Too Much Space Is Now Just the Right Amount

 For years now, commercial real estate users have been looking to divest property and downsize in square footage.  This trend picked up rapidly as the pandemic set in, and workers began telecommuting from home.  Once we started to take a long view, however, things changed.

Now we can see far enough ahead to realize that bigger buildings may be an asset.  It allows all kinds of users to have space for their workforce to spread out, or for retail tenants like exercise studios or restaurants to occupy enough real estate to have customers socially distance.  As I've been writing for months now, warehouses were already hot, because of the trend toward ecommerce and the need for distribution hubs.  Now we know that they can also be repurposed for other buyers and tenants.  

As we work our way toward the new normal, whatever that turns out to be, the lack of new supply will force creativity on the part of property owners and investors.  New businesses are springing up, and people are finding ways to work and play in new circumstances.  We can see that there may be a demand for space for learning pods for students, for telecommuters who don't want to or cannot work from home, for pick up and drop off sites for businesses that want customers to be able to stay apart while doing errands, for studio space serving online business and arts production, and for last-mile delivery hubs for all kinds of products.  Can you imagine a giant warehouse full of toilet paper?  If you can, you are probably not alone.  

The world has changed in so many ways, but the creativity and resilience of entrepreneurs and existing industries will be up to the task of figuring out a path forward.  If you are a property seeker, or an investor, location should still be a key factor.  However, don't pay as much attention to size, condition, or current usage.  Whatever you have, a buyer or tenant is probably out there looking for something like it.  And those buyers will certainly have favorable financing terms today.  So think about now as a great time to sell, lease, or sublet. There's no time like the present!

Central Location

We have seen a surge in the popularity of old industrial buildings this year.  Some of them are being used for residential repurposing, but many are put to use as warehouses.  Despite the complaints about our highways, Connecticut is located in a region where most places are accessible easily by truck, and rail goes through the state in more than one direction.  While we have become positioned as an unattractive place to do business, storing and shipping from here seems to be the exception.  Fewer jobs, especially fewer high-end jobs, are created with warehouses, but there is also less risk for the buyers or tenants.  In addition, some of those old industrial facilities have environmental problems, which are less of an issue when they are being used as warehouses, as opposed to living spaces.

Will our resurgence on the warehouse front lead to other development, or further investment in Connecticut?  It's too soon to tell, but it's good  news for those who have owned--and often sat on--those buildings for years now.  We're happy to advise you, if you are such an owner.

End of Summer Hopefulness

Greater New Haven's Commercial and Industrial Realtors held their annual outing yesterday, and the mood was upbeat.  Although a lot in August seems to be on hold for Labor Day and the coming of fall, most people were busy, or had the prospect of being busy in the weeks to come. 

That doesn't mean that all the property is being snapped up, however.  Really attractive office space is still begging, in many cases, for tenants.  And New Haven's dependence on not-for-profit employers and institutions leaves us vulnerable to changes in State and national funding.  However, retail has made a comeback, and flex and warehouse space is tight in some places.  There is somewhat of a disconnect between what buyers want and what sellers have to offer, but hey--there are buyers now!

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.