July 5, 2022 at 6:00 am
On May 24, Katie Allen, a Broker at The Dunham Group, was a commentator for the Maine Real Estate & Development Association’s (MEREDA’s) 2022 MEREDA Index. Katie’s comments on the Commercial Sector follow Economist Charles Colgan’s analysis for 2021.
The MEREDA Index is a measure of real estate activity designed to track changes in Maine’s real estate markets. The Index is a composite of nine seasonally adjusted measures reflecting both new development and transactions involving existing properties and it covers both the commercial and residential markets statewide. The most recent edition covers the year 2020 and provides commentary on the Commercial, Residential, and Construction sectors. The MEREDA Index for 2021 is 116.3
THE COMMERCIAL COMPONENT: 116.7
[Charles Colgan Analysis] “Following little growth in 2020, the commercial Index grew overall by nearly 9%. The principal driver of the growth was a significant increase in lease and sales transactions. There were 575 commercial transactions in 2021 compared with 325 in 2020. Square footage sold and leased also increased by 1.6 million square feet. The rapid growth in supply was most likely a response to the abnormal conditions of 2020, but the supply growth was not met with comparable demand growth, resulting in both the per square foot sales and lease rate indexes to each decline by about 5%.”
[Katie Allen, Broker, The Dunham Group] “Coming into 2021, we felt a sense of optimism that people would start coming back to the office. While this did happen on a small scale – predominantly in downtown offices – the Delta variant quickly changed people’s ‘back to work’ plans. Office tenants were all over the place and no one seemed to have an answer on how to effectively move forward. As a result of all this uncertainty, two major trends emerged. First, tenants with lease expirations in 2021 (or even later) whose employees could work from home, chose to abandon their space altogether. Second, tenants chose very short-term renewals as a way to kick the can down the road. Most landlords accepted these renewals, often on less than favorable terms, in order to keep vacancy down and to get a shot at future renewals. In my opinion, because of this, the real impact of Covid on the office market has yet to be seen.
In direct contrast, the investment market thrived in 2021 where the overriding theme was lack of inventory. Quality, well-priced investment properties almost never made it to market, but were sent directly from brokers to the ever-widening pool of eager investors. Cap rates at or below 6%-7% became the norm, especially for larger apartment complex sales, and 1031 Tax Deferred Exchanges remained a driving factor in the strength of the market.
Hands down, the shining star of the 2021 commercial market was the industrial sector. With a vacancy rate of less than 2%, every aspect of the industrial market seemed to flourish. Rental rates were up, sale of owner/user properties and industrial investment grade properties set record $/SF sale prices. Even with an influx of new inventory from The Downs in Scarborough, the industrial sector managed to surpass everyone’s expectations and will likely continue to do so for the foreseeable future.
The retail sector was a bit of a surprise. While we saw some bigger vacancies in the suburban market, we didn’t see the panic we expected from Covid. The downtown Portland market sadly lost several restaurants and retailers, but it felt like just as a space would go vacant, someone was there to scoop it up. Tenants who have been trying for years to get into the Old Port now had the opportunity. Also, as Covid drove people out of bigger cities into Southern Maine, their ideas for new restaurants, boutiques, and specialty stores came along, too. Thankfully, it seems that neither online shopping, food delivery services, nor Covid can kill the bricks and mortar stores and restaurants we all love.”