ROUNDTABLE: Maine Real Estate

Illustration by M. Scott Ricketts

Mixed-up Market

There are scads of office vacancies, so that means it’s a bad time to sell a commercial property, right? And home ownership’s still a dirty word, isn’t it? Wrong and wrong. Tom Lea, Earl Black, and Morris Fisher tell it like it really is.

Conversing with three real estate industry veterans in one week is a mind-expanding exercise. When else would you get to discuss topics from economic cycles to adaptive reuse of defunct textile mills to the science (or lack thereof) of vernal pool legislation? It’s a complex business, and it takes a person who is willing and able to respond to continual change to succeed over the long haul.

Tom Lea, Earl Black and Morris Fisher are three of Maine’s most successful and well-respected men in the real estate sales and development business. Tom Lea and Morris Fisher have been a part of some of Maine’s most important deals, from different sides of the table. Lea is a commercial lender; Fisher is a commercial broker. Earl Black has owned and operated real estate companies in Maine since the 1970s, with the majority of his work in residential sales.

All three have witnessed a lot of booms and busts, tempered as such cycles seem to be in Maine. Back when they started, clients would have to come look at real estate listings in a book at their offices, the multiple listings book. Today, especially on the commercial side, they might sell a property via the Internet to someone they never even meet. Back when Lea and Black started, it was like the Wild West; every buyer for his or herself. Now the bullets they dodge are more likely to come from the federal, state, or local statutes or zoning boards.

All agree that this last real estate bust was, in Tom Lea’s words, “particularly nasty.” But, as the cliche goes, with challenge comes opportunity. Maine now has plenty of properties out there waiting for a new business, family, or investor. But sellers need buyers. It’s spring. Why not do some window-shopping?

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Tom Lea • Maine Real Estate & Development Association – President

Tom Lea is president of the Maine Real Estate and Development Association (MEREDA), a statewide organization of commercial real estate owners, developers, and related service providers. Lea has been a residential and commercial real estate lender for the past 39 years. Since 1988, he has focused exclusively on commercial real estate lending. Lea is a 1970 graduate of Bowdoin College and holds an MBA from the University of Southern Maine. He has served on several nonprofit boards and sits on the investment committee of the Maine Housing Equity Fund, an investor in new Maine affordable housing projects.

Please tell us about your work as president of MEREDA.

The thing that’s really interesting about MEREDA [Maine Real Estate and Development Association] is that only about 10% of the organization is made up of investors and real estate developers. MEREDA was started by investors 26 years ago because they were getting blindsided by new rules and regulations coming out of Augusta, but over time, the organization has really evolved into something much more than that. Our members are accountants, architects, engineers, brokers, bankers, contractors; there are 12 cities that are members; plus Maine Housing, CEI, etc. At MEREDA, we really look at things from the 30,000-foot level. The thing that we’re told by a lot of people, even people who don’t agree with us, is that they look to us as a reality check—because we are the whole delivery system for real estate development, not just the risk takers themselves.

You’re also a full-time commercial banker. How did you get started?

I’m the senior commercial real estate lender in the state of Maine for People’s United Bank. I’ve been a real estate lender since December 1970. My early career was in the mortgage business, at what was then called Sun Savings and Loan. I worked in that field until 1988, when I was hired by Casco Northern Bank. By 1989, the real estate market was crumbling, badly. So I entered the commercial lending world in a debacle, which is maybe a good way to start in this business, given the risk aversion that you have to deal with. But I’ve really enjoyed being a commercial real estate lender. I have about four more years before I retire. I’ve been a member of MEREDA for over 20 years; this is a good way toward the end of my career to maybe give something back to the industry.

How have things changed since you started?

When I started in 1970, there were virtually no regulations. It was the old Maine; life was fairly straightforward and simple. It would have been impossible to imagine what life would be like now, in terms of the regulatory climate, the business climate. Over that 40 years, one of the things that you notice is that you go through business cycles. They’re a naturally occurring way the market responds to excess or other harmful things, and that causes the market to really contract. Then there’s inflation. At the end of the Carter administration, inflation was something like 10% a year, which would be unthinkable now. The prime rate was 22%. Trying to put that in today’s context would be an interesting dinner conversation.

What is some of the fallout from the recent downturn?

What we’ve seen this time is some consolidation in the mortgage brokerage business. The same thing is happening for commercial tenants. They’re downsizing, so they don’t need as much space, and they’re not making as much money, so they go back to their landlord and negotiate a deal. Oftentimes. there’s a good relationship between them, so the landlord is willing to take a cut in rent in order to keep that tenant in place. But that has a ripple effect. This recession has hurt everybody. Everybody. I don’t have a single customer who is better off now than they were four years ago.

How did Maine fare compared with the rest of the country after the economic crisis of 2008?

