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!

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.

Lots of Churches

We have enjoyed becoming specialists in selling churches, as we have begun doing in the past  year.  It's a specialized business, and we are getting in gear with the various rules and regulations, and the special needs of congregations.  I recently returned from a meeting of brokers from around the country, and this is happening elsewhere as well.  Traditional denominations are consolidating their parishes, while new churches are springing up all over.

One of the challenges is to creatively reuse buildings that were designed when churches were the social centers of their neighborhoods.  Those neighborhoods have changed, and the way congregations operate has often morphed as well.  Sometimes it makes more sense to turn sanctuaries into housing or educational space.

Who would have thought that we would have moved from industrial and commercial brokers into agents who worked with churches, casinos, breweries, and marijuana facilities?  It's a brave new world out there, and we're proud to be in the vanguard.

Two Recent Quick Sales

For those of you who think that it's impossible to sell an industrial building in Connecticut, we have good news!  Although it is often reported that manufacturing, and most industry, is dying in our region, industrial buildings are still desirable.  It may be that they are more often used as warehouse space, or flex space of some kind, or even converted to residential use, but they are being shown, and bought.

We have closed two buildings in the past week that went into contract within two weeks of being listed.  They were both industrial free-standing buildings, and they were in two different parts of our market, and they both attracted calls,showings, and offers right away.  They were priced correctly, and were in the "sweet spot" of 5,000-15,000 sf, with docks and overhead doors.

If you've been waiting to see what will happen, wait no more, because investors are also active in our market, and users won't want any extra competition.  Some people have needed more space for years now, and finally are pulling the trigger.  Others are opening new businesses or territories, and some are just betting on the come that prices will increase.

 It almost doesn't matter what reason you find most compelling.  It just matters that sellers know to list now, and buyers know to act now.  You'll be glad that you did.

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!

CERC survey: View of CT realty upbeat

Written by Gregory Seay

Connecticut landlords and other realty professionals feel better about the near term prospects for the residential-property market than they do the commercial-space sector, a new survey shows.

According to the Connecticut Economic Resource Center (CERC), its latest SiteFinder semi-annual online survey of Connecticut commercial real estate conditions indicates that respondents are generally positive about markets, except for the office market and overall economy.

The 72 respondents included brokers (65 percent) and economic development professionals (22 percent) from Connecticut and out-of-state. Almost one-third of respondents (32 percent) were from New Haven County.

Respondents generally rated local market conditions as satisfactory, with a majority saying the industrial, investment, and residential markets in their respective geographic areas were "excellent" or "good" (53 percent, 50 percent, and 62 percent, respectively).

Respondents were more pessimistic about their local office markets, with one-quarter rating it as "poor" and 56 percent rating it as "fair."

At the state level, residential was the only market for which a majority (51 percent) said it was "excellent" or "good." One-quarter (25 percent) said the office market was "poor," and one-third (30 percent) said the overall economy was "poor."

Respondents are also seeing tangible improvement in the real estate markets in the state. Over half of respondents (57 percent) reported seeing an increase in buyer interest or inquiries compared to this time last year.

Nearly half (48 percent) also reported an increase in the number of deals. There was an increase of those reporting increased number of deals (from 38 percent) and buyer interest or inquiries (from 48 percent) from the first quarter of 2016.

"As the need for large office space continues to decline, the demand for modern industrial manufacturing and distribution space continues to increase,'' said CERC Real Estate Program Manager Erron Smith. "End-users have communicated that they are willing to pay a little more, if it translates into occupying a space that can satisfy their operational needs."

More than half of respondents thought sale prices for industrial, retail, investment, and residential properties would increase in the state in the next three months (63 percent, 51 percent, 61 percent, and 57 percent, respectively). Most expected this gain to be less than 5 percent, but more than 10 percent of respondents thought there would be a gain of at least 5 percent in sale prices for residential.

"There was a similar pattern for lease prices, with expected gains in sale prices for industrial, retail, investment and residential, and a loss for office," said Alissa DeJonge, CERC's research vice president.

Nonprofit CERC is a public-private partnership that provides economic development services. Its SiteFinder Real Estate Survey measures the health of Connecticut's commercial real estate market.

Election Pause?

Many real estate professionals claim that there is always a hiccup in the market before an election, as people try to figure out what will happen in either scenario. It's not clear to me that it's happening this time, although you couldn't have a starker contrast between two candidates than we are being presented with this time!

One thing that is clear is that interest rates are never lower than before an election, especially in a presidential election year.  This time is certainly no exception, and that should spur action under any vision of the future.  Over the long run, it matters more what your interest rate is than what you pay for the property, within a certain range. 

Besides, how do we even know which candidate Wall Street will favor?  Hillary has most of their contributions, and Trump is a businessman, like most of those running big companies.  Either one should have their fair share of support, meaning that the stock market should not react wildly to either outcome. 

Well, here's one time when I'm clearly on the line, since we only have two weeks to go, before we find out what happens.  In the meantime, go forth and buy or sell--you should be fine, in any event!

Investment Fever

The recent travails of the stock market have proven to be a boon for investment real estate.  The appeal of being able to see what you own, and touch it, is proving irresistible to investors from here and abroad.  We are seeing feeding frenzies for apartments, where buyers are making offers sight unseen, and office buildings, where we are surprised at the final sales prices.

Investors are being priced out of NYC and Boston, and are turning to us to look for available product.  We are happy to oblige, and are getting used to learning the nuances of moving money from country to country.  It's nice to know that the United States is still the place where people feel that their money is well spent.

If you are a buyer, you have new competition from overseas.  If you are a seller, you have new buyers.  This may be the time to cash out, and it may not matter whether you own apartments, retail, industrial, or commercial real estate.

Supply vs. Demand

We've just finished reviewing all our commercial listings, and something really interesting has become clear.  The calls we get from buyers and tenants seem to be largely requests for small space and flex industrial space in increments of 5,000 to 10,000 square feet.  The listings we consider best, and which we feature as prime listing properties, are mostly office buildings and large industrial buildings.

This disconnect is a key factor in the relative health of the commercial real estate market all over the country. Buyers want investment properties that are often difficult to find--apartment buildings; fully tenanted office buildings; and shopping centers.  Sellers want to dispose of property or lease property that is meant for users, and is often available in amounts that are too small or too large for the needs expressed by tenants and buyers.  And therein lies the rub.

So how do we find owners who are ready to market investment and divisible property, when they are reading that the market isn't active?  And how do we attract buyers for the good listings that we currently have?  That's our challenge, and one that we are working on daily.

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.

First Entry

Welcome to the new and improved Pearce Commercial Real Estate Website, and to my commercial blog.  While I have been blogging for a long time, this is my initial foray into exclusively commercial material.

It's always an interesting feeling to be writing in cyberspace.  You have no idea who, if anyone,  is reading what you post.  Nor do you know, unless they contact you, what they think of what you say.  That's my way of saying that I'm going to write about whatever occurs to me that I think might be useful or relevant to the potential audience, and I would be delighted to get feedback from reader about potential future topics.

By way of introduction, Pearce Commercial Real Estate covers most of Connecticut, largely excluding Litchfield and Fairfield Counties.  We do sales, leasebacks, leases, exchanges, and buyer brokerage for industrial, office, retail, and investment property.  We also have a large residential department, and joint ventures in appraisal services, insurance and mortgages.  We see the market from the "boots on the ground" level, and get enough industry material to also get the view from 10,000 feet above the ground.  I will try my best to balance those two perspectives, and hope that you will find this site useful.