What Do Out of Town Buyers Know About New Haven That We Don't?

Investment property is hot these days--that's hardly a secret.  What is surprising is how many of the buyers are coming from somewhere else.  Even when the buyers are local, the money may be coming from another part of the country, or even the world.  Why is that happening?

Our real estate prices have been languishing in Connecticut.  Our economy has lagged behind other areas.  Even the new Governor of Virginia exhorted that Virginia should not become Connecticut in terms of job creation.  Jobs, businesses, attitude toward business, taxes--all of these things can change. What can't change is the amount of land, or its location.  That classic real estate valuation phrase--location, location, location--has never been truer than when applied to property in Connecticut.  Nestled between two huge metro areas, it only makes sense that the value of what is here would rise as prices skyrocket in Metro NYC and Metro Boston.  

Wouldn't it be a shame if the benefit of a run-up in prices in our region went to people from out of town?  Sometimes we are more negative about our area than others are, and it's likely that this is one of those occasions.  Given everything we know about the future of work, the need for a skilled workforce (where Connecticut excels), and the positivity toward business shown by the present State administration, our  future fortunes look bright.  And we should jump on them before others do.

Office Space is Filling Up Again in New Haven

 There is great interest in the few buildings that have been, or are in the process of being, built recently.  Much of that has to do with the character of new buildings.  They tend to have lab space or tech space, communal spaces for collaboration, amenities for eating and exercising, and easy commutes by bike or walking.

Density tends to improve value.  That's interesting, considering the pandemic, because it used to be that people wanted to work in buildings with wooded spaces around, and ample parking, near highway exits.  Now it seems as though just the opposite approach is warranted.  

Maybe that's not counterintuitive.  Maybe the drive toward more outdoor space at home, combined with flexible work options for telecommuting, means that people are choosing to spend their time outside near home, with work being for interacting with others, having restaurants and stores nearby, and socializing on days in the office.  While that's a big shift, it's consistent with the way we work today:  We go into an office to be with people, and, when we don't want or need that, we retreat into our homes and yards.  

That means that center cities, and advanced office spaces, will do well in the future.  Given what some pundits have been saying about the end of offices, that's good news for those of us in the industry!

Why Do Real Estate Professionals Care About State and Local Debt?

 It was recently announced that Connecticut has a debt load per taxpayer of $62,500, against an average across all states of $9300.  There are many ways to calculate debt, and to measure it versus average income, but this is a high number by any measure.  The reasons go back decades, most specifically to the 1980s, when Connecticut was flush with tax money, and many programs and benefits were instituted.  That, combined with the unusual strength of the public sectors unions in our state, left us with problems that still persist, and in some cases are getting worse.  The looming issue of State employee retirements, due to the benefit changes that begin in 2022, is leaving us, thanks to many exiting the workforce this year or next, with a much bigger roster of retired State employees, still entitled to the old package.

Why does this matter?  Ultimately, it affects property values.  The certainty of large future State expenses almost guarantees future tax increases.  Because we are not gaining population, as many other places are, the number we have to cover is not being spread over a larger group. This compounds itself as an issue, when those left to pay more decide to move out of state themselves.  For example, 37% of Connecticut's retired employees live outside of Connecticut.  So they don't pay taxes here, but get mailed checks every month.  So, to make up for that, we have put in very high estate taxes compared to other states, making older taxpayers move away even faster, since they don't want to die in Connecticut.  

This becomes a vicious cycle.  More people moving out means that taxpayers left owe more, which causes more people to move out.  You get the idea.  When fewer people stay or relocate into Connecticut, there are fewer buyers for property, making the market softer.  There are issues that go the other way, such as the fact that very little has been built over the past three decades, and that we have little land available for future construction.  COVID has actually helped us, given our open spaces and proximity to NYC and Boston.  That has caused shortages in housing and industrial real estate, for two examples, which is raising prices for those sectors.  

Within Connecticut, some cities and towns have their own debt loads that are high.  Hamden is a good example.  Taxes are higher on similar property than in surrounding towns, as Hamden struggles to reduce its debt.  Even though it is doing the right thing, there is pain for taxpayers in the solution.  It's easy to see how that scenario could play out on a statewide level.

