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Spring 2019 MEREDA Index Commentary – THE CONSTRUCTION COMPONENT – Richard Brescia, Cianbro

Richard Brescia, Vice President of Cianbro recently provided insight for the Spring 2019 Edition of the MEREDA Index by sharing his perspective on the Construction Sector over the last 6 months. 

“In late 2018 and early 2019, Cianbro continued to see strong construction demand, including
increased interest and investment from sources outside of Maine. What’s more, the demand wasn’t
concentrated in our largest metropolitan markets, but stretched statewide, putting added pressure
on construction resources and – subsequently – costs.

The building market was extremely active, especially in corporate office, senior living, and
institutional markets, including healthcare, higher education, government, and life sciences.
While we feel these markets will continue their momentum in the coming months and years,
private development may be tempered by rising costs, particularly for labor and materials.

The driving forces behind increased construction costs can be attributed to a number of factors:

• Supply & Demand – Contractors and subcontractors are extremely busy. That means there are
fewer bidders for any given project, which in turn means pricing is likely to be less competitive.
Construction materials are also in high demand, affecting both pricing and availability.

• Skilled Labor Shortage – As older craft workers retire, there are far fewer young people
entering the trades to replace them. To help remedy the situation for us and our clients, we
created the Cianbro Institute where we educate our employees in a variety of trades, from
rigging and welding, to carpentry and electrical. Hopefully we’ve started a trend.

• World Economy Uncertainty – Tenuous international trade agreements and commodity tariffs
have led to some significant cost spikes in widely used construction materials such as steel and
aluminum. That means items including I-beams, rebar, window casings, ductwork and exterior
metal panels are now more expensive.

Considering that budgets for today’s construction projects may have been developed a year or two
years ago, the cost increases are sobering for owners. Looking ahead, Cianbro believes contractors
can mitigate this by employing creative solutions such as lean construction principles and a colaborative
construction management (CM) delivery approach.

The CM model is based on the owner and design and construction firms working together as a
team from the conceptual stage through project completion. Most notably, it involves an iterative
design and budgeting process that enables the project team to monitor real-time pricing at each
design stage and, when necessary, make changes to materials, program or scope to attain the
desired guaranteed maximum price (GMP) quoted by the constructor.

Add to that lean construction principles utilized by the CM and subcontractors, such as just-in-time
material deliveries, modular components, advanced technology, smart construction practices and
proper sequencing, and you have a recipe for optimal efficiency that will keep projects on schedule
and within budget. In today’s robust construction market, these will likely be the keys to success for
savvy owners and astute contractors in Maine.

Click here to download the full report.  For more information and a video on the MEREDA Index, please click here.

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Spring 2019 MEREDA Index Commentary – THE RESIDENTIAL COMPONENT – Elise Kiely, Esq., Legacy Properties Sotheby’s International Realty

Elise Kiely, Senior Vice President , Legacy Properties Sotheby’s International Realty recently provided insight for the Spring 2019 Edition of the MEREDA Index by sharing her perspective on the Residential Sector over the last 6 months. 

We are continuing to see robust sales activity in Maine’s residential market. 2019 has started off with relatively
low inventory and strong demand across most price points. Volume of units sold may be lower in some sectors
due to lack of inventory, but we are seeing some increases in sale prices. Properties in good condition and
appropriately priced are seeing multiple offers with sale prices at or above list price. The pattern is similar to
what we experienced last year at this time. Our spring selling window continues to start earlier in the year,
encouraging some homeowners to list their homes in January and February, as opposed to April and May in
years past, in the hopes of taking advantage of less competition.

One key driver of the healthy demand in our residential market is the hiring activities at a number of Maine
based companies. For example, many of our buyers are coming from new hires at WEX, Covetrus, Idexx, Tilson
and Tyler Technologies, along with the traditional hiring from Maine Medical Center. These organizations
are attracting talent from both within and outside the state and the region. Part of our job is showing these
potential new Maine residents the advantages of living in Maine. Essentially, we are serving as ambassadors
for the state, a role we are proud to embrace. Maine has a strong lifestyle brand and reputation appealing to a
wide variety of different demographic groups.

I meet with people every day who are looking to move to Maine. When I ask what is bringing them to this area,
the response I most often hear is…lifestyle. The traditional draws are the iconic Maine trails, mountains, rivers,
and coastline; but over the past few years, the food and beverage scene has become a strong economic driver
for southern Maine and cities up and down the coast.

The biggest challenge that I see going forward is affordability – both with new construction development and
work force housing. Certainly, Maine offers more affordable and manageable opportunities than our larger
feeder markets in Boston and New York. However, the significant increase in construction costs (from both
a severe skilled labor shortage and a rising cost in materials) is starting to impact new construction options.
It is also impacting the effort to preserve, let alone, meet the increasing demand for affordable work force
housing. In order to sustain the golden goose of the food and craft brewery economic drivers for the area, we
need to ensure affordable housing for the people serving in these fields. The real challenge in addressing the
affordable housing need is doing it in a strategic and effective way that encourages the private sector to have
a voice in the solution.”

