N.H.'s real estate market: a roundtable
NHBR's editors recently talked with representatives of New Hampshire’s commercial and residential real estate industry to get an overview of the sector and find out what they believe the future holds.
• Roger A. Dieker, first vice president/managing broker
CB Richard Ellis/N.E. Partners, Manchester
• Ralph Coppola, branch manager, Merrimack Mortgage Company, Nashua
• Dean J. Christon, executive director, New Hampshire Housing Finance Authority
• Alan DeStefano of Bristol-based Granite Group Realty Services and president of the New Hampshire Association of Realtors
• Ken Raymond, president, New Hampshire Real Estate Investors Association
• Robert L. Rohrer Jr., managing director, Colliers International, Manchester
• Margherita Verani, Berkshire Hathaway Verani Realty,
• Bruce M. Waters, Lang McLaughry Commercial, West Lebanon
• Brian W. White, president of the New Hampshire chapter of the Appraisal Institute and owner of White Appraisal, Dover
Please assess the state of the real estate market now, compared to the prerecession and recession years.
Alan DeStefano: 2013 has been the best year since 2007, and 2014 is a mirror image of 2013. We are looking at the best year since 2007. I am looking at them as being very similar in volume, to be the same as roughly 2002 and 2003 in the marketplace, which was a time when the market was just starting to ramp up a little bit.
In the Lakes Region, I survey a volume of nine offices in the Plymouth Bristol marketplace around Newfound Lake, the total dollar volume was up $40,000. We are seeing an increase in listing inventory.
Ralph Coppola: Sales are down approximately 50 percent from the peak market. There is a lack of inventory, and it seems that first buyers are less motivated and determined to own than in the past.
Dean Christon: The market is better now during the recession years, particularly 2013, a turnaround year. Pretty consistent positive improvement in pricing and sales for the most part. 2014 has been a little weaker than one might have expected, but that may be attributable to the really bad winter. But certainly both those years showed a marked improvement over the recession years. Nothing nearly as strong as the prerecession years, but that’s not surprising.
Ken Raymond: The real estate housing market as a whole has become very stable in most areas, and I don’t see any signs that there is a chance of prices falling in the coming years. As the market gains traction the mortgage interest rates will begin to climb, indicating just how strong the market has become.
The housing market is strengthening here in New Hampshire with housing prices approaching the prerecession values. Looking at several of the large metropolitan areas, prices of homes are at or exceeding prerecession values, which will continue to spread to the outlying areas.
Robert L. Rohrer: I think the real estate market is at its strongest since the recession took hold. The office market is improving, but it would not be correct, in my opinion, to say that it has returned to its prerecession position.
Vacancy rates are down and, particularly in the Seacoast and Salem markets, the market is growing, but not with the conviction it had prerecession.
Roger Dieker: Large office users continue to downsize as they are coming out of leases that began prior to 2008. The excess space left behind by these large users is being back-filled by smaller, growing entities that are seizing on the opportunity to occupy quality space at reasonable rates.
Manchester, for example, has seen the space left behind by Bank of America at 1155 Elm St. (in Manchester) with their lease expiration in 2012 now fully occupied by Anthem. Anthem, however, while filling the 40,000-square-foot hole left by Bank of America has left a 200,000-square-foot hole at 3000 Goffs Falls Road in Manchester.
Margherita Verani: This past recession had a magnitude that was greater than previous ones because of the tremendous run-up in prices before the crash. The double-digit increase was unsustainable, and the crash created an inventory overhang that is still somewhat present six years later.
Adding changes in the credit and mortgage requirements and the onset of financial institutions that were and still are too big to fail, virtually the entire industry was brought to its knees. Today, things continue to improve. the overall market is starting to come into balance, and many homeowners are starting to see modest price appreciation.
Bruce M. Waters: Currently, we see a stronger demand factor over the period 2008-2012 in all segments of the market. Leasing retail (office and industrial primarily) continues to be slightly weak. Investor buyers are back in the market, but at higher “cap rate” requirements for quality properties. Leasing and purchase values are flat, despite the demand. Until we absorb the former vacant inventory, prices will remain neutral.