What should you do?  Vote for fiscally responsible candidates.  Write to the ones already in office, and express your concern for added entitlements or givebacks.  Read the facts and take action as citizens.  And, above all, remember why you love living here, and work to preserve that, as well as promote Connecticut to others.  

Buyer Brokerage for Office Tenants

 Many firms have a person inside the organization who would be in charge of leasing office space. In many cases, they have a narrow range of buildings that they are considering, and most of those buildings would have leasing agents. It seems simple enough to have that person call the various leasing agents, gather information about the lease terms and availability, and compare the needs of the firm against the possibilities. 

Especially when dealing with professional firms, there can be an attitude that the real estate agent does not have much to add.  This is not usually true.  The leasing agent for the building represents the landlord, and, while s/he can show the space and prepare the lease, that falls short of everything a tenant would want to know.  Knowledge of the local market, terms common to the neighborhood, landlord concessions, and fit-up allowances are all important.  Understanding what to ask for is a key part of the leasing process. Good agents are in touch with current practices, and may be aware of going rates, even before they are published or can be used in an appraisal.  Since appraisers can only use information from closed transactions, there will always be a lag in that regard, unless an agent has another source.

Sometimes the leasing agent may also represent the tenant. If they are in formal relationships with both, that is called dual agency.  It must be disclosed, and agreed to, by all parties.  It is not uncommon, but having a written agreement means that there is a fiduciary duty to both sides.  Although that duty exists, it is still the norm that the landlord would pay the commissions, even for the buyer's agent.  When that is true, the tenants are receiving help and information that is not costing them anything.  

More on that last point:  Could you negotiate a better deal, if you had no agent who had to be paid?  That is a commonly held belief, but it's important to realize that, without agents, both sides expect to save money. Whether or not it happens is subject to negotiation, but it would be naive to think that the tenant would get all the savings.  Even if they did, they might pay more for the space because of scarce knowledge of the going rates, concessions, and fit-up allowances.

In some ways, it can be akin to the advantage of using a good travel agent.  You still pay the advertised rate for your trip, but you get the benefit of added background, and the commission is paid by the vendor or venue.  In fact, you may well do better with the travel agent involved, especially if you need to negotiate terms or changes.  Think of that when you consider a new office lease.  To use a real estate professional or not?  The answer should be clear.

Will Offices Rebound?

 While we know that the future of office working is uncertain in the short run, and we suspect that the long term will bring more flexible schedules, there is still reason for hope for office use and demand. 

 We have never had so many people in our country working from home, and yet employees in general seem more unhappy than they have ever been.  Some of the malaise clearly has to do with COVID, and what that has done to people's lives.  But, when we examine that statement more closely, what we know is that many workers--and retirees as well--miss the interaction with others that they used to find in their places of work.  

Not just connection, but collaboration--working on projects, receiving input, brainstorming--has been missing as well.  Some parts of work just can't be done alone, or at least can't be done as well.  The social aspects of sharing office space seem obvious, and hard to replace.  The sense of ease you do or don't have with coworkers comes from interaction, and not many have had much of that lately.  That makes us think that offices aren't dead yet.  Although dressing up (and that may not come back anyway) and commuting (but think coffee and podcasts, plus a separation between work and home) may not be something everyone looks forward to, the intangibles of sharing space may win out, at least part of the time.

Then there's the social distance issue.  Even if fewer people are in an office at any given time, they each may need more space, or more privacy, or both.  It could turn out that half as many people take up just as much square footage, so downsizing may not take place the way we once thought it might.  

For lots of reasons, don't count the office sector out just yet.  Let's just wait and see.  Community takes all kinds of shapes, and coworking is one of them.

Land Rush in Connecticut

The old saw, that they aren't making any more land, is still true.  The pandemic has made people look for room to spread out, whether it be to live or to work. We've been seeing more land sales as a result.  

It's probably also because land is harder to finance, and requires more money down.  Money is cheap now, and also doesn't have a lot of value just stored in a bank.  In addition, most people with investments have seen them go up in value, so they have cash with which to diversify.

 

Given our prime location in Connecticut, between NYC and Boston, land should be at a premium.  And, since so much of what's already built is being repurposed for newer uses, it makes the cost of building from scratch look less steep.  Plus, you can have exactly what you want. The lack of supply feeds into this too.  If you can't find it, build it yourself.

