As large projects loom, a mixed bag for office (high) and apartment (low) vacancy rates
In commercial real estate as in other matters, hope springs eternal.
Never more so than this spring, as a protracted winter finally yields to warmer weather, and the economic downturn slowly turns around.
Those in the trenches report heightened activity in the New Haven area. The multifamily market is thriving. Other sectors are lagging, particularly the office market in New Haven, where two major construction projects are starting, and city deputy economic development director Tony Bialecki says, “There’s no shortage of people wanting to construct new or redevelop older buildings.”
Here’s a look at some recent developments.
100 College Street, New Haven
March 22 marked the groundbreaking for preliminary infrastructure work for this ten-story, 435,000-square-foot laboratory and office building developed by Winstanley Enterprises. It is the first phase of the Downtown Crossing/Route 34 East project, which plans to reconnect city streets between downtown and the medical district torn asunder by construction of Route 34 in the 1950s and 1960s and reclaim 10.5 acres from a network of expressway stubs and ramps for health care, residential, retail and other development. Alexion Pharmaceuticals will be the anchor tenant.
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“We are still working and planning for the next phases,” says Kelly Murphy, New Haven’s deputy mayor for economic development. These include reconfiguring Orange Street and Temple Street and the Hill-to-Downtown Planning Initiative, which targets the area between Union Station and Yale-New Haven Hospital.
275 Winchester Avenue, New Haven
The redevelopment of Tract A, the former Winchester Repeating Arms factory, will continue shortly with the construction of 158 upscale apartments.
“We’re going to break ground this spring,” says Abe Naparstek, senior vice president of Forest City Enterprises, which has been working on the project since 2008. The recession intervened, but last summer a $4 million state grant set the wheels in motion.
“It’s going to be a historic preservation rehabilitation with 20 percent affordable housing,” explains David Silverstone, chairman and CEO of Science Park Development Corp. (SPDC).
The first phase of the Tract A revival, a collaboration between Winstanley Enterprises, SPDC, Forest City Enterprises and financial services firm Higher One, was renovating 140,000 square feet of the 600,000 space for Higher One’s headquarters.
Naparstek says Forest’s “loft, luxury-style” studio, one-bedroom and two-bedroom apartments, with open floor plans, granite countertops and stainless steel appliances, should appeal to graduate students, young professionals and empty nesters. The average monthly rental will be around $1,800, and leasing will begin around 60 days before the project is completed in summer 2014.
“New Haven has a very low residential vacancy rate, so we’re very optimistic about these units,” Silverstone says. “As soon as that is closed, we will turn our attention to the rest of tract, which is around 250,000 to 300,000 square feet. That will be commercial or residential — whichever we can attract.”
Adds Naparstek, “We have the opportunity to do another 200 apartments.”
In other downtown news, Montreal-based Live Work Learn Play and Newman Architects, the preferred developers of the 4.6-acre former Veterans Memorial Coliseum site, soon will unveil a mixed-use plan they’re crafting with a strong retail component.
Also, a deal may be in the works for the sale of 205 Church Street, according to city officials, who identify the prospective buyer only as “a major residential developer.”
Cushman & Wakefield executive director Bob Motley describes 2012 as a challenging year for landlords and brokers. “Because you had a very sluggish economy, you weren’t creating jobs,” he explains. “And when you don’t create jobs, you don’t have the need for additional space.
Sectors adding jobs include education, research and medicine, according to Motley, who says employers “are asking more of their workers in law, financial services and other professions.” He predicts gradual improvement in employment during 2013.
What this means for the New Haven office market, however, is not a pretty picture.
“Between direct vacant space and sublet space, there is a Class A vacancy rate of over 25 percent,” Motley says. “We have not seen that since 1992,” when the economy was just emerging from recession. “I don’t see that number dipping below 20 percent before the end of the year.” Per-square-foot rental rates, covering everything, range from $26.50 to $32.
Motley is hopeful large chunks of Class A office space may come off the market eventually. Among them are the former United Illuminating Co. headquarters at 157 Church Street, with around 90,000 square feet of unoccupied space, 555 Long Wharf Drive, with 80,000 square feet lying fallow and 265 Church Street, where Wiggin & Dana is trying to sell the 15th and 16th floors (33,000 square feet combined).
Not surprisingly, these kinds of conditions place “continued pressure on landlords to further come off their asking rents,” accompanied by “pressure by small and mid- to large tenants looking for concessions,” Motley says. “We’re seeing free rent coming back with a vengeance, with six to 12 months [free] on a ten-year lease. You’re seeing landlords throw out money to build out space from $30 to $35 [per square foot] in improvement allowances. In select instances, some landlords are throwing out free parking. It’s going to be a tenant market for next 12-18 months.”
Inquiries about industrial properties are up thus far in 2013, says OR&L Commercial’s Frank Hird, who is pitching several major parcels, including the 165-acre former Pratt & Whitney plant in North Haven, which will be razed to make way for a new industrial park. Hird is optimistic about closing deals in coming months.
“High-bay warehouse is strong,” adds OR&L Managing Director J. Richard Lee. “Low-bay industrial is not so much in demand. We continue to lease space, but not in big chunks yet.”
Another broker, who asked not to be named, paints a bleaker picture of the industrial market.
