by Justin Lamontagne, CCIM, Partner | Broker, NAI The Dunham Group

A “healthy” market is a catchy and common term to describe the current state of the Greater Portland industrial sector. But our experience suggests that the market is only healthy for a select few, primarily landlords and sellers.

For the sixth consecutive year, vacancy rates have dropped. In fact, last year, I called the 3.38% vacancy rate “remarkably” low. Today, that number has dropped a full 100 basis points to 2.32%, which I would call simply “inhibiting”. Throughout the year, we worked with buyers and tenants who struggled to find suitable relocation and growth opportunities. Multiple offers and off-market sales became common, which further frustrated end-users. We coached clients to remain patient, flexible and communicative in this fluid and competitive market.

Accordingly, the limited inventory drastically increased both lease rates and sales pricing for industrial style space. Sale price trends, in particular, deserve a closer look. In 2011, at the tail end of the recession, Class A & B industrial buildings were selling in the $40/sf range. Sales were almost exclusively going to owner-user businesses who were bullish enough to bet the economy would turn. Today, those businesses are competing with a smaller inventory pool, and against investors looking to diversify their portfolios. Quality industrial buildings are now averaging in the high-$50/sf range and we have seen peak pricing at $70-80/sf.

The bright side, and a “healthy” sign of market conditions, is the recent resurgence in new construction, adding much needed inventory. And that trend will continue into 2017 as speculative industrial projects are being built and marketed in Saco, Gorham, Scarborough and South Portland. I expect that over 150,000 SF will be added to our inventory in 2017.  That means busy contractors, architects, engineers, brokers, attorneys, bankers, etc.

New projects do, of course, require higher lease rates, which the market is starting to support.  I predict lease rates will continue to climb for at least another year or two. And, the added inventory will finally slow our plummeting vacancy rates. An important caveat to this prediction is the still unknown impact of recreational cannabis cultivation and retail sales. Anecdotally, our industrial clients still prefer to buy existing buildings when possible. We have advised them to be ready to jump when opportunity arises and be willing to pay a premium in order to win a deal. Therefore, I predict sales price per square foot will again rise, and the gap between existing and new construction costs will continue to shrink.

So, is this a healthy market? It depends on who is asking! On behalf of all us at NAI The Dunham Group, thank you. I hope you find the data discussed herein helpful as it pertains to your particular real estate holdings and business goals.

Originally published as part of NAI The Dunham Group’s Greater Portland Industrial Market Survey, January 2017, http://www.dunham-group.com/uploads/industrial-market-survey-2017_web.pdf