 

Finally, entrepreneurship is at a high level these days.  Risk takers take other risks as well.  Building is often seen as riskier than buying an existing property, and certainly building on spec is always a risk.

  

What does this all mean?  If you have land, now just might be the best time to sell.

Commercial Deals in Connecticut Are Going Forward

COVID's effect on real estate was a hot topic early in the pandemic, but the residential market clearly took off.  A combination of increased saving, low interest rates, high household formation, and desire for more space for working and distancing added up to strong demand, while lack of supply fueled the increase in prices that followed.  Although there was a dip here in the second quarter of 2020, the rest of the year, and most of this year so far, have been good ones for the industry.

But what of commercial real estate?  Uncertainly is always a huge factor in that sector, and nothing could have been more uncertain than the length and severity of the public health crisis.  While office space has continued to languish in many places, research facilities and health care needs have boomed. Distribution was already a robust area, and the pandemic caused more and more home delivery, leading to greater demand for distribution footage.

In Connecticut's cities, the increase in population has led to the building of additional rental apartments, particularly in the luxury market, and they have continued to lease well.  The latest census shows a shift from suburbs to cities over the State, with New Haven out in front.  

Homeowners and tenants always lead to more demand for retail, and, despite lockdowns and closings, this year has been no exception.  Only lack of staff has limited restaurant growth.  The most surprising fact is the desire for more retail grocery stores.  Even though people have been wanting, and waiting, to eat out, they apparently are cooking more as well.  Fairfield County especially seems to be seeing a great deal of transactions in premium stores.

If the last two years have taught us anything, they've taught us that it's hard to predict the future.  Yet, throughout it all, real estate has carved out a healthy growth rate and popularity.  And that bodes well for Connecticut's next decade.

The Future of Office Space in Greater New Haven

 Much has been written about the terrible effects of the pandemic on occupancy rates in major cities.  Although New Haven is a smaller city, it has reasons to hope that office space locally will not take the big hits predicted in other areas.

First of all, we don't have the same supply.  We haven't been adding to the number of office buildings the way other regions have done.  In fact, we've been taking office and turning it into residential in several cases.  Low supply always pushes up occupancy rates.

Secondly, we have been adding residential units, both condo and particularly rentals, at a fast clip over the past decade.  Luxury buildings have all filled faster than expected, and sometimes it seems that there is an unending demand.  Although some tenants commute to other cities, preferring New Haven as a place to live, most people are working or going to school here.  As that continues, it leads to a greater need for commercial space, even offices.  Obviously, it helps retail, restaurants, and service uses, but it has long been known that people try to work where they want to live.

Thirdly, our uses for office space don't line up exactly with most urban locations.  Yale is a large tenant, in addition to owning millions of square feet of space.  Biotech is a greater percentage of the for-profit sector than in most other cities, and the need for lab space and intensive collaboration means that employees can't do much of their work from home.  Those factors won't change, and that will help us fill more office/flex space going forward.

Finally, COVID has pushed many to move from dense locations to ones with more open space.  Smaller cities are thriving, and may outpace larger ones over the next few years.  New Haven, with its desirable location between NYC and Boston, may well be one that does exceptionally well.  And we're on board with that!

Still More Rentals Needed

We are starting to see the effect of slightly rising interest rates and rapidly rising home prices on the Greater New Haven real estate market.  First-time homebuyers, many of whom have burdensome student debt, are beginning to be priced out of the tight sellers' market we are currently in.  More houses are going under contract and then returning to active status. Many homes now sell without contingencies, but those go to buyers who know that they will have the cash, or the easy availability of mortgage funds, to close.  

Houses going back onto the market are often ones where the buyers need to sell, or be qualified, before they can lock themselves into a contract.  Sometimes they don't qualify for the lowest rates, or those rates have risen.  Sometimes they don't calculate fees, insurance, and other costs.  Sometimes they just get cold feet.  When that happens, what will they do?

They will continue to rent.  As we have discussed before, there seems to be a bottomless demand for rental housing in our market.  Some is caused by one of the scenarios above.  Some is caused by COVID, because student housing cannot be as dense as it used to be.  Some is demographically driven.  Whatever the reasons, people are still filling up what's out there.

That's an opportunity for investors and developers.  Buy a home, convert a building, or build from scratch.  It's a good time to go into the rental market as an owner, and make a living from the proceeds.  We're here to help!

