MARKET HIGHLIGHT, FEBRUARY 2007

CONNECTICUT MARKET HIGHLIGHTS

Connecticut Retail Market

2006 was no exception to the past 14 years of explosive retail real estate growth in Connecticut. Retail developments with Home Depot or Lowe’s along with Wal-Mart, Big Y, or Super Stop & Shop are springing up in towns that not too long ago, barely supported a local hardware or convenience store.

In Lisbon, for example, a town with a population of less than 5,000 people, SR Weiner developed Lisbon Landing with Wal-Mart, Home Depot, Kohl’s, Old Navy and others. Cedarwood Development is finalizing plans for another regional retail center directly across the street. Similar-sized projects are also proposed for the similar-sized towns of Pawcatuck and Griswold.

East Lyme, a town with a population of less than 20,000, has a new CVS, a new Brooks Pharmacy under construction, a Super Stop & Shop supermarket with a pharmacy, and a redevelopment plan for a center that includes another new CVS. A new retail development featuring Walgreen’s is also being planned.

While our new generation of teenagers are savvy Internet users, they are more apt to shop and buy at their favorite stores for the latest styles with less regard to price and the time benefits of on-line shopping. Retailers and restaurateurs saw a substantial increase this holiday season in the sale of gift cards, which do not affect the retailers’ reported bottom line until the cards are redeemed. Consequently, even though retailers reported lackluster sales this holiday season, we should see substantial same-store comparable sales increases when the January 2007 results are in. As early as February, we will learn that the recently reported death of retail has been grossly exaggerated.

Development of quick-service restaurants such as McDonald’s or Wendy’s has slowed in the Connecticut market, but premium convenience/quick-casual restaurants such as Pei Wei, Moe’s, and Cosi are expanding.

National, multi-unit restaurant development is a very active component of the retail real estate industry. While quick-service restaurant development has slowed to a snail’s pace, and in some instances throughout the region several units have even closed, the hottest sector of the restaurant industry, the premium convenience/quick-casual restaurants such as Pei Wei, Moe’s, and Cosi, are expanding. Cosi restaurants, with 115 upscale salad /sandwich /soup restaurants throughout the United States, has embarked on a plan to reach the 800 restaurant mark by the end of 2010. With six restaurants now open in Connecticut and three open in Boston, Cosi has 10 new units in the development pipeline throughout Connecticut, Rhode Island and Massachusetts.

In 2007, retail development will continue in the tertiary markets of Connecticut, which are showing signs of growth or just growth potential.

— Timothy A. Londregan is a broker at Londregan Commercial Real Estate Group, LLC in Old Saybrook, Connecticut.

Retail Surges in West Hartford

Blue Back Square in West Hartford, Connecticut, will feature 220,000 square feet of retail and 107 units of housing.

Blue Back Square is a new 550,000-square-foot mixed-use development in West Hartford Center in West Hartford, Connecticut. Encompassing 20 acres, the $180 million project,  developed through a joint venture between Street-Works, LLC of White Plains, New York; JDA Development of West Hartford, Connecticut; and Ronus Properties, LLC of Atlanta, Georgia, promises to revitalize West Hartford’s downtown by bringing back prime retailers missing from the area. The development will feature 220,000 square feet of retail space, which includes major retailers such as Crate & Barrel, Barnes & Noble, Criterion Cinemas, REI, Fleming’s Steakhouse, The Cheesecake Factory and Whole Foods. Richard Heapes of Street-Works, LLC, says, “In the design of this project, the development team wanted to bring in the retail that used to exist in the Downtown West Hartford area. Whole Foods has brought grocery shopping back Downtown and Crate & Barrel has brought back the destination retail that was missing from the Downtown area. There also used to be a central theater Downtown, but it is now gone, so Criterion Cinemas will bring that aspect back to the area. Overall, Blue Back Square brings in all of the retailers that are needed for the area to be competitive long term.”

Besides first-rate retail, the development will also include 62,500 square feet of Class A office space and 160,000 square feet of medical office space. In addition, Blue Back Square will feature The Heritage, a 59-unit condominium building and The Gramercy, a 48-unit rental loft building. “As the first urban mixed-use development in the market, the project has been a good demonstration of alternative housing in West Hartford, which until now had been mostly single-family residential. By adding this variety to the marketplace, the Downtown will be much more competitive, healthy and sustainable,” says Heapes. The development also includes the renovation and refurbishment of much of West Hartford’s existing infrastructure. The Noah Webster Public Library will be renovated and expanded by 12,810 square feet, the Town Hall will be refurbished and improvements are being made to underground utilities, roadways and lighting. In addition, a 3-acre park is being added and two town-owned parking garages are being built.