Maine fared very well at the onset. A lot of that has to do with the fact that we don’t grow very much, so we didn’t suffer from the overbuilding that was done in much larger metropolitan centers. This time we didn’t have a lot of condominiums unsold. We learned that lesson.

However, moving ahead, office vacancies are now higher than they have been in 20 years, which surprised a lot of us. It was a big jump last year. It’s still a buyer’s market as a tenant.

How about commercial real estate sales?

In the commercial real estate market, there is virtually no inventory for sale. One reason is, there is a tremendous amount of cash out there, liquidity, and that cash is constantly looking for opportunities to buy properties or develop properties, but there’s nothing there. There’s no demand for new space, there’s no growth. New construction is just a small fraction of what it was five years ago.

So for those people who own a nice performing real estate property that has cash flow, is in good shape, in a good location, this is perhaps a good time to sell. The problem is, once you have that cash in hand, how do you replicate the cash flow? You can’t. So we’ve been in a standoff for four or five years now, where buyers and sellers are way apart in their expectations in terms of price point.

Nonperforming assets, that’s a whole different ball of wax.

There was a lot of buzz at the MEREDA conference about how the LePage administration could impact Maine real estate. Your thoughts?

The tide has shifted, politically. It’s a much different playing field, so we were having different kinds of conversations. Speaking for MEREDA, we see very positive changes taking place.

Most of the business community believes that we are overregulated, often by multiple agencies, overlapping, sometimes in disagreement, and that the standards are set too high. Maine seems to have a penchant for exceeding federal standards, almost routinely. I can give you countless examples. And I think it’s also the whole process. Business is viewed as something to be regulated rather than fostered. So it is my belief that the reason the governor was elected was that Mainers decided that that process had to be reversed, and he’s going about doing that in his own way.

What are some specific issues MEREDA’s looking at?

One is the Informed Growth Act. This was the offshoot of a determined group of citizens who wanted to make it very difficult for a large retailer to come into the state and build a “big box.” The statute says if the project will have an adverse impact on the local economy—which is very subjective and requires a $40,000 study—the permit cannot be granted. We’re trying to get that law adjusted so that if towns want that level of protection, can opt into the law. But if they want a large retailer in their town, they shouldn’t have the state telling them that they have to go through another process. And if they don’t want it, why not just zone it?

Another issue is the citizen initiative in its current form. Now, if a retailer wanted to build a store somewhere in Maine, they could go through all DEP processes, all the local zoning, ordinance, planning, permitting, which sometimes takes years—this is not coming in under the cover of night—but even after that is done, the citizen initiative can overturn all of those approvals. So if you’re an investor or a retailer, you’d say, I’ll go somewhere else, I don’t need that risk.

What we hope, at MEREDA, is to ensure there’s fairness in the process. If someone wants to build or buy or develop a property in this state, we want to make sure the rules are clear, not subject to change, are unpoliticized, and that there’s clarity of process and the ability to predict an outcome.

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Earl Black • Better H & G Real Estate Town & Country – President

Earl Black is president of Better Homes and Gardens Real Estate Town & Country, with eight offices and 120 agents statewide. Black is a past president of the Bangor Board of Realtors, as well as past president of the Maine Association of Realtors and the Bangor Region Chamber of Commerce. He was named Realtor of the Year 1992. He has served on several national committees, as well as the National Association of Realtors board of directors. His involvement in charitable organizations includes the YMCA, Literacy Volunteers, and the Bangor Lions Club.

Please give us a brief overview of your company and describe your role there.

We have eight branches, covering from north of Dover-Foxcroft to Rockland to Ellsworth and beyond. Our primary focus is residential real estate; we do some commercial, but more than anything else it’s residential. We have about 120 sales associates and 14 employees. We also started a referral company for people who decided to leave the real estate business and go do something else, and we have about 30 people in that referral company. My role here is president, which can mean anything from fixing the copier to trying to decide our next strategic move for 10 years from now.

When and how did you enter the real estate profession?

It was really by accident. Ted Sherwood was a real estate client of mine when I was a loan officer at Eastern Trust. And Eastern Trust had been sold to First National Bank of Lewiston. We were losing our individuality in the bank and Ted came in one day and said, “I’m looking for a partner in my business and I’d like it to be you.” I joined him as a partner in the late ’70s.

How has the market changed since you started? What have been the high points and the low points?

The real estate business when I entered it was a buyer-beware industry. It was no disclosure, and everybody worked for the seller, all the time.

One of the high points was the change in the mid-’90s, when you could actually work for a buyer. The difference is if I’m working for a seller and you say to me, “I’ll offer 150 but I’ll go up to 160 if they don’t accept,” I’m legally obligated to tell the seller what you just told me. But if I’m working for you and you tell me that, I have an obligation to keep it quiet because now you’re my client. Many people acted that way anyway, but they were in essence breaking rules. I served on the national association when they took a look at representation and decided we needed to have a proactive buyer representation system.