Return to Commercial Real Estate Normalcy?

Everywhere we go these days, we see signs of the region opening up.  Since we in Connecticut were so locked down compared to some other parts of the country, the difference is palpable.  There are many fewer masks, at least outside, and more open storefronts.  Traffic has also picked up.  Economists are predicting a surge in consumer spending, with price increases and supply shortages.  Tour operators and airlines are seeing strong demand, with many trips around the country and the world sold out.  

What will this mean for commercial real estate in our area?  With people venturing back to "normal" life, and not as much to spend their money on, with building projects and delivery of many consumer goods backed up, they are likely to patronize restaurants, stores, and other attractions.  Summer weather will likely bring a boom in the retail sector.  

Rental and multifamily housing will also remain strong.  Families who have sheltered together may have come to the end of that phase, and younger--and maybe older--members will seek new apartments, especially if the supply of single family homes continues to be so scarce.  Greater New Haven and Greater Hartford are primed for more demand in this sector, with lots of new projects, and affordable prices. Given our vaccination rates, we are likely to attract those from other places as well.

Industrial real estate is like toilet paper was last year--there just isn't enough to go around.  That leaves office space as the wild card--how will it do?  Some changes in commuting patterns and remote work seem permanent, or at least semi-permanent, so that will have an impact.  But, if the economy booms, will new companies take that leftover square footage for new ventures?  Let's hope so.  

In the meantime, let's enjoy Connecticut's moment in the sun--literally and figuratively!

Greater New Haven is Poised for Liftoff (Literally)

For decades, Greater New Haven business leaders have been pointing to the dwindling fortunes of Tweed New Haven Airport as a major barrier to economic development in the region.  This week's announcement that the airport will be privatized for at least the next 43 years, with a longer runway and a new carrier offering flights to several cities, is a huge boon to our area.  

Connecticut has spent most of its air transportation money on Bradley, which is now offers international, as well as domestic, flights, and is the biggest of the State's three airports.  There has been a great deal of rivalry between Sikorsky in Stratford and Tweed in East Haven.  Neither one has made much, if any, progress.  Both have been hampered by surrounding residential developments, short runways, and poor prospects for big carriers.  Nor has either location garnered steady support from its legislative delegation.  

It's a new day now for Tweed. By inking a private deal, public sector funds are no longer necessary.  The powers that be in Hartford don't need to be courted, and they should be nothing but enthusiastic about this outcome.  Both New Haven and East Haven, whose borders it straddles, will see upsides from this arrangement, apart from a boost to the region as a whole.  The terminal will be moved, which will ease the traffic burden on the Morris Cove neighborhood.  Jobs will be created for both municipalities, and other development should spring up on the terminal side.  

Once we can offer residents convenient flights to hubs or favored destinations, within minutes of their homes, people who travel regularly on business, or even for pleasure, will reap major benefits.  Whether they park at the airport, get dropped off, or take a short Uber ride, they will save hours of time now taken up with congestion leading to the NYC airports.  The certainty of the amount of lead time required to get to Tweed, and the small size of the TSA line, will outweigh in many cases the need for stopover plane changes to many cities.  

Regional business leaders have long known the untapped demand for a viable local air transportation option.  With the huge increase in remote work possibilities brought on by the pandemic, many more people are likely to choose to live in Greater New Haven.  We have recreation, schools, health care, and the arts, all in abundance.  Now we will have commutability as well.  Let the commercial expansion begin!

Industrial Real Estate in Connecticut is Flying Off the Shelves

Actually, the real problem is that there isn't enough to fly off anything.  For many years now, industrial real estate has languished, and much of it has been converted into other uses.  Little new square footage has been built.  As a result, there is a real dearth of supply.  With demand booming in many industries, and PPP money shoring up cash balances, people are looking.  And not finding anything, in most cases.

If you need more space, or are planning to move in the next few years, this is the time to put your current property on the market.  As buyers in the residential market abound, there is evidence all around of residents putting down roots in Connecticut.  They will need jobs, or they will own or open businesses.  This is a great opportunity for sellers, since supply cannot simply catch up with demand in the short run.  