A particularly unique aspect of the development is the Hartford Wellness Center, a 128,000 square-foot hospital that also includes Healthtrax, a 32,000 square-foot health club. According to Heapes, the Hartford Hospital Wellness Center, which is set to open spring 2007, was the first major anchor tenant for Blue Back Square and has already brought in several different medical practice groups. “The development partnership is working to make the hospital a new destination anchor,” says Heapes. “It brings a needed and unique convenience to the residents and employees living and working in this area of West Hartford.”

In developing Blue Back Square, the partnership worked to create a cohesive development in which each element of the Downtown area worked together seamlessly. “Blue Back Square is not just about lifestyle retail in a pseudo-street environment, it is about creating unique, one-of-a-kind places that are completely blended in with the surrounding environment. Our goal is that people coming to the area won’t be able to tell what is Blue Back Square and what isn’t,” says Heapes. “The development team spent a great deal of time working with the local merchants to create an environment that is a part of history because that is where you get the long-term sustainable value.”

Connecticut Office Market

As home to both Stamford and Hartford, the Connecticut office market is divided significantly in price and performance, offering investors and tenants a range of opportunities to choose from.

Stamford, with its prime geographic proximity to New York, generally operates as a larger tenant market, with Fortune 500 companies paying rents between the low $30s to high $30s per square foot and investors buying, according to Real Capital Analytics (RCA), at rates that as of third quarter 2006 ranged from $100 to $325 per square foot.

Hartford, conversely, offers a more diverse range of fundamentals and therefore more manageable pricing. Since the 1990s, the market has struggled with down-cycle activity and still reflects an overall office vacancy rate of 16 percent. Thanks to some recent large absorption of office space by insurance companies, Hartford’s downtown Central Business District vacancy rate sits at approximately 10 percent. The rest of the market, however, remains at a 20 percent vacancy rate. Rents range from the low $20s to high $20s per square foot, depending on product type and location.

On the upside, rents are projected to follow the lead of Stamford, growing slightly over the next year as businesses show increased confidence in the economy and their ability to profit and expand. This also may help improve Hartford’s office values, which according to RCA-reported sale prices as of third quarter 2006 ranged anywhere from $50 to $125 per square foot.

Outside of one major build-to-suit corporate office project for ING, there is little major office construction occurring in Hartford. One trend taking somewhat of a hold is smaller-scale office condo development, which includes the construction of neighborhood office parks and the repositioning of existing buildings into 1,000 to 5,000-square-foot office condos. Condo activity is occurring particularly in Hartford’s suburbs — including around Bradley Field airport — and along the interstates, where significant new retail and residential growth have attracted service providers and independent business owners looking to transition from home office to formal workplace.

In terms of tenant interest, whereas Fortune 500 companies tend to choose to locate in Stamford, insurance companies continue to heavily dot the Hartford market. And while Hartford in the past few years has lost insurance tenants due to mergers, it still boasts an employee pool heavy with insurance and insurance technology experts that help maintain a strong base of insurance employers.

While Stamford will likely continue to thrive based on location, Hartford’s office market health will be tied much more to economic performance. At present, Hartford buyers fall primarily in to two groups: those that are purchasing as an owner user or those purchasing for investment, in which case they are buying almost solely into buildings that are fully rented for the long term. With an improving economy, many hope investor thinking will shift instead toward purchases based on Hartford’s promising upside potential.

— Jim Neckermann, managing director, Sperry Van Ness

Connecticut Investment Market

Nirvana continues for the sellers of all investment classes. Across the board sellers of office buildings, retail shopping centers and apartment buildings are achieving record sale prices and unimaginative low cap rates. This trend has been going on for six years and other than a small blip earlier this year, prices have continued to soar. The small blip in the second quarter was a direct result of a short term interest rate hike, which quickly went back down and is currently hovering around historical lows. The basis for buyers’ enthusiasm continues as there is tremendous liquidity in the marketplace, interest rates are low and demand still far outweighs supply. We expect this upward trend to continue through 2007 with only a mild slowdown towards the third and fourth quarters as interest rates are likely to increase and supply will likely catch up to the overwhelming demand as sellers look to cash in on the market.

The active purchasers have been interestingly varied. Both local players as well as institutional type of players have been equally active. In the Stamford market, a local investor has purchased: 1111/1177 Summer Street in Stamford, CT, a 120,000 square foot office building for $24,300,000. While a New York City based purchaser bought Pickwick Plaza in Greenwich, CT for $235,000,000 and National Resources purchased iPark in Norwalk for $16,000,000.  Other notable transactions include: the purchase of 2777 Summer Street, a 110,000 square foot office building in Stamford for just under $20,000,000 by an affiliate of Mill Management.

On the institutional side, US Realty Advisors purchased the Stanley Works world headquarters in New Britain, CT for $18,500,000. 

The leasing markets remain strong as positive absorption and lower vacancy rates continue across the state. This should positively affect the investment sales market as strong investors will ultimately look to the leasing velocity in the marketplace while analyzing purchases.

— Cory R. Gubner is president and CEO of GVA Williams in Stamford, Connecticut


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