NORTHEAST SNAPSHOT, DECEMBER 2008

Vermont

Bradley

The Vermont real estate market, despite being somewhat insulated from the sub-prime crisis and accompanying wave of foreclosures, finds itself struggling with many of the same concerns that other states throughout the country are currently facing. New residential construction has declined 44 percent from the previous year, equating to an approximately $300 million drag on Vermont’s economy. The state is also facing weak job growth, restrained consumer spending trends and a corresponding decline in state tax revenue, with current predictions forecasting a $50 million shortfall. This statewide economic downturn is expected to last through 2009 and into 2010, with the governor, Jim Douglas, commenting that the current budget is the most challenging of his time in office.

In terms of the retail market, the annual rate of growth statewide over the past 14 years has been 2.7 percent, and there is only a modest level of growth forecast for 2009 (1.9 percent). The retail market continues to be relatively stable in the state, in comparison with the national situation, but the worsening economic forecasts will undoubtedly have a negative impact on demand, exacerbating the trend towards reduced consumer spending and an increase in store closings. Vacancies remain relatively low at approximately 5.8 percent, although this figure may increase in the upcoming months, particularly if the holiday season is significantly down in terms of retail revenue.

The office market remains relatively stable throughout the state, with the notable exception of Chittenden County, which has seen a 5.6 percent growth rate in 2008, well above the historic average of 3.4 percent. The vacancy levels throughout the state are worrisome at present, chiefly due to an abundance of new supply, particularly in the suburban markets that is causing rates to trend above historic averages. Downtown vacancies are below average, following a statewide trend that began in 2004 of increased emphasis by the state on growth centers and designated downtown districts. High vacancies and oversupply conditions in suburban and outlying markets will pressure weaker rents, more aggressive marketing and increased concessions until oversupply conditions are rectified.

Projected rates of industrial development in Vermont are relatively weak for 2008 to 2009, with a projected blended growth rate of only 1.2 percent. This directly reflects two things: the cautious nature that investors and state businesses have adopted over the course of the second half of 2008; and corporate losses caused by stock market volatility, decreased economic activity and the generally uncertain economic climate. Rents continue to be stable in this market, facilitated by lack of new supply, as well as adaptive reuse of existing industrial properties; however, activity has been curtailed by the generally low rate of growth in this sector, which has been the trend in the state for several years.

As for the state’s investment/multifamily sector, there has been a variety of changes this year in the overall trends of investors. The rental market itself is quite strong, with low rates of vacancy statewide (approximately 1.7 percent, the lowest since 2003), and strengthening annual rents. Investor activity is declining, however, due to increased capitalization rates averaging 8.8 percent, lower selling prices, and increasing equity and liquidity requirements by lending institutions. The increased demand for rental properties is directly related to the retraction and relative uncertainty of the owner-occupied housing market, with many first-time buyers opting to delay their first home purchases and continue renting instead. However, the resulting lower home sale volume seems to be stabilizing statewide, with a reduction in new supply coming to market. In general, supply and demand continue to remain constant, with fewer properties on the market for sale.

The majority of development in the state in all sectors continues to focus on Chittenden County, which has the highest population statewide, and subsequently the largest presence in all of the above categories. Retail growth remains sluggish in this market, and is likely to continue to average approximately 1.7 percent statewide. Two new developments by Pomerleau Real Estate include a project in Milton, Vermont, that will add 80,000 square feet to an existing shopping center, to allow for a larger Hannaford’s Supermarket and inline space; as well as a new Lowe’s Home Improvement Warehouse currently being constructed in Essex. The new153,000-square-foot store will replace an existing 97,000-square-foot center. J.L. Davis has received approval to begin construction for a new Wal-Mart in St. Albans after a 4-year process. This will be Wal-Mart’s fifth store in the state, and it is currently planned to be larger than the closest current store, located in Williston, allowing Franklin County to recoup some of the sales that it has lost to Chittenden County over the past several years.

Finally, it is important to note that the northern sector of Vermont has seen a relatively large influx of business from Canadian shoppers and investors, due to the increasing parity of their currency to the U.S. dollar. They have become an important contributor to Vermont’s retail market strength, as well as an increasingly important presence in the investor market. It will be important to keep a close eye on the variations of their currency as the global economy contracts, and the U.S. dollar strengthens as a result.

— Yves Bradley is the vice president of commercial brokerage for Burlington, Vermont-based Pomerleau Real Estate.

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