Connecticut Retail Market

For owners and sellers, Connecticut’s retail market may not get any more attractive. Though overall vacancy is 11.4 percent, centers are better leased than they have been in years. Inventory is balanced, investors are interested and owners are riding the coattails of a stellar U.S. retail market.

Blue Back Square
Retail in central Connecticut is selling at an average of $175 per square foot and 7.7 percent cap rates. Quality product in Hartford can reach more than $200 per square foot at sub-7 percent cap rates. This is a significant factor for investors coming out of New York at a cap of 4.2 percent and unable to find acceptable exchange deals locally. Such demand has been the most significant contributor to Connecticut’s retail market. As of third quarter 2004, the demand had helped sell almost $139 million in product.

Most new development and leasing activity is occurring in the more populated markets of Hartford, West Hartford, Manchester and Bristol. Of these, downtown Hartford may be the one to watch. Here, new residential development has added foot traffic and pushed retail occupancy to nearly 100 percent. The conversions of the G. Fox building and former civic center to mixed-use will add even more multifamily and small retail space.

In 2007, Blue Back Square, a lifestyle project by BBS Development in West Hartford, might have an impact on tenants in the area. Blue Back is applauded for its ability to generate tax revenue, but its plans for as many as 30 shops and restaurants have raised concerns about luring smaller retailers away from downtown.

Blue Back is indicative of Connecticut’s overall retail health, including the areas of Manchester to the west and Bristol, located south of Hartford on Route 6. All of these communities have significant retail construction and continue to attract major tenants such as Wal-Mart, Lowe’s Home Improvement Center, Best Buy and Target. They also benefit from a supermarket war between Stop & Shop, Shaw’s and Big Y.

In West Hartford, only a handful of vacancies exist in smaller, 1,000- to 1,500-square-foot stores. Manchester is booming with infill construction, particularly along Interstate 84. Though known more as a secondary market, Bristol is filling space that has been sitting vacant for years. Of just more than 1 million square feet, less than 80,000 is currently vacant and construction is mostly pre-leased.

But inventory remains tight across the board, and that keeps values relatively overheated. Still, if you’re able to put cheap debt on a deal, high values will redeem themselves with cash flow and upside profits.

Joseph French is a senior advisor with Sperry Van Ness.

Connecticut Multifamily Market

The Connecticut multifamily market is on the road to recovery thanks to a rebounding economy and an upswing in employment. In addition, rising interest rates bode well for apartment owners, limiting the number of renters who can purchase single-family homes. With buyer demand for multifamily properties throughout Connecticut far outweighing supply, property values are on the rise.

In the New Haven metropolitan area, while employment is expected to decline slightly in 2004, modest growth will resume in 2005. Forecasts call for 8,800 new jobs, an increase of 1.1 percent.

Strong investment activity is being led by repositioning or value-added transactions, with properties located in New Haven showing the most gains. In New Haven County, 692 units traded for $38.18 million in 2003. Year-to-date, pending and closed transactions in New Haven equal 1,451 units, trading at an aggregate value of $107.57 million, or $74,132 per unit. While we’re watching for rising interest rates, we expect this to be offset by improving property fundamentals.

The average asking rent in Connecticut has increased 1.5 percent, to $934 per month, compared to a Northeast region average asking rent increase of 0.9 percent and a national average increase of 0.7 percent. To date, New Haven ranks first in the country in its average asking rent increase. Average effective rent is forecast to end the year at $911 per month.

Owners report year-to-date vacancy down 90 basis points, to 4.5 percent, and we expect to see this drop further by the end of the year, to 3.6 percent. The entire Northeast averages 4.4 percent, and the nation averages 6.9 percent. We do expect to see a small rise, to 4.3 percent, in 2005 with the prospect of new completions.

In Hartford, the real estate market is benefiting from the continued revitalization of the downtown area. The Hartford Civic Center is introducing a cluster of related buildings, including up to 262 residential units and a variety of retail, dining and entertainment venues, establishing a live-work-play environment. Effective rents for apartments in the area have increased 2.5 percent to $822 per month with the introduction of higher-priced, new luxury units. Vacancy is projected to close the year at around 5 percent.

As the economy grows, we expect to see the Connecticut multifamily market bolstered by an upswing in employment and improvements in vacancy.

Steve Witten is a senior director of Marcus & Millichap’s National Multi-Housing Group, locally headquartered in New Haven, Connecticut.

