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!

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.

Silver Linings

We all hear a lot about the problems of Connecticut, and its economic fortunes.  A new survey shows that 47 percent of CT residents are considering leaving the state within the next 5 years, which ties an earlier record.  Not only have companies left, but we are an aging state, with many people reaching retirement age, and moving for all kinds of reasons, not just to avoid our high taxes.

On the other hand, 35 percent of those surveyed thought that they were better off financially than they were a year ago, which is also a number that has gone way up; three months ago, that number was 26%.  Some of that is national improvement, but we are seeing it here as well.

If we take those two statistics together, and apply them to real estate, what do we get?  People have more money, but they may not be staying here.  That set of facts should be overlaid on another tenet of real estate, which is that the market is always cyclical.  What goes up must come down, but what goes down always comes up at some point.  The other major tenet is location, location, location. However badly Connecticut's fortunes are lagging, we are still located on the coastline, and between two major metropolitan areas that are growing--NYC and Boston.

That leaves me thinking that investment real estate in our region will continue to prosper, and even do better.  Money goes farther here, since prices are low, and people need to invest somewhere.  The stock market is volatile, and is making investors nervous.  Even if they leave the state, they can still own property here.  Why not buy where you know the area, prices are low, and the location is good?  I'm betting on that for the future.  We've seen it in multifamilies, and apartments, and I think we will see it in individual houses and buildings as well.  Holding on to real estate here can be a very good bet, and it's worth thinking about it, while looking for a place to put money.

Urgency at Last

Forget the calendar.  We've been smoking hot for the past few months in the Commercial Division.  Beginning in the fourth quarter of 2017, we finally started to see the uptick we've been waiting for over the past few seasons.  December 2017 saw gross commissions that were ten times that of December 2016.  January kept up that trend, with commissions five times over the January of the previous year.  February is also running way ahead.

Even better, we are seeing immediate activity on the kinds of listings we said would move quickly if we could get listings of that type.  For instance, there has long been a shortage of industrial buildings under 20,000 square feet for sale.  The listing we recently posted in East Haven was shown over and over again in the first week, and went under contract almost at once.

All of this is despite January weather that was much worse than what we saw last year.  It was cold, it snowed and was icy a lot, schools were cancelled, and spirits lagged.  Yet real estate moved briskly.  I guess we can officially forget about the old pattern, where sales follow weather patterns.

Now that the stock market has begun to hiccup, we expect even more demand for other investment vehicles.  We have already seen investors coming from NYC and other places, looking to place cash into something safer, or at least cheaper.  That out-of-state interest has, in turn, caused local developers and investors to take another look, and also to bid higher, on such properties.  Multifamilies are still in great demand, and we think that will spill over into other types of buildings, and into communities outside of downtown New Haven.

If this is our market when it's dark and cold outside, we can't wait for spring!

Multifamily Still Strong

Despite talk in the NY area that prices for residential property are overheated, and although Connecticut is considered to be one of the places where buying makes more sense than renting, both have more multifamily properties in the LoopNet weekly report of the most viewed properties.  In the NYC region, 7 out of 10 of the listings mentioned were multifamily, and 8 of the 10 in CT were in the same category.

What this suggests is that it may be less about demand for the end product, and more about demand for investment properties for mostly smaller investors, at least in Connecticut.  By that, I mean that REITs may be looking at other things, but that much of what would be considered "affordable" purchases for individuals are now falling into the multifamily basket.  It could also mean that sellers are beginning to put those investments up for sale, either to reap the profits to reinvest, or to lock in gains before there is an oversupply.  Or that the stock market is getting the proceeds from any sales.

Under any scenario, it's clear that the action lately is strongest in the investment realm.  Since LoopNet is telling us that buyers are looking largely at those types of listings, it makes it a good time to list. 

Market Trends Around the Country

According to the National Association of Realtors, tides are turning in the commercial real estate market.  Money is "starting to flow into commercial real estate".  Loan originations more than doubled from the first half of 2010 to the first half of 2011 (although they are still well below peak levels).  REIT values were at an all-time high.

Office vacancies have drastically declined, more due to the lack of new product than the increase in rentals, but owners of Class A space are giving fewer concessions than a year ago.  Tenants are still kings in the Class B and C markets.  Retail space, which tends to fall with housing, had been very depressed, and is definitely on the way back  now.  Industrial space sales were up more than 50 percent, with the majority being warehouses. Hotels were the lagging performers, with average pricing on sales decreasing and average room rates increasing only slightly.

Multifamily property sales more than doubled from 2010 to 2011, and apartments are the highest performing category of commercial real estate.  Effective rent per unit has bounced back to its peak, paving the way for building more capacity.  Also, rents are on the rise, with vacancies and concessions declining.  When this is combined in New Haven with the country's lowest vacancy rate, we can see this strong market continuing.

All in all, while improvement will be slow and steady, the future certainly appears brighter than the recent past, and should build upon itself as others are drawn to agree.

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.