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The State of Commercial
Real Estate
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Business New Haven
9/11/1995
By: William D. Langbein
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While no one in the greater New Haven commercial real estate community is ready to proclaim that even a modest recovery is gaining momentum, nearly everyone points to credible data that indicates that the worst, at least, is over. For most of the commercial market, the operative description is “stabilized.”
Even the hard-hit downtowns of New Haven, Bridgeport and Waterbury are exhibiting signs that the bottom has passed. Foreclosures resulting from the excesses of the 1980s have been completed, nearly all of the existing debt on occupied buildings has been restructured to manageable levels, and the future has been established for most of the major tenants that remain in downtown locations.
The same market conditions apply to suburban communities in New Haven County, but occupancy is much higher. Available commercial space is even beginning to become scarce in suburban towns, particularly in the apartment and light industrial markets.
Yet rents and sale prices of commercial buildings remain flat. Lenders likewise have yet to see the surge of economic expansion that can justify an equivalent increase in lending for new construction. Bank of Boston Connecticut, New Haven Savings Bank and Centerbank are just three of the lenders who have “returned” to construction lending, even though their underwriting continues to be conservative. David Bodor, senior vice president and head of the special financing division of Centerbank, concedes there is no lending on speculative real estate projects compared to the boom years of 1986-87, but maintains that Centerbank and others are “aggressively” pursuing construction loans of $500,000 to $5 million in nearly all sectors of commercial real estate.
“A developer needs to present a bankable deal with a significant amount of pre-leasing,” says Bodor. “'Significant' could translate to 40 or 70 percent, depending on the building.” But all deals with Centerbank, adds Bodor, must have enough cash flow to cover debt service.
Like most lenders throughout the country in recent years, Centerbank is lending exclusively on the cash stream generated by the leases, foregoing all expectations of any increase in investment value. Developers and borrowers understand the conservatism, but point to fundamentals that argue for an easing in underwriting standards.
Greater New Haven leases 37.8 million square feet of industrial and distribution space, according to the 1994 report prepared for Society of Industrial and Office Realtors by the Geenty Group, a Branford-based brokerage and development firm. The vacancy rate for the 2.8 million square feet in the city of New Haven is seven percent; in the suburbs, the figure drops to five percent.
Much of the unoccupied space involves buildings that need to be rehabilitated or comply with stricter environmental regulations before they can be leased. The same rehab and environmental problems apply to the office market, in which an abundance of the Class C (least desirable) office buildings are not expected to be released for office use.
In a recent report prepared by Sentry Commercial Real Estate Services of New Haven, Sentry calculated a 12.46-percent office vacancy rate for the central business district in New Haven. Such a vacancy rate would rank New Haven as one of the strongest office markets in the country, instead of one of the worst. Sentry's logic? Exclude all Class C office space and include owner-occupied buildings like the several properties owned by SNET and the Knights of Columbus building.
Sentry's calculations push the total central business district office space capacity up to 4.5 million square feet, while a competitive estimate from Hartford office of Cushman & Wakefield lists 4.2 million square feet. Sentry argues owner-occupied buildings become listed as available space when owners move out, so the buildings should be considered part of the city's total inventory while the owners remain occupants, thereby providing a better reflection of business conditions in New Haven. Statistical tricks aside, recent evidence justifies Sentry's contention that Class C space will not be released for office use.
Two Class C office properties recently sold by Connecticut Bank-Owned Properties have recently been redesigned to be leased for residential and retail space. “In general it's still the property that's attracting investment, not the market,” says Steve Witten of Connecticut Bank-Owned Properties. If the property is well located and priced right, creative buyers and developers will find a suitable use.
Another example of a creative rehab project is the old Geometric Tool building in the Westville district of New Haven (see story, page 18). At the site, 70,000 square feet of industrial space built in the 1880s is being retrofitted for use as a banquet facility, retail shops, and yes, even new office space. “We're approaching the end of a long down cycle,” explains Witten. “In the next 12 months, we'll see occupancy rates rising and more dollars available for renovations and building expansions. Lenders will be more aggressive in underwriting quality buildings.”
Trickling Down
But Witten cautions the new aggressiveness will not be market-wide, only on individual buildings. The suburban markets will remain stronger for the foreseeable future, especially if building owners or developers can demonstrate the value-added potential to be realized by an infusion of capital.
Eventually, when lenders run out of well-located, fully leased properties that could benefit from capital improvements, their aggressiveness will have to trickle down to third-tier properties and the few remaining development parcels in New Haven County.
