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Commercial Real Estate:
Then & Now
The industry has a new lease on life with signs of improvement
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Business New Haven
10/6/1997
By: Kirah Ramage
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With apologies to Mark Twain, although rumors of commercial real estate's resurrection in Connecticut were indeed premature, the industry at last appears to be making a comeback.
Unlike the enormous surge seen recently in the construction industry, real estate growth is slow and steady. And that suits Deforest W. Smith, principal of the Milford-based George J. Smith & Sons Commercial & Investment Real Estate just fine.
“Back in the years between 1984 and 1987 there were a lot of speculators,” he recalls. “People would buy land and buildings or build buildings on speculation with the belief that they would sell the land, or build the houses and sell them, or lease the office space. “They won't do that now,” says Smith, “for two reasons: One is the emotional and financial scars that everyone has who lived through the '80s and early '90s. Second is that even for those few people who would consider speculation, they cannot get financing.”
Why not? Replies Smith: “Banks got badly beat up, and they won't lend on speculative projects now. Just as the developers want to know exactly what they're going to do with a piece of property, the banks also want to know, or they won't lend any money.”
Smith does allow that although banks remain cautious, default rates are sharply down, and for the first time in seven years they are aggressively soliciting commercial accounts.
Twenty-three-year commercial real-estate veteran Carl Russell, president of the Greater New Haven Board of Realtors, likewise sees improvement. “I would say the economy started to straighten out in 1993, but the real good business started about 24 months ago,” he observes. “By 1995, we started to see prices stabilize and then start to grow. It's not off the charts, but it's a nice steady growth, and those of us who survived are starting to enjoy life again.”
Moreover, Russell, believes the trend will continue. “For one thing,” he notes, “the state has gotten back about 75,000 of the 200,000 jobs lost [during the recession]. There's been strong growth in housing and construction. “Retail development is the one area that has been off the charts,” adds Russell. “Route 1 from Milford to Orange is probably the hottest strip of land going. There's more retail development taking place out there than I've ever seen in my lifetime.”
What about the brokers?
Over the last ten years the number of licensed brokers in Connecticut has dropped from around 40,000 to about 20,000 according to Russell and Smith. Few firms have entered the market, although some, like Calcagni Associates Real Estate, have opened new commercial divisions within already existing companies. CB Commercial and Farley Whittier Partners are merging to create CB Commercial/Whittier Partners. The new firm will manage more than 16 million square feet of real estate and employ in excess of 75 people, making it one of the largest real estate entities in the region. On a smaller scale, many one- and two-person operations have merged as well.
In the main, brokerage firms are leaner, wiser and smarter about the system than they were in the 1980s and early '90s. Most don't become involved in a project until they have a definite use in mind for it.
Three and half years ago, George J. Smith & Sons drafted a five-year plan to develop a distinctive product. The firm began buying raw land, and is now working on selling and developing some of it. In the works is an office building and retail structures which are pre-leased.
It's a major change for the company to actually buy and sell property. Smith says his firm is working toward dividing its business equally between brokerage and development. Moreover, New Haven's C.A. White, which handles brokerage, management and development, has made a commitment to expanding its brokerage and management fronts and has added five new employees.
How does the New Haven County office market compare with the recent past? The market in New Haven's central business district (CBD) has remained mainly static, while the New Haven non-CBD and other submarkets have lowered vacancy rates. The eastern shore, including Branford, East Haven and Guilford, are seeing zero vacancy rates compared to 29 percent in 1992 according to Cushman & Wakefield of Connecticut.
Realtors say taxes continue to be one of the biggest barriers to business growth in the Elm City, placing New Haven at an insurmountable disadvantage to suburban communities. Though ample space remains unleased in the CBD, John Wareck of the Chapel Group in New Haven says his 50,000-square-foot retail and office property at 1060 Chapel Street is 94-percent occupied, and C.A. White's Frank Micali reports that 234 Church is now 80-percent occupied.
What businesses are fueling the market?
According to Russell, manufacturing is a major force in the economy. There is far more demand than supply. The problem is that it is not yet economically feasible
to build industrial space and lease it at prices that make sense. The current asking price for industrial property is $4 to $6 per square foot, which means new buildings would have to be leased for $7 to $8 per square foot
to make money. Right now the prices are not quite
high enough.
Biotechnology firms such as Branford's Neurogen, which just completed an expansion, and service businesses such as Rite Aid Corp., which recently paid $1.85 million for property on Boston Post Road in Milford with plans to build a pharmacy, are also fueling the growth. And as the population ages, assisted-living and senior-care facilities are taking hold in the market.
New Haven's Ninth Square is one focal point in the revitalization of downtown. Project director Kathleen Etkin says Ninth Square has close to full residential occupancy and 57 percent of the street-level commercial space leased. Etkin says more businesses are moving in and that the relocation of the Yale Co-op to Chapel Square Mall is a big step forward. “Businesses attract other businesses,” she notes.
The long-awaited demolition of the Edw. Malley building and the renovations of the Liberty building at 152 Temple Street into luxury apartments with street-level retail space and the former Park Plaza into the Omni Hotel are likewise signs of revitalization.
C.A. White's Micali points to the purchase option Baltimore developer David Cordish retains on Chapel Square Mall and the 900 Chapel Street office tower as key to the city's future. “It will be one of the biggest things to happen in New Haven,” Micali says.
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