Click here to download the full report.  For more information and a video on the MEREDA Index, please click here.

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Spring 2019 MEREDA Index Commentary – THE COMMERCIAL COMPONENT – Joseph Porta, Porta & Co.

Joseph Porta, SIOR, Broker/Manager of Porta & Co. recently provided insight for the Spring 2019 Edition of the MEREDA Index by sharing his perspective on the Commercial Sector over the last 6 months. 

With Q1 of 2019 behind us, and an active second quarter approaching, it’s a perfect time to reflect on
southern Maine’s capital real estate markets. I am frequently asked; in a market where pricing is higher than
it has been in over a decade how does anyone acquire investment real estate without over paying? In short,
very carefully, but more specifically, by sticking to fundamentals with an increased focus on creating value
between Net Operating Income (NOI) and after-tax cash flow. Investors are managing risk by prioritizing
value over short-term cash flow.

Limiting risk is about managing a position’s exposure to a worst-case outcome. To effectively do that late
in a business cycle requires a readiness to reinvest capital, a willingness to rely on appreciation, and the
patience to realize returns over longer periods of time (5-10+ years). For example, this could mean acquiring
an empty building and repositioning it for a higher and better use as we’ve seen with recent redevelopments
in Portland’s Bayside neighborhood, or purchasing an asset based on its future ability to generate a higher
rent as we’ve observed in Monument Square. The common denominator in both situations is an under
performance of some kind where an asset’s value is not exclusively derived from its existing income.

After 8 years of economic expansion and historically low interest rates, capitalization rates have dipped under
7% for the strongest commercial assets in southern Maine. This has produced soaring valuations with pricing
in some instances trading at or above replacement cost. In effect, deal pricing is equally driven by factors
relating to the capital stack and financing as it is from the relationship between NOI and price. Professional
operators (owners/funds) utilize financing structures where membership equity (investor) is layered onto lower
leveraged institutional lending to create a less expensive cost to capital. Opportunity zones have added yet
another wrinkle to the life span of investment capital going into these designated areas. New class A office
buildings for Sun Life Financial, WEX and Covetrus have been able to utilize these tax advantages, effectively
opening pathways where new construction is a plausible solution.

The underlying driver of this market growth is the sustained expansion of Portland’s downtown and greater
metropolitan statistical area (MSA). Entering Q2 and looking forward to Q3, we can expect a continued shift
in emphasis onto internal rate of return, and the deployment of investment capital with the patience to utilize
time in order to reach underwriting objectives.

Click here to download the full report.  For more information and a video on the MEREDA Index, please click here.

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Spring 2019 MEREDA Index Commentary – INTRODUCTION – Tim Soley, East Brown Cow Management, Inc.

Tim Soley, President of East Brown Cow Management, Inc. recently provided insight for the Spring 2019 Edition of the MEREDA Index by sharing his perspective on the markets overall. 

I’ve always found the MEREDA Index to be an extremely valuable tool. Not only is it a
great source for measuring changes in our industry over time, but it is a lso a wellspring of
information from industry leaders sharing their insights. The Spring Index provides us with
a full look at 2018 and allows us a peek at how 2019 is setting up.

Having grown up in mid-coast Maine and been active in commercial real estate in southern
Maine over the last 30 years, I have never seen such a br oad-based, diverse, and robust
expansion. From industrial to flex, to development land, to residential condominiums and
rentals, to large companies’ office space and hospitality—the growth is unprecedented
in modern times. While mostly concentrated in southern Maine, it is late in the current
market cycle and the growth is demonstrating weakness. During the 3 economic cycles I
have experienced in my career, people always say that “this time is different” – it never is.
Lateness is sometimes measured in years, and sometimes in frothy activity which does not
mirror the underlined fundamentals. I believe that both conditions apply now.

Maine is following a nationally choreographed path now affected by increased interest rates,
international trade tensions, post tax stimulus let-down, and market cycle expansion fatigue.

For example, in Portland I see this represented by stagnant office demand from the typical
1,000 to 3,000 square foot office tenant. We also see residential condominium demand
begin to slow.

Having said all that, and having no crystal ball telling me when the recession will occur, I have
never been more excited about the fundamental and foundational potential of the real estate
economy focused in southern Maine. I see unprecedented opportunity in elevating the level of
design and construction quality in Portland’s built environment.

There are geographic locations of strengths in specific industries or businesses, but nothing
broad-based. One of the differences about this expansionary period is that Maine has not
seen uniform growth statewide.

Quality of life, a mantra heard here for a couple of decades, is bringing young workers and
older retirees to live here. Tourism has never been greater or as seasonally diverse, and
provides possibilities. Tourism is one of Maine’s largest industries, therefore most important
exports. In our relatively rural, economically disadvantaged state, tourism provides our best
opportunity to export our tax burden. Finally, large, growing companies are either expanding
outposts here, or are willing to call Portland, Maine their home. I see opportunity in the
cyclical dark clouds ahead.

Click here to download the full report.  For more information and a video on the MEREDA Index, please click here.

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