It may be cheaper to buy new, and sell what is outgrown. Sellers with land, or extra land around a facility, should consider monetizing that property.  With so much pent-up movement, and a year of doing nothing behind us, 2021 is shaping up to be a great year for real estate.  Why not join in the party now?

Ecommerce is Still on the Rise

A recent article about retail sales in the New York Times indicated that, while online retail--especially Amazon--had done very well during the pandemic, it still only amounted to about a quarter of retail sales.  That has some interesting implications for commercial real estate in Connecticut.

Given our location between Boston and NYC, and our high average income within the State, it stands to reason that, if ecommerce has not reached its peak yet, our warehouses, flex spaces, and raw land should do well in the future.  Distribution is the key to timely deliveries, and the ability to get something within a couple of days is a key factor in deciding whether or not to buy it online.  Whether goods are traveling further up into New England, or being delivered to homes around us, there will need to be warehousing available near our highways, railroads, and airports.  

Although our roads and bridges have been a challenge for trucks and overland traffic, Governor Lamont's call for a stronger focus on infrastructure, combined with President Biden's emphasis on the same, seem to point to a brighter future for distribution in and through Connecticut.  Smart buyers will begin to develop properties that have been languishing, and take advantage of changes coming down the pike (pun intended!).  Even if there is only a small continued shift toward home delivery, the amounts in question are enormous. Those developments should get filled, and provide income for the owners well into the next economic cycle.  

Commercial Real Estate Lags Nine Months to a Year After Residential

We all know that real estate sales go in cycles.  Buying at the top is expensive.  Buying at the bottom is lucky, but usually only known in arrears.  What we should think about now is this:  Commercial real estate activity usually follows residential patterns, but nine months to a year later.  So what do we know about the housing market in Connecticut now?  It's hot, hot, hot. And what does that tell you about waiting longer to purchase commercial space?  Do not, not, not! 

This is the time to lock in real estate, before a booming surge in new homeowners leads to a need for other kinds of real estate.  All those buyers will need furniture, cars, food, tools, and other things that come along with a new lifestyle or location.  We already know that restaurants and other entertainment locales are just waiting for spring and summer patrons.  But what about everything else that they haven't bought during the past year?  While it's true that ecommerce has filled a big part of people's needs, there will still be an uptick in bricks and mortar for all kinds of purposes.  

If the second Roaring 20s are going to hit us soon, why not position yourself to make money just through foresight?  Buy now, and reap the rewards as the economy recovers from the pandemic.  Your investment portfolio will thank you later, if you fill it with some commercial real estate now.

Will the Economic Stimulus Bill Stimulate Commercial Real Estate?

While some of the details could change, we know that money--lots of money--will be headed out of Washington and into the hands of taxpayers.  Some of them have already received checks, either individually, or through the PPP or other Federal programs.  What will be done with all that cash?

It seems like a safe bet to say that some of it may well be pumped into the real estate market.  The stock market is already high, and somewhat volatile.  Some people will decide instead to invest in tangible assets, and real estate is definitely in that category.  

Once the decision to invest in real estate is made, buyers will shop for the best deals.  And Greater New Haven offers some great deals in this sector.  There is a great need for rental housing, and a built-in student population, which is transient.  Those same students also have disposable income to spend on retail, dining, and entertainment.  They may also work in start-ups and tech companies, which will have at least some need for office and lab space.

That puts Greater New Haven firmly on the "buy" list. Adding its central New England location as a warehouse and distribution hub, and the index for buying is even stronger.  Prices have lagged in commercial real estate and, unlike residential, have not been helped by the pandemic.  It's time to change that.

Smaller Cities Are All the Rage

New Haven has been billing itself for years as the GSCIA (Greatest Small City in America).  Now that there is a burgeoning population of both workforce members and retirees moving from big cities to smaller ones, that seems to put New Haven in a great position.  We have the elements that people look for---education, excellent health care, recreational possibilities, and affordable housing.  That last criterion slipped a little this week, as the list of the fastest home price appreciation in metro areas listed New Haven as number 11.  And Bridgeport was number one!  Some of that comes from the fact that our prices were so low for so long, as our recession values persisted for many years after other places pulled out of the recession doldrums.  It’s obvious that a lower base produces higher incremental percentages.

