Commercial real estate: Supply low; demand high
by Joseph SantangeloCape Cod commercial real estate is an anomaly. Demand is as strong as ever. Vacancy rates are low. Long-term fundamentals are good, as population, income and jobs increase. Capital is available for commercial construction.
Yet the supply of good quality office, industrial, retail, multifamily and hospitality properties is weak. New commercial projects already in the pipeline are few and far between. Nationally, commercial construction has increased and helped fill the slack in residential construction. Not so on the Cape.
Two major mixed-used developments in the Golden Triangle of South Sandwich are still seeking final regulatory approval, as is the 152-acre CanalSide Commons at the Bourne rotary. Mashpee Commons is planning an expansion. Some modest projects may begin soon in downtown Hyannis, which has received the green light for redevelopment along with Dennisport Village on Route 28.
Elsewhere on individual sites, plans are in various stages of discussion for office condominiums, second-floor office development, environmentally friendly industrial areas and technology parks.
What’s the holdup? Essentially, the problem is twofold: soaring land costs and tough regulatory hurdles.
Barring a national recession, the Cape Cod commercial real estate market is likely to become only tighter in 2007.
“Commercial land prices rose dramatically from 2003 to 2005,” according to Ben Edgar, president of SeaWatch Realty Inc. “It’s expensive to buy land, what’s left of it. Interest and construction costs are higher, and there are more stringent limitations involved on construction.”
Edgar added, “Existing buildings in good locations are certainly selling at a strong price. The market has not slowed down. A well-located commercial property is going to sell. A building in a poor location will have significantly less demand.”
“The commercial market is pretty promising from our standpoint,” said Nat Santoro of Kinlin Grover GMAC’s commercial real estate division. “We’ve been seeing a lot of activity. Executives from various companies who are getting a golden handshake or have tired of the corporate life are starting a new business, and they would like to own the real estate with it.”
Santoro added, “Values continue to go up. Demand is still there, and property will be more and more expensive as time goes by. Future construction will be limited because there is relatively little land for commercial development.”
“Not only are people paying a premium for land,” said John Harding of RE/MAX Bayside Commercial in Cataumet, “in most cases they have to rehab the building and usually there is not enough parking. It’s a challenging prospect.”
Cape commercial land prices have more than doubled this decade. An acre of commercial land that might have sold for $185,000 three or four years ago now commands $500,000. Land prices appear to have peaked in 2006 and few vacant commercial land sales have been recorded in recent months.
Quality properties are selling
For quality buildings in good condition at favorable locations, properties have been selling at a premium. Brokers, however, report a tremendous variation in values, depending on the property’s use, quality, condition and location.
“For a real nice building at a stop light, I can sell it four times a day for one and half times what its worth,” said Chuck Carey of Carey Commercial in Hyannis. “Big hotels with good cash flow are selling at high prices. A worn out Mom and Pop motel with lower cash flow is a different story.”
Class A and Class B office space is in particular demand. Class A properties are defined as buildings with excellent location and access, which attract quality tenants and are managed professionally. Class B buildings may have some functional obsolescence. Class C, which characterizes most Cape commercial buildings, are older but still functional.
Who’s buying commercial real estate?
Brokers report a slowdown among investors buying buildings strictly for investment. “Buildings were selling almost like a collectible, even though they did not generate enough income to justify the prices,” said Carey. “The Cape is an end-user market now, and to choose a building is to choose an identity, sort of like choosing a car. People are buying a property that does something for the business.”
What about the future? Retail buildings will continue in high demand, along with well-located office and industrial properties. Obsolete buildings with insufficient parking, septic issues or poor location will be harder to sell.
Santoro said, “I’d say the future for commercial real estate is still great. Values will continue to go up. Demand is still there and it will get more and more expensive as time goes by.”
“One reason the prices here have been high is poor planning in general,” said Edgar at Sea Watch.
Harding concurred: “One of the problems we have here is the towns, for whatever reason, haven’t looked and established where they want commercial activity and fought to have regulations in place to do what they want to do. There is an absence of long-term planning. Let’s determine what we want here and why. Are we willing to create the zoning and infrastructure to make it happen? Until we do that, we will be in a reactive position.”
“Most of the real estate on Cape Cod is being misused or in need of redevelopment. The highest and best use is rarely being used,” added Harding.
Carey said, “The word ‘robust’ will never be applied to development on Cape Cod, where the bureaucracy is dedicated to blocking development. They thought it would force adaptive re-use and stop the mega stores. But what it did was force old buildings to stay old and ugly. And since that’s the supply, the demand is forced to use them. It’s a very artificial and unnatural situation. There is not enough high-end, state-of-the-art space to meet demand. Overregulation prohibits it. There is a surplus of old space.”
Professional offices in demand
More than a dozen legal and financial professions are pushing to make the town of Sandwich a regional hub of financial and legal services for southeastern Massachusetts. About an hour outside of Boston and just east of the Sagamore Bridge, they are ideally situated to grow, create higher-paying jobs and contribute to the expanding Cape Cod economy. But they have hit a roadblock: lack of good office space.
According to Tim Cooney of Commonwealth Financial Group, an affiliate of Mass Mutual Financial Group, “Many professionals in our community are forced to seek office space in communities like Osterville, Falmouth, Hyannis, Plymouth and points north, simply because they have no options.”
There is some local space, but most of it is considered obsolete. Cooney, who also is vice chairman of the Sandwich Chamber of Commerce and the president of the Sandwich BNI Business Builders, said, “If you take a drive down Route 6A in Sandwich, you will see an abundance of office-for-lease signs; and the reason is no one wants to rent Class C space. It is inconsistent with their business model. The result is we have many people working out of their homes, but this does nothing to promote a business culture in the community and help build tax revenue for the town.”
The Sandwich Financial and Legal Services Association is organizing to team with local officials in addressing this smart growth office space issue.
Cooney added, “The Golden Triangle development shows promise, as does the PA Landers plan to build a commerce park off Route 130, but those plans are years off and do nothing to help the problem now. Some effort has been made to establish a Tax Increment Financing zone and a District Improvement Financing program; that may help. We need to find a way to rehabilitate the commercial space that is located on Route 6A and Merchants Square now. This could be a great opportunity for the town of Sandwich to establish itself as a center for business commerce especially in the fields of banking, accounting, insurance and financial services. We have the demographics and the talent pool to define Sandwich in a new way that could serve the best interest of the greater community of southeast Massachusetts for years to come, if we can build consensus on this very important economic development issue.”
Cape commercial rental rates
How much will you pay to rent commercial space? Across the Cape, commercial rental rates vary with geography. Second-floor office space might be found for as low as $8 per square foot per year, or $8,000 for 1,000 square feet. Storefronts on Commercial Street in Provincetown will rent for about ten times as much, or $80,000 a year, payable upfront at the beginning of the year.
Though nowhere near New York or Boston, where rents can be $1,000 or more per square foot, Woods Hole, Chatham, Orleans and especially Provincetown retail space carry a premium price because of high volume foot traffic on town streets.
New medical office space would rent for about $20 to $25 per square foot. Translation: A 5,000-square-foot medical office could cost as much as $100,000 a year plus utilities, taxes, insurance and maintenance (depending on lease terms.)
Industrial or warehouse space, when available, would rent in the $12 to $15 per square foot range.
Originally published in the Jan/Feb 2007 issue of Cape Business.
Joseph Santangelo Joseph Santangelo has been a statehouse bureau chief, a corporate executive and currently works for the Connecticut Legislature. 
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