Brian W. White: It has been a rollercoaster ride for both the residential and commercial real estate markets over the past decade. The increased demand levels and prices that were experienced in the early 2000s peaked in 2007. The Great Recession, which began in 2008, had a negative impact on demand and prices through the end of 2011.
Over the past two and a half years, the residential and commercial markets have slightly rebounded with some areas or market segments doing much better than others. In most markets, prices have not returned to the peak levels of 2007.
What are the biggest barriers to sales?
DeStefano: Sellers thinking the market is going up and holding out for a higher price. A lot of our sellers in the Lakes Region tend to be from other parts – Massachusetts, Connecticut, Rhode Island. That marketplace has started to heat up so buyers are holding back slightly. Financing is still quite difficult.
I was with a young couple this morning. They’re exact words: “We need to buy within the next six months because we know the market is changing and we are going to miss our opportunity to buy at reasonable prices.”
Coppola: The tightening of credit and lack of programs suitable for self-employed borrowers. Also, move-up buyers are finding it more difficult to convert the current primary to a rental. The introduction of QM (qualified mortgage) with the restrictions associated has also limited available options due to the associated risk in making a non-QM loan.
Christon: There are still a lot of logical potential buyers who are sitting things out because they are nervous about the economy. There is a sense among first-time homebuyers that there are impediments to getting a mortgage, some real, some a matter of perception. In some areas of the state, there is a limited inventory of quality housing.
Also, the demographics of the state are not supporting traditional first-time homebuyers. There are not as many young people, and there is not as much in-migration of people who might buy homes.
Raymond: The biggest barriers I see are the mortgage lenders are still pretty tight in their lending practices. Although they have loosened up over the past couple of years, they are still understandably looking at the credibility of the borrower more closely than prerecession years.
Along with the lending qualifications are the lack of down payment funds available, many potential homebuyers are still hurting from their job losses that ate up their savings and/or they are still working through foreclosure credit issues.
Rohrer: For investment sales, the barrier is inventory. Owners feel there is a lack of investment vehicles to invest the sale funds. Taxes drastically reduce returns and there is still a gap between buyer and seller price expectations.
As for user purchase, activity levels are lower than prerecession levels. Cost of new construction and lack of existing property are two reasons. Companies are more willing to lease than buy or build and own. Leasing rates have not increased much over the past decade and a half. Leasing allows more flexibility and opens up more cash for investing in their operations.
Dieker: Tightened lending after the 2008 collapse did create some headwind for many transactions over the past few years, but it does seem that lending parameters are normalizing a bit in 2014, which is providing opportunities for many businesses to purchase and enjoy the financial benefits of ownership. These overall reduced costs of occupancy through ownership will continue to translate into more growth, equipment purchases and hiring.
What are the biggest barriers in to sales?
Verani: The biggest barriers affecting sales are still related to the difficulties we've encountered the past six years – inventory and qualified purchasers. Although we are moving towards a more balanced housing market, the ability for potential buyers – especially those with student debt – to qualify for a mortgage continues to be a hindrance in the marketplace. Should rates increase, this will present an even greater problem.
Waters: Local, state and federal permitting, state-adopted building codes for new and existing buildings and higher standard thresholds for lender guidelines. Additionally, the age of the inventory and deferred maintenance on existing properties. Cost of construction has also limited a gateway into commercial buildings for buyers.
White: Over the last several years, banks and lenders have been writing loans with interest rates that were at or near historic lows. Financing is available for those who qualify with good credit and the appropriate levels of cash or equity. Investors have been stepping back into the commercial marketplace for the better classes of investment property.
Unfortunately, some property owners own secondary or tertiary properties, and the values of these properties, in many cases, have not rebounded. Because of this, these property owners find themselves without the level of equity to move on to other real estate.
What policy changes either at the local or federal level would improve the market?
DeStefano: Some changes in legislation that could help ease lending criteria a little bit. I certainly agree that it was a little bit too loose when they were just giving the money away, but it is now very difficult for people who are more than qualified. You can have a guy with an 800 credit score, self-employed and you still can’t get financing.
Coppola: The biggest change would be to get back to commonsense lending. Currently all borrowers are feeling that they have been put through the mill due to the amount of information required, along with substantiating documentation. The restrictions are discouraging the origination of loans, even with demonstrated ability to repay.
