The Amazon Ripple Effect

Now that Amazon's new warehouse is about to open in North Haven, we should focus on the broader effects of its presence.  Although politicians tend to focus on employment, we should also consider the other businesses brought here by Amazon.  We have had two large deals recently, where the buyer chose the location because it was a supplier to Amazon, or provided a service that it would purchase. Investors, developers, and builders, please take note.

Since all of those other organizations employ people as well, plus they pay taxes and buy goods and services, this is very good news for our region. Warehouse space is becoming more desirable, and other companies will build from scratch.  The multiplier effect will be in full force!  Employees will also buy houses, cars, and durable goods, plus eat out, give to charities, and pay taxes.  And that will be good for all of us.

The Next Big Thing: Opportunity Zones

As part of last year's Tax Act, there is a new way that investors can use their money to minimize taxes and invest in real estate.  Opportunity zones have been created around the country, and there are 72 of them in Connecticut, with 7 of those in New Haven, 7 in Bridgeport, and 10 in Hartford.  People can substantially rehab or build new structures in those zones--or even invest in operating businesses--and postpone taxes or even have them forgiven, under certain circumstances.  Residential and commercial real estate are both covered.  Much of the program is similar to the 1031 exchange option that has been around for years, but is broader, if the investment is in those particular census tracts.

We've been told that even accountants and lawyers may not be up to speed on this investment potential, because only recently have the zones been finalized.  You can find the Connecticut interactive map on the www.ct.gov site.  Because the rules are specific and unforgiving, it's best to check with tax professionals before buying, but looking can start immediately!  It isn't that often that we have something so new to share, and we're glad that real estate is included.

Think Broadly About Investment Property

If you own property that you are using, but would like to free up the cash you have invested in it, consider the potential for selling and leasing back.  We are seeing many investors in our market, looking for places to put stock market gains, proceeds from other real estate sales, or just extra liquidity.  They are perfectly willing to buy commercial rental property, but they want it filled. If you are willing to sign at least a five-year lease to stay where you are, you have a good chance of finding an owner for your building.  That will allow you to expand, deploy the funds elsewhere, or just diversify your own portfolio.  Even if you buy another property elsewhere, or of a different type, you have spread your risk farther.

We have seen many downsizing baby boomers who are willing to sell their big homes and rent apartments, often in cities.  Now that the stigma of being in a rental property has all but gone away in the housing market, why not use the same theory in the commercial sector?

Think Ahead

I've been posting recently about the lack of listings in many parts of Connecticut, and about our need for certain types of property in particular.  What we haven't stressed is the lead time for many sales to consummate, given environmental and zoning concerns, plus financing contingencies and the usual delays and detours.  Given the demographics of our state, and some of its fiscal issues, we know that there are lots of people out there that may have property they hope to sell in the coming years.  Many of those putative sellers should be talking to us now.  We have investors who are flexible about occupancy and who might be likely to prefer a seller who wants to continue to use the property for a period of time.  We have buyers with longer lead times that would be interested in knowing what would be available at a point in the foreseeable future.  We have tenants in leases that are not yet up, but who are looking to move at the end of their terms.

All of this is to say that there is no time like the present to think about the future!  Call us today to see what your property is worth, and to strategize about the best time to market it for best results.  The answers could surprise you.

Where are the Listings?

Our commercial real estate sector in Connecticut is short of listings!  On the sites we monitor, and in the meetings we attend, new listings are thin on the ground these days, all over the state.  Some of it is time of year--people are thinking about vacations, not real estate.  However, there are companies and investors out there looking, and there's not much new to show them.  Many of our leads these days come in from online sources, and there it's the most recent that attracts the attention.  When nothing changes in the inventory, we get fewer leads. 

What's the takeaway here?  If you've got something you have been thinking about selling, now is your chance to get the greatest response.  If you are offering something new, you'll be in very select company, and those looking will respond.  So ignore the weather, and the season, and list now.

Activity at Lower Price Points

One of our jobs as commercial real estate professionals is to educate clients about the state of the market.  That's a particularly difficult task just now, because the national news often diverges with what's happening in our own state.  In fact, Connecticut recently has been all alone in seeing prices fall.  Although we don't like to admit it, we are experiencing that in many instances. 

Everyone knows by now about Connecticut's fiscal problems, and is aware that GE, and most likely Aetna, are moving their headquarters elsewhere.  What that means for the rest of us is that prices are much less apt to rise here than in other places, where the economies are healthier.  In fact, we not infrequently have to tell sellers and landlords that prices are going down, not up.