The low point in the business has been probably this last five years. Not only did the value of housing drop significantly, but there’s been a lot of bad press about owning a house in general.

Do you sense that we’re getting out of this recession?

Yes, but it’s going to be slow. There are more buyers, but I don’t think we’re going to have any price increases this year. The number of units should be up this year, though.

The residential climate in Maine right now is characterized by a lot of inventory on the market.What do you see as good investment opportunities?

There are some buys in the foreclosure market in all locations. I was talking with a friend of mine who said that since this recession began he had sold a certain person something like 100 foreclosed properties and none of them were over $50,000. He’s buying distressed, damaged properties and turning them around. If I were an investor, I’d look at the foreclosure market first. For an average buyer, it goes back to something I’ve always said about single-family housing: “It’s not an investment; it’s a place to live.” Historically, it will be a good investment if you keep it for a number of years. You’ll be not only gaining market value, you’ll be gaining equity. People who hold onto their houses end up having a pretty good nest egg.

What kind of properties are buyers staying away from?

Two- or three-family housing, as an investment, is a bad deal because you usually don’t have enough income to make it worthwhile, like with a 10- or 12- unit apartment building. Plus, not everybody’s a landlord. It requires some work because you need to know the laws and you need to be willing to take care of the apartments. So I think that market has been hurt the worst.

What percentage of your clients are in-state buyers as opposed to out-of-state buyers?

Something like 80% of this market comes from Maine. I think the Camden market was more like 60% from Maine, but overall it’s much more Maine than anything else.

Among the out-of-state residents you deal with, what are the primary motivators for buying property in Maine? What factors most often kill the deal?

The primary motivator in a market like Camden would be that you want to live in Camden. The primary motivator for someone moving to Bangor probably has to do with a job: the university, the hospitals.

What kills the deal? Most of the housing now that we sell has a home inspection, which I think. by the way, is great, because it gives the person a chance to see what’s right or wrong with the house. So those deals sometimes fall through because there’s more work to do to the house than they thought. We’ve had people come up, buy a house, go to work, and then just be totally disenchanted with the winters in Maine.

What impact will Maine’s fast-aging population have on your business in the next 5 to 10 years?

There will be more of the older homes for sale because that’s where a lot of our older population lives. Some of those will probably not be appealing to the younger people; I think younger people want carefree homes; they don’t want to spend a lot of time painting, so those homes will be a little depressed in market value. The other thing that we’re conscious of is helping people who want to stay in their own house. I’ve promoted the reverse equity mortgage several times; it’s a good system for older people who, with rising expenses, may not otherwise be able to afford to stay in the house.

There was a lot of buzz at the MEREDA conference about how the LePage administration could impact Maine real estate. What are you hoping for?

One thing I’ve heard him say is that he’s looking to smooth out the licensing process from when you start a subdivision to when you can finish it. That’s important, because you can invest a lot of money and the market can change. I am concerned about the new insulation requirement for new housing. The Maine Association of Realtors is trying to get that looked at again to make sure we know what we’re doing before we slow housing down.

What things worry you the most professionally as you anticipate the rest of 2011? What things give you the most encouragement?

If the banks aren’t lending money, then everything else slows down. I used to be a bank examiner many, many years ago for the state of Maine and came to understand that good banks make good communities, not the other way around. The bank has to be out there supporting that community, and I don’t mean by donations. That’s nice, but I mean supporting that community with loans to let that community grow. My other concern is what’s going to happen to energy prices. At $4 a gallon, agents can’t run the cars around to show houses; it can be devastating.

But I’m encouraged that the news media is starting to talk about now being a good time to buy property. I’m seeing signs that people are bringing their bodies out and looking around and saying, “Yup, might be a good time to buy.”

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Morris Fisher • CBRE | The Boulos Company - President

Morris Fisher joined  Boulos Property Management in 1990 as controller, and in 1992 was named chief financial officer. He became president of CBRE | Boulos Property Management in 1995, and has since become a principal of the firm. He became  president of CRBE | The Boulos Company in 2005. Fisher is a trustee of Maine Medical Center, the Portland Public Library, and The Park Danforth. He is a former officer and member of the board of Catholic Charities of Maine and the Portland Downtown District.

First, please give a brief overview of your business.

I am the president of two companies, Boulos Company and Boulos Property Management. We operate as one brand, which is CB Richard Ellis | The Boulos Company. We do property management, consulting on construction, actual construction, and development, and have expertise in economic development issues related to real estate. We have 53 employees in Maine and New Hampshire, the majority of those in Maine, and have 14 licensed independent real estate brokers, for a total of 67 associates.