Christon: The feds have this policy of extremely low interest rates in place. At the same time, they have increased the cost of FHA mortgage insurance and put into place regulations making it harder to access mortgages. They could re-examine those policies.
Raymond: The restrictions that Dodd-Frank imposes on honest investors have slowed the growth of the real estate market. The policy is long, confusing and difficult for many people to understand, along with so many compliance regulations that they must comply with has scared away the average investor which has made up a large portion of the housing recovery.
Rohrer: New Hampshire’s tax structure makes it difficult to offer incentive-laden packages. Create an environment that puts New Hampshire ahead of its New England neighbors in terms of business and employment taxes. Streamlined approval processes at the municipal level would help as well. It shouldn’t be as laborious a process as it has become to get approvals to change uses or construct new buildings. This includes the review and approvals needed from State agencies.
On a federal level, more stability and less “unknowns” – changes to government laws and regulations that impact business. Health care and international tax policy are two examples.
Dieker: The continued, prudent relaxation of commercial lending parameters will sustain the momentum. A wary eye should be kept on both the residential and commercial lending qualifications so that the excesses in the run-up to the last meltdown are avoided.
Verani: On a local level, it varies, but in the past most communities were so intent on minimizing real estate taxes that they created ways in which to stunt growth and primarily allow for only elderly housing in towns. They are now faced with empty schools, lack of affordable housing for younger folks and lack of job opportunities due to companies not moving into high-cost development communities and potential high Medicare costs down the road. Nationally, we have not had a coordinated, cohesive housing policy in some time.
Waters: Increase spending on municipal infrastructure and more openness to commercial zoning.
White: On the local level, the planning boards set the tone for growth within the community. Some municipalities have gone through periods of expansion (or stagnation) largely because of the planning board members in place at that time. The best policy is one where there is consistency at the planning board level. This gives developers the needed confidence to come forward with plans for new development.
Can you address prospects and barriers for new development and construction?
DeStefano: Land sales are still at an all-time low. You need them for development to happen. This is partially due to increased zoning requirements in some towns to put in full blown subdivisions with paved town roads. It is much more difficult to cut up a piece of land and then sell it off. Someone can buy an existing property with a house on it and do slight improvements for far less than buy land and build.
One good thing: Bank foreclosure inventory is starting to dry up and go away. That will ramp up the new construction market.
Christon: We did a study recently and held focus groups, which included Realtors, builders, consumers groups and others. They all said that local regulatory policies are out of touch with current reality. They reflect a fear of growth pressures that go back to the 1990s and don’t really allow the market to build smaller housing that might be higher-density, more likely to appeal to homeowners now and be more affordable.
Raymond: There are still great prospects in this market when it comes to commercial real estate, there are many rundown buildings, mills and factories that can be bought fairly cheap, which opens the door for a developer to rehab the property for businesses to move into such as retail, office or apartments.
The barriers would be the high cost of construction and materials along with high fuel costs. All these factors drive the cost of construction up, thus reducing the profitability for the developer. Having a good team in place to reduce the costs is critical in this market.
Can you address prospects and barriers for new development and construction?
Rohrer: The cost, in time and dollars, to get projects through state and local approval processes is part of the problem. Faith in the strength and stability of the economy is also an issue. Lease rates have actually gone down quite a bit in real dollar terms. This makes it difficult for new construction to compete, as the cost of materials has, and continues to, increase, and land costs have also increased – albeit at a slower rate. That said, the demand for real estate needs to increase.
Dieker: While the economic and environmental parameters are creating an added burden to new development, many projects are moving forward with the resulting properties providing a more planned and progressive infrastructure. The development land in Londonderry just south of the new airport entrance, for example, is progressing with newly constructed warehouse and distribution facilities that will be world class. Having these facilities located in New Hampshire will take our local economy to a new level as we upgrade this important infrastructure for the future.
Verani: The main barrier for quite a few years has been zoning. Planning boards have been heaping on the restrictions and requirements for both residential and commercial development in many towns. The result is a high building cost which precludes the possibility of affordable housing or the entrance of commercial enterprises which could have provided jobs. To enable a developer to do it in town they must apply for federal regulations, which just adds another layer and another cost.
