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!

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.

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.

Old Real Estate Maxim Still Rules

 When I was in business school, now decades(!) ago, I had a professor whose current work then was focused on how CEOs decide where to locate company headquarters.  His conclusion, after much research, was that the biggest factor in choosing a location was where the CEO him/herself wanted to live.  

While that isn't a shocking result, it is a little surprising that big organizations, with all kinds of considerations for transportation, labor force, infrastructure, taxes, and a myriad of other factors, would in the end have personal preference of one person as the greatest determinant.  We can see evidence of this still, in the recent behaviors of business executives during the pandemic.

Connecticut has been the beneficiary of a move out of New York City, and thousands of people have moved here in the past six months.  Yet we didn't expect that companies themselves would move, and that's turning out to be the case.  And that isn't just in the office arena--manufacturers and other seemingly less mobile property users are also in the mix.

We are getting showing requests and offers from buyers out of state, who are looking to locate where they plan to live.  There are many reasons for their choices, but it points to a brighter future for Connecticut than was predicted while tax policy and weather was causing a rush to warmer climates and distant vistas.  Now, the proximity to major metropolitan areas, combined with family dynamics, is helping us catch us with the economic progress made by other areas over the past two decades.

There are good reasons for this to continue.  Our location between Boston and NYC is obviously key.  Company owners and investors don't necessarily have to live here, but they will have employees and tenants who do.  Many family business owners also want to be where their children and grandchildren are, whether or not those generations are in the company or not.  The current focus on low density and outdoor space work in our favor, and our natural assets have become more important to real estate decisions.

Looking forward, we can see from the residential market that supply may become a limiting factor.  While none of us expected it, this uncertain age has become one of increased real estate activity, and a good time for sellers to consider putting properties on the market.  Who knew that the old research about company location would be so relevant now?

Multiple Offers Come to Commercial Real Estate

Connecticut has been experiencing a lack of adequate supply in residential real estate for some time now.  It's what we call a "seller's market", meaning that there aren't enough listings to satisfy the demand.  This obviously pushes up prices and lowers time on the market.  It also leads to more than one offer at a time on certain listings, which hasn't happened with such frequency in quite a while.

Lately, we are seeing this trend in on the commercial side as well.  With certain types of real estate, especially warehouse and investment, there aren't enough properties on the market.  This is partially due to the fact that very little has been built in recent years, but changes in demand have also affected us.  

One such trend is the move out of bigger cities into smaller ones.  This has increased during the pandemic, and is leading to a resurgence for places where social distancing is easier.  Offices are less affected, because so many people are actually working from home.  Retail has been impacted by e-commerce.  Even industrial properties, though, have seen the uptick in demand.  

Location is also about proximity to larger markets, so it isn't just about where people want to live.  Our real estate is more affordable, and transportation is available to both Boston and New York. We have become very attractive to investors for these reasons, leading to an increase in multiple offers.

We expect this to continue, and we need more listings, in order to satisfy buyers.  Normally, summer would be slow, but that won't be true this summer. Fewer people are traveling, and more want to buy, rent, and sell before a possible second wave of COVID.  So think about your long-term goals, and call a commercial agent soon!

Amazon and Connecticut--A Good Match?

Plenty of pundits have already weighed in on the issue, but I feel compelled to comment on the Amazon search for a second headquarters, because the question emphasizes both the benefits and deficits of Connecticut.  Everyplace in the country is competing, so we should strut our stuff as well.

They want a place with access to a skilled workforce.  We have that in abundance.  Our higher education system is good, and our proportion of highly educated workers is above most other locations.  We also have lots of people looking for good jobs, or leaving the state because they can't find them.

Amazon is a distribution company at heart.  Its real mission is to get you what you want, when you want it. That's different from manufacturing, or even from most retail businesses.  Rather than having a unique product, they have a unique delivery and distribution system, because they both store and consign items.  They ship from other places and other companies, even from other distributors, and they do so on a timeline that's very hard to beat.  Where is Connecticut located?  Right between the Northeastern hubs of NYC and Boston.  Our future is, as some have said, in distribution.  We are too high-cost to manufacture some things, and too small to have the population to use all the goods ourselves.  But we can ship in every direction.  And we have excess real estate at reasonable prices.

So why aren't we on the short list?  Probably we never made the long list, and that would be because we have a reputation for being a tough place to do business.  Not just expensive, since both Boston and NYC can beat us on that front, but unfriendly and anti-business.  We are almost alone in our own quadrant there, although Vermont is probably nearby. 

It certainly doesn't help that Hartford is poised to file for bankruptcy, we have no state budget, and we have union contracts that are far more generous that the states around us, or anywhere.  If you were outside the State, reading the papers, would you consider us?  I certainly hope so, for the reasons above.  And I hope even more that the Legislature and the Governor's cabinet do everything they can to address the issues in this paragraph. 