Even the most optimistic market observers predict lenders will not become overly aggressive for at least two years. Until then, disagreements will continue - much like the debate about the true office vacancy rate - between developers and lenders regarding what constitutes a “bankable” real estate project.
Nowhere is the tension regarding what is a bankable project more detectable than the light industrial market. Kevin Geenty, of the realty group that bears his name, points out that in the 370,000-square-foot available Branford Business Park, a mere 12,000 square feet is vacant and 4,400 square feet of that vacancy is under contract.
“We're receiving more inquiries from mid-tech, service and electronics companies that want to lease or buy 12,000 to 14,000 square feet of space on the Shoreline,” says Geenty. “But there simply is no industrial space available in that range.” Most of the inquiries are the result of growing Shoreline businesses needing room to expand; owners don't want to relocate themselves, or their employees, away from the Shoreline. As recently as a year ago, Geenty claims there were some light industrial options available in Milford and Wallingford, but even those markets have tightened in the last 12 to 14 months.
Searching
for Niches
In the Elm City, there are only two or three buildings available for light industrial or distribution use, says Diane Petra, a principal with the Petra Corp. In the past year, expansions by New Haven businesses such as Simpkins, Echlin, C. Cowles and H.B. Ives have cut into the city's available inventory.
Distribution companies are particularly drawn to New Haven because of the junction of I-95 and I-91. “Because the rest of the country is doing better economically, we're doing better in New Haven,” explains Petra. “Distributors want to gain a piece of the national market.”
In addition, Petra notes that no businesses, or buildings, have closed their doors or left town over the past year due to poor economic conditions. In fact, the reverse is taking place - on a modest scale. Petra leased space in the past year for two manufacturing firms that relocated their businesses to New Haven from New Hampshire and Massachusetts.
“Both companies had outgrown their existing buildings and came to New Haven partially because of the competitive rents,” says Petra. “But they also were drawn to New Haven because of the community and cultural benefits of the area.” Petra also is receiving inquiries from biotechnology firms wanting to relocate from California.
In addition to its access to the research at Yale Medical School, biotech firms also are looking at New Haven because of its central location on the Boston-Washington corridor. Cambridge, Mass. remains a mecca for biotech startups and all biotech concerns have to consult with the National Institutes of Health and the FDA regulatory agencies located outside of Washington.
In New Haven, biotech companies also can cement relationships with the young firms incubating at Yale University's Science Park as well as the nearby research operations of pharmaceutical giants Bayer Corp., Bristol-Myers Squibb & Co. and Pfizer Inc.
Accordingly, Petra plans to hold on to a couple of the larger industrial spaces she is renting for a prize tenant that will lease space at, or slightly higher than, the $4-$5-per-square-foot range the market now commands. The tenant may be a biotech company or it may be a software company or small electronics company, but the demand from those types of companies is real.
“Once [these light manufacturers] begin to feel more confident about the economy,” Petra says, “we'll see more movement among tenants and a natural migration to the 15,000- to 20,000-square-foot leases.” When that migration begins to occur, rents and new construction will have to pick up.
Credit - Where
It's Due
Kevin Geenty points out there has been no new construction of light industrial space for six years. Only five or six acres of land is zoned for industrial use in New Haven, and some land is available in Hamden, Branford, Wallingford and North Haven. The Midway Industrial Park in Meriden also has a few industrial lots that can be developed.
But while lenders claim they are making loans, developers counter most of the activity is “recession-proof,” such as the post office and owner-occupied manufacturing building that were funded in Wallingford last year. Neither is the type of development to catalyze expansion by local businesses or relocations by companies in other states. “Banks aren't lending unless there is a tenant for at least 50 percent of the development,” notes Stephen Press of Press Cuozzo Realtors.
More typical is the lending and new construction taking place in the retail sector. Levey Miller Maretz Realtors recently leased Whalley Commons, a 30,000-square-foot retail center to be built at the junction of Routes 63 and 69, for ACL Development of Atlanta. Tenants in the center include Walgreen's, Blockbuster Video and Boston Market - all high-credit tenants which will occupy 80 percent of the available space. Similarly, established retail locations like Connecticut Post Mall, the K mart center in East Haven and the Price Club in North Haven have received capital for expansion. Hence, while lending activity is clearly on the rise, it remains limited to high-credit tenants and locations.
“Banks know they've been burned in the past,” says Geenty. “There's a new breed of executives lending now, and they're determined not to fail in the same way.”
However, avoidance of failure eschews all risk and the only way commercial real estate has ever recovered from previous recessions is through developers and lenders agreeing on some form of a risk-reward equation. In greater New Haven, that equation is still being negotiated.
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