CBRE | The Boulos Co. on Tuesday released its 2012 Office Market Survey, which will be officially presented at the Maine Real Estate & Development Association (MEREDA) Annual Real Estate Forecast Conference on Thursday.
The report looks back over 2011’s office market in the greater Portland area, and offers predictions for 2012, as well. It is, as always, a veritable cornucopia of information about the market, noting recent trends, suggesting future ones and examining both the big deals of 2011 and the areas for potential in 2012 and beyond.
The firm finds results it says are consistent with that of a recovering economy. The overall vacancy rate for greater Portland in 2011 decreased slightly by just under 0.5 percent even though new rentable square footage was added to the market.
In his introduction to the report, CBRE|Boulos President Morris Fisher wrote:
I have been wrestling with how to recap 2011 as I write this annual message. No matter how long I look at the encouraging numbers and positive movement in the most quoted economic indicators such as vacancy rates, unemployment rate, and interest rates, it doesn’t feel like we made progress due to the constant barrage of bad news in the press, particularly around mortgage foreclosures, the federal debt and the European bond crisis.
In spite of issues like the continuing high unemployment rate and the lack of any solid fiscal plan coming out of Washington, D.C. our local commercial real estate marketplace was quite active this year. The results of this year’s office market survey certainly demonstrate that our vacancy rates for office space remain at historical highs, but underneath the numbers are some signs of improvement, with the overall vacancy rate declining to 10.7% from last year’s rate of 11.2%.
The report looks broadly at three areas: Downtown Portland, Suburbia and Medical Offices.
Historically the strongest sector, Downtown Portland’s Class A space had a difficult year with a significant vacancy rate increase for the third consecutive year. It went from 4.2% in 2008, 6.2% in 2009, 10.7% in 2010 to 14.6% this year, representing 295,359± SF of vacant Class A office space. Two Canal Plaza, One and Two Monument Square, Two Portland Square, 27 Pearl Street and 511 Congress Street all report significant vacancies. Class B space reflected some stabilization as the vacancy rate decreased slightly. Class B vacancies jumped in 2010 to 13.9% from 7.4% in 2009. This year the vacancy rate retreated to 13.5%. Major vacancies continue to plague office spaces along Congress and Commercial Streets and the Monument Square area. Overall vacancy rate for Class A and B buildings increased from 12.6% to 14% in 2011.
The suburban office market reflected some stabilization in 2010 as the overall vacancy rate fell slightly for the first time since 2006. In 2011, the suburban market continued to strengthen as the overall vacancy rate, including Class A and B space, fell from 9.4% to 7.8%. While certain geographic areas face higher vacancy rates than others, nearly all of the geographic areas that comprise the suburban market showed substantial improvements in Class A buildings. As of December 1, 2011 the vacancy rate for Class A space was 7.9%, a decrease from for 11.3% in 2010. Class B space saw a vacancy increase from 6.7% in 2010 to 7.8% in 2011.
Medical Office Space
The medical office market continues to rebound from a record high vacancy in 2008 due to new development that increased overall medical space. Much of that new space was quickly leased the following year. For the third consecutive year the vacancy rate fell as the new space continued to be absorbed. Class A medical space improved from 2.4% vacancy in 2010 to 1.3% vacancy in 2011. This represents positive absorption of 8,771± SF. Class B medical space remained stable in 2011 with the vacancy rate going from 6.3% in 2010 to 6.2% in 2011. Overall, the medical office market continues to tighten with a vacancy rate of 2.5% in 2011. Medical office continues to have the lowest vacancy rate in every sector we track.
The report also takes a quick look at the Lewiston/Auburn and Augusta areas, too.
As to predictions for 2012 – CBRE|Boulos sees improved occupancy levels, progressing gradually, but signifying an “office market in recovery.” The firm sees it as a positive sign, particularly given the difficulties experienced since 2007.
Some forward-looking thoughts from the firm:
• No new office building development will occur without a tenant secured with a fully-executed lease agreement for the space. In other words, no speculative office buildings will be built. The rent necessary for new construction is significantly higher than the rent for buildings where vacancies exist. The current backlog of space must first be reduced in order for the development of large office buildings to take place.
• We believe the existing downtown Class A vacancy rate of 14.6% is the bottom of the market and should slowly improve over the next few years. Since a large percentage of the downtown Class A office market vacancy is accounted for in three buildings, the lease-out of vacancies at these locations will have a significant positive effect on downtown occupancy levels.
• As landlords sit with vacancies, their willingness to provide incentives to tenants such as free rent, above-standard tenant improvements and other inducements will increase. These incentives are temporary and will decrease as vacancies fill.
• While multiple offers for office space were common several years ago, it is now highly unusual for a landlord to receive more than one offer for its space at any given time. Multiple offers for office space continue to be the exception rather than the rule. As vacancy rates improve over time, this will change and landlords can expect, on occasion, to see multiple offers.
I’m hoping to cover the MEREDA conference on Thursday, so follow me on Twitter at @bdnbiz for quick bon mots and oh-so-witty insights throughout the day. Watch this blog for more in-depth updates. And, of course, watch for a story at bangordailynews.com and in our Friday print edition.