Let’s compare the market at the beginning of your real estate career  in 1990, when you joined Boulos, with the current market. Is this one the low point?

I would say the recession of 1990 was the low point. At that time, several real estate developers and real estate professionals went under, so it was a very traumatic time for a lot of the players in our business and the lenders as well.

Are there similarities?

It was a tenant market back in the early ’90s; it’s a tenant market now. We issued our office market survey in January, and there’s a half million square feet of vacant space in downtown Portland, and there’s vacancy throughout the state much greater than any time we’ve been doing that report—which goes back many, many years.

So we have a lot of space on the market. If I’m a tenant looking for space right now, I should be locking in rates for as long as I can. Of course, landlords would rather not do that because sure enough rent will go up again. It’s all cyclical.

Do you have a sense of the market turning around?

The market is getting there. In the office market, I think we’re close to a bottom for rental rates, for vacancy. The retail market has probably bled as much as it’s going to; the apartment market has held up OK, though certainly rents are down. Industrial space—there’s not a lot of demand for that in Maine. We have our share of manufacturers and distributors, but we are kind of at the end of the line in that regard.

Among the out-of-state residents you deal with, what are the primary motivators for buying property in Maine? What factors most often end the deal?

Out-of-state buyers who come to Maine, and particularly to greater Portland, love what they see. They understand when they get here that we have water, we have the port, we have really good infrastructure. And then they meet the people and they see the work ethic. I hate to say it, but Maine somewhat sells itself initially from a perception standpoint. Then you dig into the demographics and the numbers, and we do obviously come up a little light there. Utilities are more expensive here and in the rest of New England than they are in the rest of the country.

Taxes are high here, and just south of here is Portsmouth, which is quite a beautiful place, too. You know it’s going to be hard to get them across that river. They can be close to everything in Maine and not have to pay the taxes in Maine.

What areas of Maine or types of properties do you see as good investment opportunities?

The owner-occupant market is very attractive right now for buyers. There are more lending opportunities available to them now, so if they can get the capital they need, they will find a good deal for their business. I think the bigger issue for them there is making the decision to take the plunge and make an investment.

From an investor standpoint, when we get an opportunity to sell a piece of real estate that has investment characteristics, income-producing properties for a passive investor, we sell it. There is a lack of good product available to sell to the demand. So that’s been a very active market for us to the extent we can source product.

Why is there so little inventory available?

There are plenty of people who would like to sell and convert something they’ve owned for 15, 20 years into something else, but their perception may be that it’s a bad market right now. In reality, we’ve been able to keep prices up on that type of product because there’s a strong demand.

There are a lot of people sitting on the sidelines with money, and it’s not earning them much. Many don’t like investing in the stock market, and they certainly don’t want to invest their entire net worth in the stock market; they’d like to diversify. Banks at this point aren’t paying a lot on deposits. So they look at real estate as an opportunity to get into a fixed income type investment, and they’re willing to accept a modest return, which, for us, helps us to convince our buyers that they can get good value—if they’ll take that first step and get over the psychological issue.

The Internet is changing how people buy and sell everything. Some are predicting that large stores may soon be a thing of the past. Do you agree?

I don’t agree that the growth of the Internet will negatively affect my business. When it first took off, everybody assumed there’d never be another bricks-and-mortar store built. But last I knew, Amazon still needed warehouses. L.L. Bean, which generates an enormous amount of business through its catalogs and now through the Internet, is building stores because the customers want the experience. They want to go in, touch and feel things, and I don’t think that’s going to change.

What are you hoping the new LePage administration will do or undo regarding state legislation?

One law that should go is the retroactivity of being able to reverse permitting decisions if there’s a citizen initiative. It’s just not fair, and it sends a really bad signal to businesses coming from elsewhere. We went from a collaborative environment to an environment of putting up walls and being suspicious as a populace, and I don’t know how it happened; I don’t know why it happened.

What encourages me is that I see us dealing with some fundamental flaws and issues that are affecting us today, but would be more of a problem 10 to 20 years from now. I’d like to see us straighten those fundamental issues out and then start spending money again on things that will build our infrastructure in Maine, our roads particularly, our electrical grids, our utility infrastructure, so that we are attractive to business.

What would attract a Fortune 500 company to Maine?

If it were the right type of industry that we wanted, telecommunications or something that was very attractive to us as a state, I would give them all their taxes back. Why would we make them pay taxes? Come and create 1,000 jobs in the state of Maine and you have a tax holiday, I don’t know, for 20 years, 40 years, forever. At the end of the day, it isn’t about how much you could tax these companies that come here. It’s about how many jobs could they create and how much payroll could they create, because that gets spent, and it won’t get spent here unless the jobs are here. I’d have everything on the table.