Tenants and buyers are finding lots of bargains around our area these days.  It does depend upon the type of real estate, with investment and multi-family trending as the strongest sectors.  However, our continuing depletion of industrial users has made those properties decline or stay steady in value over the past number of years (some for as many as 25 or 30 years).  Unless we can get owners to understand these cold facts, they are prone to thinking that what's true in Boston and NYC is true here, and that's just not the case.

What's the silver lining?  As I've been saying, we have plenty of bargains available. We also should be able to attract investors, and maybe even some users, from higher-cost regions.  As long as sellers don't get greedy, there are deals to be made, and we are looking to help make them.

Services for City Dwellers

"Walkability" is near the top of the list of attributes for residential housing these days.  Everybody wants to be able to walk--to work, to restaurants, to public spaces, and to culture.  Even towns now advertise when something is walking distance from whatever town center is closest.  New Haven is enjoying a boom in high-rise living, with prices headed up and supply being absorbed ahead of anyone's predictions.  What does that mean for our commercial sector?

In prior days, retail meant big box stores that could be accessed with little driving time, and abundant free parking on site. That's still true if  you are big enough--IKEA comes to mind.  For almost everyone else, retail now means the old-time corner store, the local market, the neighborhood bar or restaurant, and farmers' markets nearby.  With all the new housing downtown, there are still services needed locally--in this case, hyperlocally.  What about pets?  Drugstores? Grocery stores? Even gift shops?  We've got something for everyone, but there's room for more.  Tenants and downtown homeowners expect to pay more for convenience, and they will.  More boutiques and pop-up stores are in our future, as our more of the ever-expanding restaurant and bar scene, which already draws from around the state.  It will continue to do so, and visitors will complement the city natives who patronize those places. 

For investors or developers, there is money to be made.  Property now seems reasonably priced for commercial, and it can easily be made into space for the uses that walkability-minded folks require.  Think about it--but not for too long, or the window will close!

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.

Incubator Space

New Haven, with its entertainment, restaurants, college scene, and new rental properties, has become a haven for start-up companies.  Often such companies look for cheap space (compare us to NYC!), cheap labor (all those recent college graduates!), an educated workforce, a fun place to live, and access to universities and their research facilities.  New Haven scores highly on all those variables.

It makes sense that entrepreneurship would be booming now, because it's hard to get a job working for someone else, especially in Connecticut, which is last in the country for jobs recovered from the recent recession (now at 48%).  More often than you might think, a poor job market leads people to start their own businesses.  Those businesses are almost always short of cash, and therefore can't pay premium rents.  Of course, they also fail more often than established enterprises.

On the other hand, they can grow rapidly, and end up expanding into additional space.  They may also migrate from one property to another, belonging to the same developer or investor.  Also, they usually don't require the kind of fit-up that bigger companies do, and may even find unfinished space funkier.  Layouts in start-ups can be freer, with open work areas without private offices common.  So, even if a landlord is taking one kind of risk, he or she could be saving in another expense category.

Think of it the way you might think of buying penny stocks.  You might lose a little money, but the upside potential is almost unlimited!

Slow and Steady Wins the Race?

We've now written quite a bit about the lagging state of Connecticut's economy, including its current status as dead last among the fifty states in economic growth in 2012.  However, it is important to point out that we're having a good year at Pearce Commercial, following a very good year last year.  By not being in a major metropolitan market, we may have escaped the worst of the price reductions; on the other hand, since we didn't fall as fast or as far, we are not experiencing the same rapid upturn. Those stories about the hot NYC market don't extend to greater New Haven and Hartford.  Office space is still moving slowly.  Could that be a good thing?

Everyone knows that real estate is cyclical.  Everyone knows that what goes up must come down.  By flattening that line, we may be protecting ourselves.  Meteoric rises are what produces bubbles.  That's what we don't want to see.  If our real estate market can grow slowly and steadily, so much the better.

It's not all rosy. Commercial real estate financing isn't easy.  Companies that downsized aren't rushing to lease more space; in fact, it's the reduction in overhead that is most likely producing a good deal of the increased profits in corporate America these days.  Perhaps most annoyingly, people still seem reluctant to pull the trigger.  They look and look, but stall for long periods of time, sometimes not ever making the offer.

