MARKET HIGHLIGHT, MARCH/APRIL 2012

CONNECTICUT

Hartford Multifamily

Restrained development, an unsettled single-family housing market, and growing rental housing demand are driving a robust turnaround in the Hartford multifamily sector, making the market one of the strongest in the country. Vacancy will fall to less than 3 percent in 2012, enabling property owners to raise rents significantly. Some of the greatest gains will likely occur in the North/West Hartford and South Hartford/North Middlesex submarkets, where vacancy rates are less than 3 percent. Overall, vacancy and rents have likely improved sufficiently to justify construction, and many planned projects may accelerate through the pipeline in the quarters ahead. The track record of recently delivered projects will likely embolden developers. For example, in the North/West Hartford submarket, vacancy fell 60 basis points last year after a 264-unit complex came online. The multifamily sector is also getting a lift from the still-struggling single-family housing market, where sales volume fell 20 percent last year. Mortgages remain hard to obtain, and many would-be homebuyers will remain in rentals for an extended period as a result.

The Hartford market continues to attract attention from investors, perhaps to a greater extent than other markets of similar size. A slight decline in transaction velocity over the past 12 months most likely reflects a lack of product available for sale rather than a waning desire to obtain local properties. Low interest rates and the expanded availability of acquisition financing are sparking interest, and many owners will find a competitive bidding climate for well-performing assets in sound physical condition. Cap rates for most assets generally sit in the 7 percent range, but will likely compress as a result of keen competition. Properties located in strong and established residential communities in the western half of the metro will garner attention due to the stability and desirability of the neighborhoods where they are located. Elsewhere, properties in the city of Hartford have also enjoyed the turnaround in property performance and appear poised to remain high-demand locations for recent college graduates.

Employment: Through year’s end, employers will add 5,500 positions, expanding total employment 0.9 percent and restoring payrolls to the pre-recession peak. In 2011, 7,100 positions were created.

Construction: Developers will bring online 270 market-rate rentals by year’s end; 264 units were delivered last year. The planning pipeline contains 2,500 units, though no start dates are currently scheduled.

Vacancy: Residents will move into rentals at a robust, albeit somewhat slower, pace in 2012, reducing vacancy 50 basis points to 2.8 percent. The rate plunged 140 basis points during 2011.

Rents: Asking and effective rents will each surpass the $1,000-per-month threshold this year, with asking rents rising 4 percent to $1,041 per month and effective rents gaining 4.4 percent to $1,005 per month. In 2011, asking and effective rents rose 2.1 percent and 2.4 percent, respectively.

— Steve Witten is a senior director of Institutional Property Advisors, a division of Marcus & Millichap Real Estate Investment Services. Witten is located in the firm’s in the New Haven office.

Connecticut Retail

In the last nine months, we’ve seen a re-energized national retailer base in the Connecticut market that’s seeking new opportunities and absorbing prime retail space. The national retailers never completely disappeared; however, from late 2008 through the spring of 2011 there was little momentum from this sector. This newfound activity has served to restore the confidence of both the landlord and the local retailer base, effectively stabilizing rents and reducing vacancy rates in prime retail corridors.

There was a great deal of talk about the “flight to quality” during the economic downturn and that trend continues. We are seeing especially enlivened activity in the upscale retail main streets in Connecticut including Greenwich Avenue in Greenwich, Main Street in Westport and Elm Street in New Canaan. This is not only a local trend, but a global one, as rental rates on high street retail corridors around the globe experienced a 4.8 percent increase year-over-year and luxury goods have made a strong comeback with year-over-year growth of 8.5 percent for the 12 months ending in August 2011. This trailed only the wholesale clubs segment in terms of overall performance. U.S. luxury retailers are also the beneficiaries of a weak U.S. dollar that has attracted record numbers of foreign tourists. On a year-over-year basis, international visitor spending in 2011 increased at an average of more than $1 billion per month and totaled $87 billion through the first half of 2011.

Select national retailers that have completed deals on the high streets of Fairfield County include West Elm, Urban Outfitters (both Urban Outfitters and Terrain concepts), Nike, Theory, Longchamp and Hermes. A number of these transactions represented first-in-the-market locations, which adds to the excitement and cachet of these shopping streets and serves to increase leasing activity.

• West Elm leased space at 37 Main Street in Westport, its first store in the state.

• Urban Outfitters completed deals in Greenwich at 20 East Elm Street and Westport at 101-107 Post Road East, its second and third stores in Connecticut. (The company’s first Connecticut store is located in New Haven.)

• Urban Outfitters is opening its first Terrain store in the market at the former Curran Cadillac site in Westport (561 Post Road East), the second store of its kind in the country!

• Hermes signed a lease at 272 Greenwich Avenue, Greenwich — its first store in the state.

• Longchamp signed a lease at 272 Greenwich Avenue, Greenwich — its first store in the state.

• Theory signed a lease at 69 Main Street, Westport.

• Nike signed a lease at 89 Main Street, Westport.

This upscale retail boost aside, retailers still remain conservative in their approach to new real estate and continue to seek risk-averse opportunities. They are taking strategic approaches to their physical stores, in many cases, opting to shrink their standard footprint and, alternatively, are creating new, offshoot concepts that allow for greater flexibility in areas where real estate is scarce and/or cost-prohibitive. The trend to smaller, more efficient and customer-targeted stores will continue as retailers can better manage their inventories and redefine their customer relationships through Internet sales and social media.

