Commercial Real Estate in Connecticut is Looking Good

 Much has been written recently about the exodus from the NYC area to Connecticut.  Connecticut is finally one of the hottest markets in the country, thanks to proximity to New York along with privacy and open space.  Residential prices are going up quickly, and supply is short.

And what do we know about the relationship between residential markets and commercial ones?  Commercial needs follow the people who move into the residential spaces.  Once there are more residents, there becomes increasing need for retail and rental units in particular, but also for office space and even investment and industrial properties.  

This is especially true before the election.  With plenty of uncertainty, the stock market is bouncing around.  Tangible property is looking better and better.  Why not invest in a growth area, and take the money out before stock prices possibly tumble?  

In addition to that incentive, there is the added benefit of lower interest rates before any election, especially a presidential one.  That will lower the cost of buying even further.  Banks are eager to lend, and it's a good time to shop for credit.

It's hard to imagine such a rosy report, given what most of 2020 has been like, but there you have it--the silver lining we've all been seeking.

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?

Investment Real Estate Still Strong

For all of the complaints of businesspeople about Connecticut, it remains a place in which people want to invest.  There are many reasons for this.  One is that most investors tend to invest close to home, maybe because it's easier to take care of details when the property is close by, and maybe because they know more about values in their own vicinity.

Another reason is that there are specific opportunities in our region.  For example, New Haven has a robust rental housing market, with thousands of students, and a population that includes 62% renters.  Despite all the building, conversion, and development of rental housing over the past decade, inventory keeps disappearing. Much the same is true of warehouse space, based upon our proximity to Boston and NYC.

Prices remain low in our area, especially, again, compared with our neighboring states.  Although prices for residential property rose 7% in January, over the January before, there are still bargains to be had.

We have a strong vacation home market.  Waterside and wooded locations appeal to buyers, because they can be enjoyed, but they can also be rented to others.  Fears about travel will only increase the desirability of locations near major metropolitan areas.

There's a lot of money in Connecticut, and it all needs to find places to go.  Real estate is an attractive opportunity, and one that most people understand and appreciate.

All of this goes to suggest that, if you have property to sell,  you should consider selling it now.  If you are looking to buy, you should do that before the inventory dries up.  Based upon the above list, that might not take too long.

Got Warehouses?

The Town of Trumbull just announced a big warehouse deal by Amazon, who is opening a facility in North Haven also.  Given our proximity to rail, water, NYC, and Boston, we are in demand as a region in an economy of delivery.  Where will the supply come from?  Since not much has been built, and since there is some oversupply in other types of flex space, what was built as office may now become warehouse space.  While not providing the same number of jobs--which may be why Connecticut's 0.2% job growth is well below that of other states nationally and in New England-- such use does bring economic growth to our region.  There's also a spillover effect into transportation and other ancillary sectors.  Beggars can't be choosers.  We have real estate, and distributors have needs.

So, if you have land on which to build storage space, or space that can be converted, this is the time to put it on the market.  There are takers out there.

Opportunity Zones Draw Interest

400 people crowded into the Omni Hotel this week, to hear about the opportunities available in, well, opportunity zones.  Governor Lamont gave an address, encouraging the use of the zones to develop Connecticut's cities, and telling the audience that he would make sure that 15 minutes got cut from the train time to NYC.

Although the State would like to see people investing in businesses within the zones, most so far have concentrated on real estate holdings.  It is somewhat of a surprise to see how many big players are looking at this new sector of the market, but it isn't clear that they will snap up the smaller choices.  That's where the average investor comes in, especially when he/she knows the local area.

The length of time for most investments--ten years or more--will discourage some, but many will be undeterred.  When the current peak prices in the stock market are taken into account, a longer term with more reasonable returns seems safer.  Most of the bigger firms are expecting to get a return of 10-11% per year, over a decade.  It behooves those of us who live here to snap up some of this product, before others swoop in to claim the rewards.

Reaping the Rewards?

Now that the stock market has started to rally so strongly, maybe it’s time for people to take what they’ve made, and buy real estate instead.  In our region, prices are still very low, compared to even twenty years ago.  We used to have average home prices well above the national average, so that job recruits moving here were worried about finding affordable housing comparable to their previous homes.  Now, we are very close to the national average, and we haven’t gone up, in some areas, enough to cover the declines of the last decade.  Commercial prices have been bumping along, also not moving up over time.  Some industrial buildings are at prices equal to those of years ago.  While some towns have a shortage of smaller commercial spaces, others have empty big box stores, many of which could be repurposed.  We are very short on affordable housing in our region, and the gap keeps growing, as rents continue to rise.  Even as housing prices for homes have declined, rents have doubled, and many tenants are paying a percentage of their incomes for rental units that is considered to be onerous.

 

What does all this mean for buyers?  Real estate is, and always has been, cyclical to some extent.  Through the boom  years, we would say that what goes up, must come down.  Now it seems that the opposite should also be true:  What went down, will come back up.  There is still an opportunity in our area, which isn’t true in much of the country—especially the coasts—to get normal appreciation on purchases, given the current state of prices.  We know that investors have been increasingly drawn to our state, because of the high prices in Boston and NY.  Why would locals not invest as well?  While we’ve been reading about the woes of Connecticut, others have been coming from out of state and out of the country, and buying and buying.  With our deeper knowledge of the local market, we should be able to do better than they could.  So let’s make a resolution in 2019:  Buy local!

New Haven Rental Boom

Most people who follow the New Haven area real estate market know that we have had a surfeit of new luxury rental properties come onto the market in the past few years.  Most of them have surpassed their expectations in terms of the speed with which they filled up.  Even the projected decline in other rental interest has not materialized.

Now the question is:  What will pop up to service all these new renters, many of whom work in other parts of the State or even in NYC?  They clearly have been populating the many bars and restaurants that are constantly opening in New Haven, and have been a boon to lots of organizations.  There will be more needed to fulfill all of their needs, however.  Even dogwalkers will see the effects of a young professional demographic increase. Services that appeal to millennials, either because they save time or because they cater to new interests and requests, will continue to grow as this group expands.  Farm markets and other local options for eating will prosper, and traditional goods and services, including hairdressers, nail salons, and dry cleaners, will lengthen their hours to accommodate the needs of users who work later hours.

Although we've seen some increase in the demand for retail and service locations, we expect to see more in the future.  We probably don't even know either the total demand or the range of expectations that will arise, whether it is for breweries or cigar bars or something that hasn't yet been offered.  If you've thought about expanding  your business into our region, or starting a new company, here's your chance!  We're glad to help.

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!

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.