Greater Hartford Office Market

The city of Hartford, Connecticut, and its surrounding suburbs are on an upward development swing. In the central business district, there are a number of development projects currently underway; these projects will bring people to the streets and help boost business. Adriaen’s Landing, a 30-acre development project along the Connecticut riverfront, will include a science center, the largest convention center between New York and Boston, a Marriott hotel, retail and residential development. The project is under construction and scheduled to open in 2005. In addition, developers are building or have recently completed several residential projects in downtown Hartford; these projects total more than 1,200 apartment and condominium units. The former Hartford Civic Center Mall complex is being demolished and redeveloped as Hartford 21. This complex will house the first new office space (90,000 square feet) to be built in the downtown Hartford market since 1991 and will include street-level retail and a 36-story residential tower.

Recently completed development projects include the renovation of many downtown office buildings, including a modern, 300,000-square-foot campus housing Hartford’s Capital Community College, a 40,000-square-foot, state-of-the-art Graduate Learning Center for the University of Connecticut School of Business. The array of development activity is expected to have a positive effect on the downtown office market. At 16.6 percent in the third quarter of 2004, the Class A vacancy rate in Hartford’s CBD is slightly higher than the national average of 14.4 percent for downtown markets.

The first two quarters of 2004 saw positive net absorption and increased leasing activity in the Greater Hartford office markets. Current overall vacancy is holding steady at 18.1 percent, after reaching a high of 19.4 percent in the second quarter of 2003. Since the economic downturn in 2000, little office development has taken place in the Hartford area. Only four suburban office buildings have been built on spec in the past few years and they are leasing slowly. Rental rates have trended downward over the same period and range from $19 to $25 for Class A space. Tenants are receiving aggressive rental rates and concessions packages from competing landlords across the market. Many companies are taking advantage of reduced rental rates to renew existing leases early or look at other options. Companies are still focused on productively downsizing office space but as new hiring continues so will growth.

Melissa Pasquale is director of market research with CB Richard Ellis-N.E. Partners.

Greater Hartford Industrial Market

With an industrial inventory of 67 million square feet and a 12 percent overall vacancy rate, the Greater Hartford, Connecticut, industrial market is quite stable and demand is high. (The national industrial vacancy average in the third quarter was 11.2 percent.) Traditionally a manufacturing-driven market, the Hartford area’s prime location between Boston and New York and ample developable land have recently made it extremely attractive to national distributors. Few new buildings in the area have been built on spec, and many tenants have found the build-to-suit option the best choice. Companies are looking for modern, efficient distribution buildings with 30-foot ceiling heights, ESFR sprinkler systems, super-flat floors, and, ideally, cross-docks. Typical lease rates for this type of product are above $6 per square foot NNN, while the overall average asking lease rate market-wide is about $4.50 per square foot NNN.

In the northern suburban market, location, ample land and cooperative officials have helped attract companies such as Pepperidge Farms, TJX, Ford, Honda and The Home Depot. The 24 million-square-foot northern suburban market closed the third quarter with less than 8.5 percent vacancy. TJX built a 430,000-square-foot distribution center for its HomeGoods division on 90 acres in Bloomfield, while Pepperidge Farms built a 265,000-square-foot facility across the street, and Ford built a 232,000-square-foot parts distribution center in Windsor Locks. Companies are finding build-to-suits that have their specific needs in mind are more economical. For example, in Windsor, ADVO built a 160,000-square-foot direct mail processing center and was able to combine two locations into one more efficient space, reducing overall square footage. Building owners with low ceiling heights or older product have to offer lower lease rates with more square footage to compete with today’s modern facilities. One case study showed that while industrial buildings with 25-foot ceiling heights and higher have less than 2 percent vacancy, the rate for buildings with less-than-20-foot ceiling heights exceeds 20 percent.

One of the largest deals of the year occurred in Enfield. The 190,000-square-foot Jagenberg building, a German-owned facility, had been on the market for nearly 2 years. Eppendorf, another German company came to the Hartford market planning to do a build-to-suit. The two companies were able to connect in Germany and complete a sale transaction that was economical for Eppendorf and beneficial for Jagenberg.

Continued demand and low interest rates are the basis for the more than 1 million square feet of positive net absorption the industrial market has experienced so far this year. Additional positive absorption and continued build-to-suit activity are expected during the fourth quarter and in 2005.

Melissa Pasquale is director of market research with CB Richard Ellis-N.E. Partners.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.

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