— Jessica Curtis, associate director with Cushman & Wakefield

Connecticut Industrial

In the central Connecticut market, owner/users are beginning to seek fair priced industrial facilities that can be financed by mostly local community banks using SBA and some conventional loans. Also we are seeing companies come up from Fairfield County (Bridgeport and Stamford) to take advantage of Waterbury Development Corp. loans and some forgivable grants. One 35,000-square-foot user put up their equipment as collateral to obtain a $500,000 loan for modern space where they could become more productive at a much lower cost of occupancy and expand their workforce.

One landlord is buying large vacant industrial facilities at $20 per square foot and rehabbing and subdividing for re-lease programs. We are also seeing some new construction and facility expansions in industrial parks that offer Enterprise zone incentives.

Municipal and state Department of Economic and Community Development incentives are driving transactions. These incentives include the Urban Jobs program, Enterprise Zones and Corridors, SBA 504 loans, and tax abatements and other enhancements.

Waterbury has four industrial parks and at least five business parks surrounding the city, including Watertown, Plymouth, Naugatuck, Cheshire, Oxford and others. The city of Waterbury offers many perks, and the others offer lower taxes and suburbia.

The Naugatuck Industrial Park on Route 8 in Naugatuck is considered the top of the Route 8 corridor to many Fairfield County customers, but buyers look everywhere for the best overall situation. Brokers need to have exclusive representation agreements, lots of patience and a really good comparative skill set.

Property values are flat at best. Good facilities are selling at about $50 per square foot. Higher priced offerings languish on the market unless they are truly mint condition, or they become price reductions. Buyers want good, modern facilities that are not polluted and their banks are picky as well.

Good product is hard to come by. For example, a lease on a prime 20,000-square-foot manufacturing building for $6 NNN recently fell through because the landlord/user could not find a suitable facility to move his company to. Many available facilities are old and not what current manufacturers seek. In addition, we could attract more distribution companies if we had more facilities with high ceilings. Most of the facilities that come available have 12- to 18-foot height, whereas today’s distributors require 22 feet and up.

— Tom Hill III, owner of Tom Hill Realty & Investment LLC in Waterbury, Connecticut, and host of the Tom Hill Show on WATR 1320-AM .

Fairfield County Office

Patterson

Fairfield County’s office market recorded limited movement in 2011, symptomatic of resurfacing concerns regarding the strength of the ongoing economic recovery. Although office-using employment is expanding, more hiring is needed before companies will increase demand for office space. Office leasing activity in Fairfield County accelerated through year-end 2011, driving net absorption to 378,748 square feet. While leasing activity in 2011 was nearly 40 percent lower than in 2010, totaling 2.5 million square feet for 2011, fewer tenants chose to vacate their space. Many space users with 2011 lease expirations decided to execute renewals rather than relocate.

Significant renewal activity in Fairfield County helped to offset a lack of new requirements, driving a slight decline in the county’s overall vacancy rate to 22.1 percent at year-end 2011 compared with 22.7 percent at year-end 2010. Class A fundamentals recorded a similar trend, with the vacancy rate contracting to 21.5 percent in 2011 from 22.1 percent in 2010. Because new demand remained anemic, landlords held relatively steady on asking rents this year. The overall average asking rent increased 0.9 percent during 2011 to $32.54 per square foot, and the Class A average asking rent was flat at $35.82 per square foot.

Just as Class A indicators showed less movement than the overall market, indicators reveal a bifurcation among Fairfield County’s office submarkets. The Greenwich CBD/Railroad and Stamford CBD/Railroad submarkets typically benefit from transit-

oriented demand. At the same time, these submarkets are at the mercy of the Manhattan office market; they benefit when New York’s office market is tight but lose momentum when Manhattan fundamentals weaken. For example, during 2011, net absorption of office space in Manhattan was positive for the year but lower than levels seen one year earlier. The lack of a material recovery in Manhattan likely prevented a more significant rebound in the Greenwich and Stamford CBD/Railroad submarkets, which recorded negative net absorption during 2011.

The composition of demand for Fairfield County office space is changing, which could set the stage for improved absorption and velocity this year. In 2011, leasing volume in Stamford comprised mostly smaller deals and renewal activity. So far this year, a greater variety of industries is driving demand, and several requirements in the market are value- and transit-hub driven. In Greenwich, while demand is coming mainly from existing tenants with upcoming lease expirations, the need for expansion space is also emerging. Financial firms dominate all requirements, which range from 5,000 square feet to 20,000 square feet. Limited demand was the main obstacle in 2011, but supply-side challenges will come into play during 2012.

While the 2012 outlook for Fairfield County is very modest recovery, Stamford may be facing a period of declining rents over the next year. The exodus of UBS from the city will mean a glut of office space on the market — 100,000 square feet has already been made available for sublease. In addition, Building and Land Technology’s purchase of Stamford’s 581,766-square-foot 695 East Main Street will heighten competition among landlords of the highest-quality buildings. The sale should catapult the building back onto the market as a viable option for tenants. As these blocks of space come on the market in the form of sublease and direct space, landlords will likely see tenants re-evaluate their space needs and consider a move towards better quality space, particularly if it is priced at a discount. The re-marketing of 695 East Main Street, coupled with sublease space from UBS, could drive down asking rents across the Stamford market through 2012.

— Erin Patterson, senior analyst – research with Jones Lang LaSalle

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