It looks as though our time has come!  Millennials desiring open space, retirees needing superior hospitals, and people fleeing the denseness of big cities have all been considering these moves.  We are a smaller version of Austin, Texas, perhaps the hottest destination going right now, with two larger cities on either side.  While we don’t have quite the economic base that Austin is building, or a State Capitol (or, let’s face it, the climate), we still have a lot to offer.  Investors and entrepreneurs should be scouring our region for opportunities, while prices continue to rise and rates remain low.  All the signals from the Biden administration point to increased economic stimuli in the months to come, and this is a perfect place to take advantage of that funding.  People have been hunkering down, paying off debt, and staying home.  Once we are all vaccinated, there should be a boom in all types of commerce.

If you haven’t jumped on this bandwagon already, don’t miss out.  If you are a seller, now is the time to offer your property. If you are a buyer, the best is yet to come.

The Future of Offices When Workers Have a Choice

By Doug Proleg of the New York Times, Click for New York Times Website

 

Some work spaces in central employment districts may become housing, and some housing in residential areas may become work spaces.

Some work spaces in central employment districts may become housing, and some housing in residential areas may become work spaces.

Coronavirus will not kill the office. If anything, it figures to be more dynamic than ever. The ability to work remotely will not drive most people away from cities and offices, but it will enable many to live and work in new ways and places — while causing its fair share of disruption.

Even before the pandemic, there were signs of trouble with the office market in the handful of cities where the “creative class” had been flocking. In 2018, net migration to New York, Los Angeles and San Francisco was negative, while the U.S. economy grew at a healthy 2.9 percent. Creative magnets like London and Paris were experiencing similar declines.

The explanation for the declines — mostly high housing costs because of severe limits on new construction — obscures other forces that were destabilizing the traditional office market. In the middle of the 2010s, Amazon, Facebook, Google, Apple and others started splitting their headquarters into multiple locations. Stripe, one of the world’s most valuable start-ups, went a step further. In 2019, it “opened” a remote hub, hoping to “tap the 99.74 percent of talented engineers living outside the metro areas of our first four hubs” in San Francisco, Seattle, Dublin and Singapore.

For the fastest-growing companies, being able to tap into talent anywhere became more important than having all their teams in one place. Smaller cities were good enough. In retrospect, this shouldn’t have been a surprise, despite all the talk about the importance of giant, dense labor markets to fuel innovation. After all, Silicon Valley itself is not a city but a cluster of sprawling towns scattered along a highway.

The defining characteristic of this new version of the creative class may not be where it lives, but its ability to live anywhere it wants. Put differently, people move to certain cities in search of better-paying jobs, but it’s now possible to earn high (if not the highest) salaries from almost anywhere. That has been true in certain smaller cities in recent years (Austin and Denver in the United States, for example, and Manchester and Leeds in Britain). To a lesser extent, it has also been true for people who chose not to live in cities at all.

There were more specific signs that the office market was headed for a crisis. While employers were fighting over talent, many employees found traditional offices lacking. In 2019, Leesman, a firm that measures employee experiences, analyzed how the workplace affects employee productivity, pride and enjoyment. Drawing on 719,000 respondents in 4,771 workplaces worldwide, Leesman found that nearly 40 percent of employees felt their workplace did not enable them to work productively.

Then the pandemic forced many employees to reassess their preferences. Multiple surveys have found that many are happy to continue to work remotely and would move, if given the chance. Still, this data tells us little about the post-Covid world. Those who thrived initially might burn out if they stayed home for a more extended period. Those who struggled might do much better once they’ve mastered new tools, once they have access to alternative spaces near home, or once children, housemates and partners are back in school or at work. At the same time, the technologies that allow us to work, learn and socialize remotely will only get better.

Covid-era market data also offers mixed signals. Landlords and brokers are quick to point out that companies like Google and Facebook signed new leases during the pandemic. But these companies hire thousands of new employees every quarter and plan their expansion many quarters or years in advance. Even companies that aren’t in growth mode have yet to make up their mind about the new normal. Instead, many are renewing their existing leases for a shorter period until market conditions become clearer. Data from JLL, a real estate consultancy, shows that renewals as a share of leasing activity have jumped to 51 percent from 29 percent pre-Covid, and that leases are becoming shorter.