Follow the Money

Greater New Haven, and especially New Haven itself, have become places where investors are looking at affordable properties.  Many have been priced out of New York and Boston, but know that our market lies just between those two cities, and that real estate is way cheaper here than in those two markets.  Therefore, many buyers have swooped in and bought (sometimes even sight unseen) buildings, especially multifamily housing units.  New Haven had the lowest apartment vacancy rate in the country, so it makes sense that investors would seize on that to buy or build.

But that also opens another avenue, and perhaps one more suited to local owners and investors.  What services will those apartment dwellers need?  We wouldn't have the infrastructure in place for all those new units, so there's a big opportunity.  Would you like to own or develop retail, restaurants, service economy space, or parking?  Here's your chance!  Be the person who provides the missing links for the new citizens of the city, and you may be handsomely rewarded.

Hartford Being Sold to Out of Town Investors?

Big Hartford office buildings are now such a good deal, per square foot, that they are attracting buyers from out of state, many of whom may have been priced out, or have priced themselves out, of the NYC market.  Since most real estate markets are cyclical, and since office space can obviously be leased for less if it is bought for less, it seems reasonable to think that these investors will realize gains in the medium and long run. 

Will other markets in Connecticut follow?  It also seems sensible to think that, the closer to NYC something is, the more it will eventually be worth.  There is a clear correlation with housing prices, based solely on distance from Manhattan, and it likely holds true for commercial buildings as well.  So will New Haven also see a boom in out-of -town buyers?  That seems already to be happening, and will probably continue.

Moving Chess Pieces

What do restaurants and technology/biotech companies seemingly have in common?  They both seem to abruptly change status.  Restaurants, for obvious reasons, don't ever seem to give a lot of notice about closings, and so closures come as a surprise.  Tech and biotech companies, which are clearly hot properties, merge or move on a dime.  Buildings which have just finished fit-up, or undergone extensive renovations, may suddenly find themselves empty again. The rent cost doesn't amount to enough to factor in heavily to other synergies of moving. 


Lately, we've seen both phenomena in our market.  Long-term, established restaurants have closed, and new lab and office space has re-entered the market.  The latter, particularly, could represent opportunity for investors and users to pick up square footage at a relatively low cost.


Nothing is constant except change!

What Do Millennials Mean for Commercial Real Estate?

We've been reading a lot recently about millennials, and what their preferences and the size of their cohort will mean for residential real estate over the next few years.  They aren't buying homes as soon as their predecessors did, nor do they seem as wedded to the concept of home ownership as earlier generations were.  In addition, they don't seem inclined to tackle "fixer uppers", and they are very clear about their expectations in housing.


I was at a meeting recently, where someone was bemoaning the fact that there were so few millennials, and that they weren't forming households quickly enough, or having children soon enough, to improve the sales of homes in the short run.  Someone else at the meeting commented that this new generation might never buy as many homes, but added that it didn't matter, as long as we turned our attention to investors.  Investors know that everyone has to live somewhere, so they are out scouring markets for property that can be rented to the millennial group.  Given their desires, those properties may well have to be gutted, or at least retrofitted, in order to provide the amenities necessary to attract renters. 


People always say that fortunes are made by finding products that fulfill a hole in whatever market is being discussed.  Well, here's one.  Investment real estate, anyone?

Greater New Haven Regional Update

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Investment Real Estate in Greater New Haven

To make money in New Haven real estate, a person needs to know that it is, at heart, a university town.  The growth is in education and health care (the latter being here in some large part because of Yale's medical school), as well as biotech (ditto the sentence above). We are disproportionately employed in the arts, again in part because of schools, and also because our highly educated workforce values the arts greatly in evaluating quality of life issues.

These factors tend to produce a population in some parts of the region that can be quite transient - students, graduate students, residents, artists, and "hired gun" executives.  At the other end of the spectrum, we have a very poor inner city area, with high rates of unemployment. Those two groups combine to produce a high need for rental properties at every price point, and contribute to New Haven having the lowest apartment vacancy rate in the country (about 1 and ½ percent).

If you've read the two preceding paragraphs, you're probably already in the market for residential investment property.  Join the club!  We have a great demand for those types of listings, and are always on the lookout for more.  New Haven now has rentals that exceed $5,000 per month for an apartment, as well as Section 8 housing (in one instance, in the same building).  Investors have a choice, therefore, about the segment of the market where they feel most comfortable.  There is also a shortage of houses for rent, and we are starting to see activity in that sector as well as the strong demand for multifamily homes that has existed, particularly near the colleges and universities.

Of course, where there are students there is also a need for restaurants, bars, retail, and health facilities, so investment property does exist in other sectors as well.  Greater New Haven is considered to be significantly "under-retailed", and 06511 is reported to be one of the nation's hottest mail-order zip codes, the theory being that the people in that part of New Haven have high incomes and not enough retail outlets to satisfy their consumption preferences.

So, whether you'd like to be a landlord, a franchisee, or simply a holder of a potentially valuable future income stream, we can find what you'd like in Greater New Haven, at any time that you think that you've had enough of entrusting your wealth to the increasingly volatile stock market.