“It has been really bad for the past year and it’s still slow,” the broker says. “A lot is going on but it’s not new business and it’s not eating up vacant space.”
Though plenty of older buildings are available, they’re a tough sell because they don’t fit current market demands and may not be conveniently located.
“Most of the industrial deals are renewals, renegotiated at lower rates,” the broker says. “There aren’t a lot of tenants moving around, and no landlord in their right mind lets a tenant leave.”
The outlook for 2013 is “extremely positive,” according to Steve Witten, executive director of Institutional Property Advisors, which often arranges sales of multifamily properties. In a recent deal, two Milford portfolios with 335 multifamily units and 476,000 square feet sold for $72.4 million.
“If we look back at the financial crisis, the commercial real estate industry came back before the single-family residential market,” Witten says. “Multifamily was the bright spot favored by investors, with yields superior to any other [property] type on the market. That market has continued to strengthen to some extent, though we’re not back to, or at par to, the height of the market in 2007.”
In 2012, New Haven made national news with the lowest apartment vacancy rate in the nation. “This year it’s still a top performer,” Witten says.
The New Haven apartment vacancy rate currently is two percent, according to the National Association of Realtors’ most recent quarterly Commercial Real Estate Outlook.
Witten says investors these days tend to be large private buyers making purchases with family money or a fund they’ve set up. There also are plenty of smaller investors looking for quality projects. Yields typically are between seven to eight percent cash-on-cash return, a formula used to measure the return on actual cash invested in an income-producing property during the first year of ownership.
“This is unique time in the market,” Witten says. “There is a pent-up demand to purchase properties. There is a reasonable yield. There are dirt-cheap mortgages, reasonable prices and reasonable seller expectations.
“It is a market in balance. It’s not a seller’s market and not a buyer’s market. The stars have aligned for all parties involved and we think that will persevere for another year or so. “
At some point interest rates will rise, Witten adds. In the meantime, multifamily brokers are “the beneficiaries of the need to keep interest rates low to stimulate the economy and to stimulate the residential housing market.”
On the Boston Post Road between West Haven and Milford, vacancy rates “have definitely been declining to under ten percent,” says Mike Richetelli, president of Colonial Properties.
Businesses occupying empty space include Chef’s Equipment, which leased around 14,000 square feet at 449 Boston Post Road in Orange, and Universal Hotel Liquidators, which purchased 8.2 acres with three buildings and more than 70,000 square feet at 855 Boston Post Road in West Haven.
Three major parcels in Milford are ripe for development: the seven-acre former Smiles entertainment complex at 1595 Boston Post Road; 2.5 acres at 1553 Boston Post Road (formerly Milford Automatics), and 1698 Boston Post Road, a 3.81-acre parcel between Costco and Whole Foods Market with a former Mexican restaurant and the Post Motor Inn.
“We working with a couple of developers, seeing interest from a lot of national restaurant chains and talking to a couple of home-furnishings firms,” Richetelli says.
Post Road rental rates took a hit during the recession, with prices for better spaces dropping from $16 to $18 per square foot to $12 to $14.
Richetelli cites strong inquiries over the last several months and higher than usual activity “for this time of year.
“People looking to relocate or open a new business are calling on our listings, which is very promising,” he says. “I would anticipate activity is going to continue to increase, and with warmer weather coming it’s going to even get better.”
Lou Proto of the Proto Group also is getting “a lot of inquiries on a lot of properties.
“But the reaction time for people to pull the trigger is longer than usual,” adds Proto, who works with national retail chains. “The phone rings. We show a lot of stuff that doesn’t necessarily come to a deal.
Overall, Proto sees a stable market with consistent pricing.
“Last year we had a good year, and that’s what we’re anticipating for 2013,” he says. “But going into the future, we hope it gets better.”
Branford is seeing the most activity because it has the largest concentration of flex space and office buildings and is the last town with sewer for biotech, according to Kristin Geenty, president and CEO of the Geenty Group, Realtors. Overall vacancies are up over 2012, “probably 12 percent across the board,” she says.
So far, 2013 has been more active than 2012,” Geenty says, “with people willing to make moves that they were holding off last year.
“Businesses are contracting, they’re moving, we don’t have a big influx of new businesses starting and we don’t have a lot of people from out of state banging on the doors to come into New Haven County,” Geenty adds. “Most of the transactions are moving from downtown New Haven to Branford [e.g., as Celldex Therapeutics did in February], and local shoreline businesses are growing within the towns they’re in.”
Investors, though not institutional investors, are out looking, and available properties are in short supply. “We’re not seeing spec[ulative building],” Geenty says.
What she is seeing is more interest — and deals — in flex space.
“There are some Class A office buildings, but people are looking equally at flex buildings,” Geenty says. “If they can go in to an office building at $14 to $16 [per square foot], they probably can go into a flex at $10 to $12. Once you’re inside you really can’t tell the difference. They give up the formality [of things like curb appeal and common lobbies]. But when you’re talking about call centers and biotech, they’re more interested in efficiencies than ambience.”
Also along the shoreline, a two-story, 20,000-square-foot office/medical addition to 385 Church Street in Guilford should break ground this summer, says Rich Lee of OR&L, which is marketing the space.