It seems safe to say that total demand for offices will diminish to a moderate degree. The bigger changes will be in how total demand is reshuffled and what office providers will have to do to remain competitive. Most office activity will not move to homes or to the cloud. Instead, it is likely to be redistributed within and between cities, with a variety of new employment areas popping up and saving many people the trouble of simultaneous commuting to a central business district.

At the end of the 19th century, most American urbanites walked to work; as late as 1930, Manhattan’s residential population was larger than it is today, meaning the city was more mixed in terms of land use, not dominated by office towers. It’s not hard to imagine that many will once again prefer to work within walking or biking distance of home.

As a result, buildings in many traditional employment districts will have to compete more fiercely, and a small but significant percentage of office space will most likely have to be repurposed into housing, e-commerce fulfillment centers, delivery-only kitchens, health care centers, meeting spaces, event spaces and other uses.

Residential areas, street retail shops and hotels may have to accommodate more daytime workers. Signs of this shift are already visible. The nation’s largest multifamily operators, Avalon Bay Communities and Equity Residential, have been adding work and meeting spaces to their buildings for a few years now.

Common, the largest co-living operator, is partnering with local governments to develop new types of live/work communities. Hospitality brands like Starbucks, CitizenM and Mandarin Oriental have been experimenting with converting local coffee shops and hotel floors into work spaces that can be booked by the hour or day. And city governments are working to redistribute jobs and services across residential neighborhoods.

Post-Covid for example, a Brooklyn or Queens resident who previously commuted to Manhattan may opt to work several days a week in a shared space within a 10-minute walk from home. Some large employers are already experimenting with satellite offices in the suburbs of cities in which they already have a downtown headquarters. The main office will remain important for most companies, but fewer employees will be expected to be there all day, every day.

The office will become more of a consumer product. And just like every consumer product, the office will have to continually fight for its customers and meet their needs — not only when it’s time to renew the lease. Offices will need spaces for specific tasks like focused work, team brainstorming, client presentations and employee training. And they will need to be more focused on individuals, even if these people work for a large company.

These changes will be gradual, but they will have a significant impact on urban office buildings, which used to be perceived as almost as safe as government bonds. Consider, in comparison, that the “retail apocalypse” that led to multiple bankruptcies and the closing of tens of thousands of stores was a result of less than 12 percent of all activity moving online, over a period of two decades, while total sales were still growing.

Over the next decade, the transformation of the office market figures to be less comprehensive, but it will probably happen faster and to an industry that is far less prepared. And just as in retail, it will create some new winners, as well as a multitude of losers — those unwilling or unable to adjust to an era of worker choice.

What Will the Biden Administration Bring to Commercial Real Estate?

 We've been through four years with a real estate owner and investor as our President, and we are about to transition to a very different administration.  Whatever we thought of President Trump, many in the field thought that he would help us, and, in some ways, he did.  Now we are moving forward with another team, and the jury is out.  What should we expect?

While taxes will likely rise, it won't be instantly.  It also may well focus more on income in general, and not on the type of income that you have, meaning that real estate would not be targeted.  Would we expect that business meals will continue to enjoy complete deductibility?  I'd guess not.  That may help us slightly now, but removing it isn't aimed at real estate, and it won't be a big surprise.  

Some of the tax advantages that real estate has had are pretty obscure for the population as a whole, and maybe even for Congress.  Are there enough 1031 exchanges to have a focus on eliminating them, or tightening the rules?  Again, probably not.  

What could help us?  First of all, interest rates.  There are signals that they won't be increasing any time soon, and that helps real estate more than anything else could ever do.  After all, it's the payments that matter, more than the price.  

Biden will also be helping those who have been impacted by the pandemic, and they have to live somewhere.  It seems plausible that rental properties will do very well in the upcoming year, and that tenants will get enough help to be able to afford the rents.  This may be particularly true in Connecticut, as a blue state.  We have been at the bottom of the list for so much federal aid in recent years, and the new administration should change that.  Cities may benefit, which is where the bulk of renters live.  

Once we achieve herd immunity from COVID-19, or when a majority of the population receives the vaccine, there should be a big upswing in retail, restaurant, and entertainment activity.  In fact, it may well exceed the norm for some period of time, as people revel in getting out and doing things.  Travel will help hotels, as well as the other categories listed above.