  But there are investors out there, as well as some users, and most of them seem to realize that mortgage rates have nowhere to go but up, and that values are headed that way as well.  We don't have big backlogs of empty buildings and overbuilt space.  In short, we seem to have most of the attributes of a balanced market.  And that's a good thing.

Heading into the Election

Some things change from election to election, but some things don't seem to vary.  One constant is that the sitting President, and his party, try to make the economy look as good as possible, for obvious reasons.  My friend Ray Fair, in his economic research, has a regression model showing that the incumbent is heavily favored, and statistically almost certain to win, if the economy is good or improving.  By those odds, Obama would seem to have the advantage, at least if you are talking to real estate professionals (although they are much more likely to be Republicans in general!).

And how does a President, or the legislative branch, go about making the economy look better?  One way is to make sure that interest rates don't go up.  As we have seen, they have just gone down again, and are now at their lowest rate in 60 years.

For commercial real estate, that means that both investors and users should be looking for product now.  They cannot count on getting the kind of financial help that low interest rates provide for much beyond the election.  Given the length of time that it's been taking to close a commercial transaction, time is of the essence.  Act now!

Users are Out There

We have been happily surprised this season by the interest in listed properties by users.  During the darkest days of the recession, most people who were looking at properties were investors, usually what we call "bottom fishers"--people looking to get a really good deal from the misfortunes of others.  This is especially true when they have cash and can close immediately.

While we expected the early spring market to be more of the same, we are finding that showings are more often for businesses and organizations that need space.  There are a lot of start-ups, and also places that need to expand.  This is an excellent sign for the improvement of the commercial real estate market, and one that we hope to see continued in the weeks and months to come!

Trends to Watch

I just came back from a meeting of large real estate firms around the country, and there are always interesting ideas that come out of our meetings.  Some of the ideas will be interesting to commercial users and investors as well. 

First of all, I heard that the largest buyer of US mortgages between 2003 and 2008 was the Republic of China.  It's clear that international money has been making its way into the US over the past couple of decades, much of which they got from trading with us in their favor.  What that suggests is that there is a whole new market of buyers out there, and we need to be looking beyond our own borders for them. 

Along the same lines, one of the brokers suggested that we get rid of some of our excess property around the country by selling it --for cash--to non-US citizens, as long as they can prove that they have the cash flow to support it for some period of time.  Once they've bought property, he suggests, they would be eligible for citizenship during a certain window of opportunity.  His idea is that such a proposal would flood us with buyers for short sales and foreclosures, as well as for other property not being absorbed through the normal channels, by granting a carrot to immigrants that will bring wealth with them, while stabilizing our real estate market at the same time.

Other brokers have looked to pools of investors, who are using to cash to buy up real estate they consider to be at bargain rates.  The investors are then holding the properties, and renting them in the meantime.  To encourage even more sales, another firm owner suggested that the rules be loosened on the use of IRAs for the purchase of real estate, and that many more homes would sell as a result.  His theory is that IRAs are for retirement, which is what most people consider their homes to be for as well.

All of these ideas, some of which are more likely to come to fruition than others, are aimed at encouraging us to look beyond the current malaise for trends and future cash flow streams which will increase sales and raise the value of properties.  And anything that does that sounds good from here!

Where Housing Grows, Retail Follows

I blogged last time about the low vacancy rate for apartments in New Haven, and I'd like to expand on why that matters to the commercial market.  When people move into an area, they want the services they use to be convenient.  So, once residential appears, developers, franchisors, and service providers follow.  Companies use demographic information to determine where they should expand.  They know that renters eat out, go to bars, and seek out entertainment, preferably without getting into a car.  After all, that's why they rented in a center city to begin with. Recently, 360 State Street opened in the Ninth Square in New Haven and is already up to 80% occupancy.  I noticed that a new Irish pub just opened on the corner of the open space behind 360 State.  Would we need another Irish pub (there are six between that one and the center of Hamden) if not for all those renters?  This is especially true with renters, who may have more disposable income than new buyers. Also, the vast majority of the 360 State renters bike, walk, or take the train to work, making close by services more enticing. Since 360 State Street is so far ahead of projected occupancy rates, it has already had an impact on the area around it, and that will continue.  Soon we will see the food co-op opening, and I expect that dry cleaners, convenience stores, and pharmacies to follow.  Already, the chain deli around the corner is one of the best-performing franchisees anywhere.  Why?  Location, location, location.

Downtown New Haven has retail opportunities that should excite both investors and business owners.  And that means that the time to act is now.