|
|
|
Weathering Tough Times
New Haven's commercial real-estate market banks on diversity to weather tough times
|
Business New Haven
9/16/2002
By: Melissa Nicefaro
|
T hree different views on commercial real estate in New Haven and throughout the region.
Bob Motley, Cushman & Wakefield
How healthy is New Haven's commercial real estate market right now?
An office leasing market is considered in equilibrium
when you have a 12-percent vacancy factor. That number
can fall and rise. It's like the job market, where you are always going to have a certain percentage of people looking for jobs. That number is typically four percent for the employment market, and it's similar to what a 12-percent vacancy factor is in office leasing. Taking the quarterly numbers and tallying those up at the end of the year is like taking the pulse of the real-estate health for the year.
New Haven is a smaller market that's half the size of Hartford and Stamford. That also works to your advantage because a smaller market can recover faster in good times. That's what has happened in New Haven.
Can you quantify that?
The New Haven office marketplace consists of about 10,442,000 square feet of Class A and B office space. There are about 175 buildings in the county. At the end of the second quarter of this year, the direct vacancy rate was 20.6 percent, and the overall vacancy rate was 22.8 percent. The difference between the two is sublet space in the overall vacancy rate, where tenants are subletting space. Last year the overall vacancy rate was 14 percent. The difference is due by and large to technology companies: software, software development, software support, fiber optics or telecommunications. That's why you have an eight-point increase.
As the national economy has gone, the local New Haven economy has gone, too. That's the bad news. The good news is that we were not a technology-dependent local economy. We're reasonably diverse. If you look at our employment base, we've got the education, hospitals and biotechnology sectors. Education and hospitals have been fairly consistent. They don't have big spikes and drops in their employment.
I'm involved in the marketing of Science Park. Biotechnology is adding new jobs to the marketplace. Not at a torrid pace, but it's a slow, gradual process. As these companies move into the area or they're launched out of Yale, there are executive, mid-level and technical jobs. All three of those sectors pay reasonably good money. Unlike Stamford, Fairfield County and to a lesser degree Hartford, New Haven did not have a big run-up on technology companies and dot.coms and therefore didn't consequently have a big fall. Because it's a relatively small marketplace with only 10.4 million square feet, you can see fairly dramatic swings in vacancy rates - not so much quarter-to- quarter, but over a six- or nine-month period.
How have the areas surrounding New Haven held up?
A lot of technology companies came out of Fairfield County. The second quarter of 2002 overall vacancy is 28.9 [in Fairfield County], compared to this time last year when it was 24 percent. So those markets have not recovered yet. I'm talking about buildings in Milford: Corporate Campus I and Corporate Campus II, where there are six or seven office buildings in a park. It's Class A property and they're good buildings, but that market has not rebounded as quickly.
In the early 1990s, when IBM had a significant presence in Milford, those markets were healthy. Again in 1996-98, those markets were very healthy due to technology and software companies absorbing space, so the vacancies were well under 20 percent. But with the turmoil in communications, those vacancies have ratcheted back up.
How is the market between New Haven and Hartford?
Another interesting market is the northern market, the I-91 corridor between Hartford and New Haven. That market has historically done well because it's only about [a] 35-minute [drive] from Hartford to New Haven. It's a great location if you're a marketing or sales organization and you want to get to clients in both of those markets, but not have to deal with parking hassles or costs associated with parking. Wallingford, Hamden, Cheshire and Meriden are markets that benefited from those things.
By the end of this year you'll see the direct and overall vacancy rates in the northern market go below five percent. There probably will be no new development. It's not because banks aren't lending and developers don't want to build, but you have to have three or four consistent quarters of declining vacancy rates for any developer to want to start to build.
Developers bought land in the 1980s and sat on it. The land cost them next to nothing. They built and didn't look at the demand side of the business, which is tenants looking for new space. The tenant demand dried up because of the softening economy. This time around we have not had that. We've had very little new development of office buildings anywhere in New Haven County in the past five years.
How big a role do bioscience companies play in the New Haven commercial market today?
On a year-to-year basis, the market is absorbing between 150,000 and 160,000 square feet of lab/office space. That's for life sciences companies, not pharmaceutical companies like Bristol-Myers or Bayer. It can go higher or lower, depending on what's happening with the venture-capital companies. VCs are pulling back a little bit, so I'm guessing we won't see that 150,000-square-foot absorption rate for 2002. It's not expected that these biotech companies are going to make money for ten or 15 years, so they are affected by the year-to-year cyclical market volatility, but they're not as susceptible to the whims of the market, [as] the telecommunications industry is.