All in all, it's a new day, and one that savvy investors will use to determine where to place money.  More of us may switch from stocks to real estate, and those who have moved to Connecticut for the open space will often stay, and spend money here.  Prices for real estate will continue to rise, and only supply will limit growth.  Since there is more supply on the commercial side, that's even better news for investment property owners.  

Happy New Year!

What's Happening in Greater New Haven Commercial Real Estate?

As has been stated so many times, this is a year like no other. Real estate, like every other sector of the economy, has been impacted by the pandemic, but it hasn't been all bad. Industrial real estate, and anything that can be used for distribution, has been doing very well in an era of home delivery. Not only did Amazon open a big facility in North Haven, they are also gobbling up property in Orange, for their Last Mile project. Investors who thought ahead have been buying up property that might be used by Amazon, or suppliers to Amazon, and this includes both local and national investors. Investment real estate, in the form of multifamily, has taken somewhat of a rent hit with the closing of colleges and universities, but the occupancy rate in the region is still high. Again, both local and out-of-town buyers have been active in our local market. Volatility in the stock market always helps investment real estate. In addition, people who work in NYC and its environs can easily come up as far as our region now, since most workers don't have to go into an office every day. Speaking of offices, the trend to use less space for office has continued. Now it may be less about open work space, and more about the lack of use of all space over the past nine months. That is making tenants re-evaluate how much square footage they really need. In one recent example, a firm that has been largely remote is rethinking a smaller floor plan, because of file storage. Once you have to make a trip somewhere to look through files, there's no real advantage to paying for Class A space to have them next to your desk at work. For a far lower cost, those files can be stored off site. We expect telecommuting, at least some of the time, to continue, and those who don't need to commute will take more residential space, further boosting the residential and investment sectors. That leaves retail, the weakest of the four. While drive throughs and pick up locations are doing well, restaurants, hotels, and bars are clearly not. While they should eventually come back, some of them won't make it, and some will have less margin for rent. Entertainment is a steady driver in most economic conditions, but this one is an outlier. There are a lot of signs out there, and they won't all go away soon. It means that landlords may have to give more incentives, and perhaps take lower rates, at least until the recovery is well underway. Connecticut, and Greater New Haven, have both been fortunate in being ahead of the national market in real estate, due to lagging past performance. If that continues, we can expect a good year next year. All the new sheltering New Yorkers should boost retail, investment, and even office, and their purchases will fill all that distribution space. For those of us in the real estate industry, there's our silver lining.

Start Ups are Starting Up All Over

 There are three primary motivations fueling the current boom in start ups.  One is that many people have left, by choice or otherwise, their employment elsewhere, and are following their dreams into their own businesses.  The second is the availability of cheap capital, with banks looking for loans, The third is the real wild card, because most of us can't remember an earlier pandemic.  The health crisis over COVID is spurring entrepreneurs to look for solutions to new problems, or to fulfill needs that aren't being met currently, such as with PPE.  

These three reasons have combined to make this year, despite all of its terrible downsides, a fertile one for new ventures.  There has never been a greater need for people to look outside the box for answers, and smart businesspeople everywhere are capitalizing on that need.  It usually also means that those same risk takers will also think differently about commercial real estate.

In the recent past, we've seen other trends, such as the repurposing of old industrial buildings and schools for residential or commercial use, or the rise of "green" as the ultimate amenity.  To court millennials, landlords have developed more open space, more areas for socializing and recreation, and paired food and drink with workplaces.  One residential landlord told me recently that he has a dog washing station at his newest project, a nod to the proclivity of millennials to have pets in urban areas.  

What will the COVID crisis bring us in innovative trends?  Maybe shared space that's shared by day, by time of day, or even by season.  Perhaps there will be more and better use of stairwells, to cut down on elevators, and probably different eating options (more picnic areas outside, fewer cafeterias).  Outside heaters and fire pits will definitely feature in chic workplaces.  Cleaning processes will become big factors in rental choices. 

What should landlords do?  Maybe begin by thinking more favorably about start ups, looking more at the people involved, and less at the company history.  Be more willing to consider drastic or unusual changes in floor pattern or layout.  What about putting the gym next to a garage door of a sort, where a whole wall opens to the outside?  Or a year-round pool, heated with geothermal energy?  It may be that shorter leases with more options for extra space or an early exit are entertained. 

If this year has taught us anything, it's that no one knows what the future will bring.  Remember that fortune favors the brave!