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January 24, 2018

Portland area's tight industrial space market is 'economic crisis'

Photo / Fred J. Field
Photo / Fred J. Field
Justin Lamontagne, a partner and broker with NAI The Dunham Group, spoke recently at the MEREDA Forecast Conference in Portland about the Portland area's tight industrial space market.

When Justin Lamontagne spoke at the MEREDA Forecast Conference a year ago, he talked about how the medical marijuana industry was helping to fill Portland area industrial space market.

This year, his focus was on how vacancies are at an all-time low and businesses like medical marijuana, craft brewing and other startups can't find space to locate a business.

"It's not just an inconvenience, or good for the property owners," said Lamontagne, a partner and broker with NAI The Dunham Group, in an interview with Mainebiz on Tuesday. "But it's an economic and growth issue. It's more of an economic development crisis."

The industrial vacancy rate has plummeted since 2011 after decades of holding a steady rate.

He said because landlords can be more selective, tenants that need more infrastructure, like craft brewing and medical marijuana, are being passed over.

"It's not a Portland thing," Lamontagne said at the MEREDA conference. "It's very much a greater Portland thing, it's becoming a Cumberland County thing" as well as inching into York County. "The situation is critical."

He said the squeeze is particularly tight within a 20-or-so-mile radius of Portland. "It's less tight on the midcoast and in Lewiston-Auburn, but they're feeling the effects too," he said.

The industrial vacancy rate in greater Portland was 8% in 2011, 5% in 2013, 3.25% in in 2015, 2.25% in 2016, and 1.25% in 2017, according to Lamontagne.

In 2018, his survey shows, there is no industrial space available in Gorham, 0.4% in Saco, 0.6% in South Portland, 1.1% in Portland, 1.6% in Westbrook, 1.9% in Scarborough and 2.5% in Biddeford.

"I live and breathe it every day, and I never thought I'd see the industrial vacancy rate this low," he said. "No one saw it coming."

Looking outside of Portland

Photo / NAI The Dunham Group
Photo / NAI The Dunham Group
An industrial building at 39 Old Alewive Road in Kennebunk was on the market for less than a week before it came under contract to be sold.

The situation is forcing industrial users to look outside of greater Portland. Lamontagne recently brokered a pending sale in Kennebunk in which the building was on the market for less than a week. The prospective new owner has a lease deal pending with a long-term tenant.

In past years no investors looking for industrial space in the Portland market "would have even looked at" an empty 8,900-square-foot building at 39 Old Alewive Road, just off Interstate 95 at Exit 25 in Kennebunk.

He said that areas farther north and west from the city won't see a similar benefit from the crunch — the cost of added transport doesn't pay off.

"Driving distances and logistics matter," he said. "An hour of highway driving can become more prohibitive (than the cost of building new). That's why we're not seeing this great flight (to those areas)."

A success story Lamontagne cited at the MEREDA conference was speculative industrial space expansion at 155 Rumery St. in South Portland.

David McClees, president of Talus Corp., bought the 5.33-acre site as an investment. It already had two buildings totaling 51,000 square feet and McClees added a 24,000-square-foot industrial building.

Construction on the new space was completed last year. McClees also upgraded the existing space. The property is now leased to two businesses, Webber Supply Co. and Mattress Firm.

He also said that he saw the industrial space market tightening up in the area in 2013, when he first started looking to move Talus out of 11,000 square feet on Riverside Avenue. He eventually found 40,000 square feet on Presumpscot Street in Portland for the business, which develops and wholesales automotive organizers and travel accessories.

"It took a long time to find industrial space that was decent," before finding the Presumpscot Street property, he said at the time. "It's tough to get these days. That's my impression."

Banking and zoning

Photo / Peter Van Allen
Photo / Peter Van Allen
David McClees, founder of Talus Corp., acquired 155 Rumery St. in South Portland, which includes two warehouses totaling 52,000 square feet, in 2016. He added another building and quickly found two lease tenants.

That was when the vacancy rate was around 5%. Now that it's at 1.25% in greater Portland, Lamontagne said that the rising price of square footage and what businesses can afford will come to a head — despite it being a landlord's market, affordability still matters and some businesses just can't pay.

The solutions rest with the banks and municipalities, he said.

Banks should take more of a chance on financing speculative construction — like Norway Savings Bank did with McClees' South Portland property, he said.

Municipalities, too, should reexamine industrial zoning and find space in town for industrial uses. He said it's one way big box stores that are empty due to changes in the retail market can be reused.

"The industrial market is something people don't think about on a day-to-day basis," he said.

While e-commerce is hurting retail real estate, it will help industrial real estate, Lamontagne said. "The industry still needs to make stuff, still needs to store it, still needs to distribute it, and the industry can capitalize on that."

The area's industrial market is thriving, or would be, if it had the space to thrive in.

He said there's no telling how many towns will see the possibilities.

"It'll be a town to town thing," he said. "It'll be an interesting conversation over the next 10 or so years."

"I think the opportunity is there," he said.

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