Science Park is a project that will have one million square feet of office and lab space. Phase I, which is underway, is a $20 million-plus renovation to the base building. The project could go on for a number of years. The renovation has commenced and we are actively seeking new tenants for the space. We'll be announcing within 60 days our first couple of deals. We are close on several deals.
For a small town, New Haven has a lot going for it. It's a pedestrian city - a lot of people walk around. There are some deals being made now that - come this time next year, if the economy doesn't just tank - New Haven will be in a very strong position with low vacancy rates and a healthy local economy.
Tim Fegan, CB Richard Ellis
You say the vacancy rate for office space in the city of New Haven is 16 percent. Is that a healthy number?
If you're a tenant looking for space, there should be enough space out there to find something you like. As an owner or someone looking to develop office space, that vacancy rate is probably a little high. If we had a company we were going to run and we said, 'Let's go find a city to find office space in,' and we looked at New Haven with a 16-percent vacancy rate, we'd think that's a pretty good spot - although we would question why the vacancy rate is 16 percent. We'd look at how the economy is in the region. On the other hand, if we were developers and were going to put up an office building, we would say the rate is high and it's not a place we'd like to construct.
New Haven's vacancy rate is a little lower than some other areas on your survey. The vacancy rate for the western suburbs [Milford, Orange, West Haven and Woodbridge] was 19.7 percent in the second quarter of 2002. The northern suburbs are at 17.2 percent. Is something different happening in the suburbs compared to the center city?
No, it's just a snapshot of a particular time. Next quarter or six months from now, that can change, so we don't want to draw a conclusion that something is not working or working. If one large [company] vacates space in Milford, Orange or West Haven, there will be a spike in the vacancy rate.
Did the bumpy economy of the past year have an impact on the real estate scene in New Haven?
No, New Haven has done well in spite of a sluggish economy.
Peter Shiue, Insignia ESG
Was the year since September 11, 2001 a tough year for the real estate market?
There was quite a lot of uneasiness among businesses. A lot of them didn't want to commit to long-term leases while they weren't sure how businesses were going to do. [But] it's my view that things were pretty consistent. We didn't see any major increase in activity - but we didn't see a huge decrease in activity, either.
There wasn't a lot put onto the market during the first half of this year and that's a good thing. I have noticed that in the past month to month and a half, activity has started picking up again and there are interesting things happening in the market.
There's the office building going up at One Audubon [Street in New Haven]; it's a 65,000-square-foot new Class A office building [developed by former Starter Corp. CEO David Beckerman] at the corner of State and Audubon. It's the first speculative building - meaning they don't have any prospective tenants yet - in New Haven in more than a decade.
At 227 Church Street, the former SNET [headquarters], they have been going back and forth between [plans for] high-end residential and office. They are going to proceed with apartment plans. And then at 900 Chapel, they're redoing the retail part of the building and in the office tower, they will be converting office space into high-end residential also. High-end residential definitely has an audience here in New Haven.
That seems to be a growing trend of owners rehabbing old properties and some transforming office space into residential space.
Last year, over at 55 Church Street, they did at least a couple of million dollars worth of improvements, and at 205 Church Street they've begun renovations as well. These are mostly renovations in terms of bringing buildings up to speed again to make them more competitive in the marketplace. And of course the mid-block garage behind 205 Church Street they've been talking about for years and years. That will add about 800 parking spaces to the area. Completion is expected within 18 months at the latest. It will be interesting to see what they do with the [Veterans Memorial] Coliseum site and whether IKEA will go into the Pirelli building [on Sargent Drive]
What would you like to see on the Coliseum site?
I've read about various ideas, and obviously whatever it is should attract people from throughout the region into the city. It's really important that it's not just another building like the Coliseum, where you get a lot of people in for one event, then they leave immediately afterward. It should be something that will keep drawing people in and integrate more people into that part of the city. Especially with the redevelopment of 900 Chapel and Ninth Square, it seems like that section of the city has momentum for renewal.
Looking at your survey, it looks like New Haven fared better than some other areas - locally and nationally - during the first half of 2002. Why?
Down in Fairfield County, a lot of the office space is occupied by financial-services companies. When American Express took a few hundred thousand square feet after September 11 and then gave back their space and moved back to New York City, all of that space was put back on the market. There is definitely a focus on financial services down there.
Here in New Haven, the local economy is a bit more diverse. You do have financial services, attorneys, high tech, biotech, telecommunications companies. In a city like New Haven, if one sector gets hit hard, you don't see the office market take a tumble.
|
Go FirstGo PreviousGo
NextGo LastGo
to Index
|
|