Waters: Most new construction has been created by institutional users. Bond financing is at its lowest in decades, but not available to the private sector, despite historically low interest rates.
In my market, I do see many small startups, seeking mostly leasing opportunities, but if you project that out, in five to 10 years, we may see a wave in new construction for a broader market as they grow and have more equity.
White: New construction of both residential and commercial property has been on the increase for the better locations over the past couple of years.
On the residential subdivision end, developers have to incur increasing impact fees that are being assessed by many municipalities. These fees are being charged to cover the increased costs to the community when additional population is added. The developers then pass this cost on to the new home buyer.
On the commercial end, the increasing demands being placed on the developers of commercial property from the planning boards is the biggest deterrent for new development.
What do you see going on in the rental and leasing markets?
DeStefano: Rents have been rising on residential apartments, and we been filling units on a fairly quick basis. I had a client who built a six-unit apartment building a year ago, and within three months we fully filled it.
Part of my company, Lake Area Properties, does vacation rentals. We are running approximately even with last year. We have obtained several new properties. We manage to fill them fairly quickly. Waterfront, which you get $4,000 a week for, has filled up.
Coppola: It seems that the consumer is more cautious in taking on a mortgage. Concern about job stability, amount of future increases in pay and overall confidence is such that they feel safer renting. Until the economy improves and we see higher-paying jobs coming back into the state, the rental market will remain strong.
Christon: That is the strongest part of the market. On the for-sale side, we are still at a 12 or 13 percent price decline in the last 10 years, whereas we are at about 13 percent rent increase during that same period.
There is a lot of pressure on the rental market – 20,000 people who lost homes to foreclosure are now in the rental market. First-time buyers who in another environment would buy a home are now renting longer, and people are not buying who are uncomfortable because of economic concerns. There’s a lot of demand, we are not producing a lot of rental housing.
Raymond: The rental market has exploded. With all of the foreclosures, people were driven to rent. Landlords did not look so much at credit scores but focused more at the prospective tenant’s whole picture and if they had previous evictions and a stable job. The rental market can burst just like any other bubble so keep your eyes open.
Eventually, those renters with foreclosures will be looking to buy again. With that will come lower occupancy/higher vacancies, which will drive rents down. Be careful how much you pay for apartment buildings today. You may not be able to support it tomorrow.
Rohrer: When it comes to office space, the vacancy rates in suburban office markets are lower and lease rates are showing signs of creeping up. Demand for central business district and Class B office space remains a bit stagnate, but shows some signs of improvement.
As for industrial, demand is there for high bay, warehouse/distribution space, but there is little or no product available that meets this demand. The available product is geared more toward manufacturing and lower bay space warehouse space.
And on retail, well-located strip malls with strong anchor tenants will do continue to do well. Those in less favored areas and/or those not managed well will likely see falling demand.
Dieker: Leasing rates and vacancies depend on the sub-market. Nashua is working hard to back-fill the warehouse space left behind with the New Hampshire Liquor Commission utilizing the newly constructed 250,000-square-foot DHL/Exel facility in Bow. This back-filling activity has put downward pressure on industrial lease rates in Nashua, but will eventually stabilize the vacancy rate.
Manchester’s central business district, on the other hand, is seeing increasing lease rates as the Elm Street towers continue to lease up. The city of Manchester is also capitalizing on this tightening trend as they increase parking rates in the CBD.
Verani: The rental market will continue to be tight and rents will continue to rise. What is somewhat frustrating is many, many renters could be homebuyers but for the tightness in the credit approval process.
Waters: I see an uptick in office leasing, followed by semi-light industrial demand. Traditional retail has been flat, but traditional retail spaces have been filled with nontraditional retail uses, such as medical clinics, service offices, etc.
White: In the primary markets, for the better residential and commercial properties, rental rates have been slightly increasing over the past couple of years. Rental rates in the secondary markets have been fairly flat while rents continue to decline (and vacancy remains fairly high) in the tertiary markets.
A Seacoast area example of this can be found in the apartment market, where rents in the Dover area have been increasing, staying relatively flat in the Rochester area, and declining in the further northern communities where the apartment space is typically older and further from modern conveniences.