Mainebiz

V O L . X X X N O. I JA N UA R Y 8 , 2 0 2 4 16 E C O N O M I C F O R E C A S T F O C U S M U LT I FA M I LY R E A L E S TAT E For investors, the multifamily real estate market looks to 'settle' in coming months B y P e t e r V a n A l l e n W hile the multifamily housing market continued to be strong in 2023, it was also a year of transitions as different forces pushed and pulled buy- ers, says a real estate leader who special- izes in the sector. Brit Vitalius, owner of Portland- based Vitalius Real Estate, says a num- ber of dynamics have come into play: tight inventory, higher interest rates, fewer so-called COVID-refugee buyers and, in Portland, rent control restrictions. "Overall, low inventory seemed to define the market and buoy prices across the board. New multifamily listings in Cumberland County were down 20% from 2022," Vitalius says. In Portland, the price of multifam- ily properties with two to four units are generally held, but with fewer buyers. Such properties are exempt from rent control laws if owner occupied, so the buyers tended to be landlords that would live on premise (as opposed to investors). Larger multifamily properties, with five units or more, have lost all their "value-add" appeal. "e rental income was frozen at a single point in time by Portland's rent control, with only minor increases allowed," he says. "is has driven many investors out of Portland's residential investments." Investor dollars continued to flow away from Portland toward the Lewiston-Auburn market. "Prices and activity jumped [in L-A] as buyers came as owner-occupants and investors, and from in state and out of state. Multiple offers were common on many listings. e smaller properties attracted many first time homeowners, including new Mainers," he says, noting that investors were paying an average of $100,000 per unit for multifamily prop- erties, an increase of $22,000, on average, from a decade earlier. Fear over higher interest rates had an impact, but the impact wasn't as dra- matic as feared. "Interest rates cooled buyer demand and sobered pricing, although not as much as the math would seem to demand. at said, we saw deals fall apart because buying power was lost due to higher interest rates," he says. Finally, the crazy demand from COVID-refugee buyers seemed to ease last year. "Few buyers arrived from out-of-state urban areas willing to 'pay anything' for their oasis in Maine. It all felt like a bit of a slow return to normal," Vitalius says. Outlook "I expect that 2024 will be another year of transition and settling. Inventory increases may be offset by increased buyer demand if interest rates decline. Personally, I'm wary that there is a piper to pay for 10 years of dramatic price increases fueled by high rents, low interest rates and then COVID relocations," Vitalius says. "Today, new inventory is coming online, interest rates have more than doubled, and the COVID pressure is off. I've been hearing anecdotal evidence of softening rental demand. If that continues and interest rates remain above 7% to the end of 2024, there is a chance that the market will cool rather quickly." C O M M E R C I A L R E A L E S TAT E General 'unease' in the air as potential tenants look ahead B y P e t e r V a n A l l e n J ustin Lamontagne, a broker who spe- cializes in industrial real estate, says he noted a decided drop-off in client contact in the second half of 2023. "Anecdotally, in the third and fourth quarters, there was a general unease in the air," Lamontagne tells Mainebiz. "is was evidenced by a decrease in phone activity, heightened buyer hesitancy, stricter lender under- writing, and numerous, 'Let's see what the new year brings' discussions among decision-makers. Frankly, it felt a little 2010-ish." e chill might have come from worsening economic signals, the rise in interest rates or global events. Overall, 2023 was a "vibrant and exciting year in the commercial real estate market. We saw steady demand in all sectors and several significant development projects came to fruition," says Lamontagne, who is a partner and designated broker at the Portland-based Dunham Group. Looking ahead to 2024, Lamontagne says Maine's remains well positioned. "e extent of this slowdown remains uncertain, but historically, Maine has demonstrated resilience, experiencing more conservative ebbs and flows. Our predominantly small to medium-sized business commu- nity, with its nimble decision-making and planning, may contribute to this adaptability," he says. "However," he continues, "economic conditions do impact us, with substan- tial office space vacancies hurting the market, especially in suburban settings like the Maine Mall area. Larger floor plates of 20,000 square feet or more are available, indicative of a shift away from the traditional call-center/cubicle working style. Savvy landlords are creatively repurposing or subdividing these spaces, while others, either resis- tant due to cost or unwilling to adapt to changing a market, grapple with heavy carrying costs and frustrated leasing brokers." Adaptability will be the name of the game in the 2024 office market, he says. Downtown Portland's office leas- ing will remain steady and he cites the return of small and medium-sized businesses wanting to return to an office setting — albeit, with a differ- ent setup than before the pandemic. "e prevailing trend is a hybrid model, incorporating desk hotel- ing and flexible employee schedules, leading to smaller, more consolidated office layouts," he says. Some 300,000 square feet of downtown office space is expected to convert to housing or hotel space. "is will significantly lower our vacancy rates but not reflect a fair indicator of office absorption. Rather, it's another example of adapting commercial space to meet alterna- tive demands," he says. e industrial sector in southern Maine will be "as competitive as ever," he says. "Our current overall vacancy rates are hovering historically low, near 1% to 2%," he continues. "Despite a slowdown in the cannabis cultivation industry, traditional demand remains strong, particularly in light industrial healthcare and home improvement. is supply-and-demand imbalance is currently offsetting interest rate pres- sures, maintaining steady lease and sales pricing. We did see a slowdown in overall transactions, however that has less to do with demand, and more a critical lack of inventory. I expect that trend to continue in 2024." » C O N T I N U E D F RO M P R E V I O U S PA G E C O N T I N U E D O N PA G E 1 8 » F I L E P H O T O / T I M G R E E N WAY Justin Lamontagne, a broker who oversees industrial real estate for the Dunham Group, cites a general "unease" going into 2024. P ROV I D E D P H O T O Brit Vitalius, owner of Vitalius Real Estate in Portland, says the combination of higher interest rates and a decline in out-of-state buyers is "settling" the investment market for multifamily housing.

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