a useful tool. Using this non-scientific method, we found that most office parking lots at the Pease Tradeport are 30% – 50% full on any given day. This is up from 10% – 20% in 2020 & 2021 but well below pre-COVID-19 levels. Given the current vacancy rate of 13.8%, this analysis shows large amounts of leased space remain unoccupied.
As many in the industry have predicted, the long-term effects on the office market may not be fully realized for years to come. In the meantime, companies are still assessing what to do with their underutilized space. Fortunately for the New Hampshire Seacoast, the past three years have been better than most had forecasted.
High Asking Lease Rates: This year’s average asking lease rate increased from $14.47 to $15.87 per square foot, NNN. This seems counter-intuitive given the low demand and increased vacancy. The increase, however, can be attributed to higher quality available space and the trend of landlords keeping lease rates high to offset the increased construction costs associated with renovating office space.
“Move-In Ready” Space in Demand: High construction prices will continue to be an issue. Available office space requiring substantial tenant improvements will likely be priced out of the market. Tenants will focus on recently renovated spaces that require limited fit-up and are “move-in ready.” Tenants will also have to make some concessions when designing their ideal office layout to lower the cost.
Large Vacancy: As already discussed, many large companies are not occupying all their space. As their lease terms end, we may see large amounts of space hit the market for lease, similar to the Timberland example that was previously mentioned. We may also see more sublease space become available from companies that have determined they do not need their space, but who still have long-term lease commitments.
Landlord Concessions: Because of the high construction costs, landlords will have a tough time discounting the lease rates. For this reason, landlords will have to offer other concessions such as free rent, reduced rent during the first lease year, moving assistance, waived security deposit, or free amenities like gym access or free parking in urban environments.
Tenant Demands: Tenants that are looking to move in 2023 will demand more from their buildings. Class A office buildings that offer amenities like on-site gyms, cafés, common space, and close access to day-care will be in consideration. This will be critical as companies will look to offer a good balance between remote work and a more enjoyable workplace to retain employees and attract new ones. Conversely, older buildings located in less desirable areas will have challenges attracting tenants.
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