COVER STORY

Just how bullish is Michael Kane about the commercial real estate market in the Seacoast region?

Enough to put his money where his development vision is.

The Kane Company plans to build a second office complex at 155 Borthwick Ave. in Portsmouth. Michael McCord photo

Kane, the chief executive officer of the Kane Company, one of the largest full-service commercial real estate firms in northern New England, plans to build a second office building next to the major complex the company opened in late 2005 on Borthwick Avenue in Portsmouth.

What makes the proposed building unique is the gamble: Kane is building and developing it on "spec," meaning no tenants have signed leases.

"The demand for office space continues to be good," said Kane whose company recently signed the last lease for the 155 Borthwick Ave. location. "There's a lot of interest for good office space almost everywhere on the Seacoast. It continues to be a strong market."

In June 2006, Kane also showed confidence when he developed his company's first hotel development project, the $3.9 million Homewood Suites by Hilton, to serve a growing business traveler, extended-stay market. "It's doing great," he said of the 108-room facility.

Be it office, retail, or industrial -- the three components making up the commercial real estate market -- there appears to be no shortage of confidence among market veterans working in the region whom Ventures contacted for this survey story. Though there are the customary caveats about economic unpredictably, they all believe the commercial market is the strongest it has been in years -- evidence, they say, of the Seacoast region's economic strength.

"The national and regional economy remain strong," said Kane. "Locally, we continue to outpace growth in the rest of New England."

An annual report on the southern New Hampshire commercial real estate market by CB Richard Ellis showed strength in office, retail, and industrial sectors.

A sign of commercial real estate market strength, the new Home Depot will open soon at the former Portsmouth Business Circle location. Michael McCord photo

Given the state's lack of a sales tax, retail has always been the strongest part of the commercial sector. But the office and industrial sectors are also growing -- a reflection of the economic recovery from the downturn of 2000-2002.

"Overall, the commercial market is very healthy," said Kent White, a vice president with CBRE. "Businesses continue to want to relocate here from Massachusetts to Maine. And we are seeing local businesses who are growing looking to move to spaces where they can grow."

White, who has worked the Seacoast region market since 1994, said the retail corridor along Route 1 from Seabrook up to Woodbury Avenue in Portsmouth is very active, while he considers office market "relatively strong" with "somewhat of a slowdown" in filling spaces from 5,000 square feet and larger.

Business condo increase

One interesting addition to the traditional buying or leasing the property choice faced by businesses has been the rise of business condo units in the region. White said one of the more innovative projects he's working on is the transformation of the Franklin and Worth blocks on Congress Street in downtown Portsmouth into business retail and office condominiums.

"It's an interesting twist for Portsmouth," White said. "It allows companies to own the space they need without having to buy the entire building property."

Bob Anderson, the lead commercial sales representative for Prudential Rush Realty in Hampton said "we are busier now than I've ever been." He said development continues at a high rate, mostly to deal with pent-up demand in retail and office markets. He cites the development "explosion" in the Route 125 area around Epping as an example.

But if a growth boom is taking place, Anderson thinks it's a smarter one than previous cycles. What is different from the go-go days of the late 1990s is that "there's not a lot of overspending" among prospective clients in search of property. "They are being cautious with their money."

Anderson is curious about what's going to happen with the office market when big companies such as Liberty Mutual complete their move to a new complex in Dover. For 2007, the CBRE report predicts "continued recovery" with gradual rental increases as the market tightens -- and "landlords will continue to pull back on concessions" they made in leasing contracts during the recovery period.

"If these Northern Tier projects (in Portsmouth) are completed, it will put a lot of office space into the inventory," said David Choate, a principal at Grubb & Ellis Coldstream Real Estate Advisers in Portsmouth.

Quarterly updates

Grubb & Ellis does its own quarterly research updates for New Hampshire and the results depend on location, size requirements and building classification. At the end of the third quarter in 2006, Portsmouth had an office vacancy rate of 7.8 percent; while Rochester had a rate of 23.7 percent, which the report attributed "to a glut of older lower-class buildings that remain stagnant in regards to leasing activity."

On the industrial side, the fourth quarter in 2006 vacancy rate was lower in Rochester (9.5 percent) than Portsmouth (11 percent), while statewide in New Hampshire the rate is 9.7 percent, up from 9.4 percent in the third quarter of 2006.

Choate is a 26-year veteran and has seen his share of cycles while taking part in scores of deals, including the sale of Frank Jones Brewery complex on Islington Street in Portsmouth. One of his concerns is that the "prices per square foot are too high" on the office side, which could lead to a correction in the market.

Choate said he's very hopeful about the "pretty interesting dynamic" in the industrial market, pointing to the expected occupation of two large buildings in Exeter formerly owned by Tyco.

The CBRE report also noted that larger manufacturing/office facilities formerly occupied by Celestica and Flextronics at Pease International Tradeport will likely find new tenants in 2007. Brady Sullivan Properties itself absorbed more than 420,000 square feet of industrial space in the region by buying the Flextronics building at Pease and two former Enterasys buildings in Rochester.

Choate said there's been a burst of leasing renewal activity and some strategic purchases made by buyers who might have leased in the past due to the strong economy and decent interest rate opportunities.

"We're as busy as we've ever been," Choate said. "I wonder how long it can last."

Patti Visconti is another busy broker. Visconti is the director of commercial development in the Seacoast region for the Masiello Group Commercial Associates and has worked the region since 1996.

"I do a lot on Lafayette Road, Route 1 from Seabrook to Portsmouth," Visconti said. "The (overall market) is very healthy."

In particular, Visconti said the strength and diversity of the region's economy has led to a wide range of industrial needs from "little guy cabinet makers," to an emerging biodiesel company and small independent film company looking to set up a movie project to be shot on the Seacoast.

She is less certain about the office market which could slow down in 2007. In Visconti's experience, the office sector is the most volatile. It's usually really up or really down," she observed. "There's no middle ground."