New Haven County Market Update

As Connecticut continues its participation in the national economic recovery there is clear and consistent evidence (nationally 144,000 new jobs in August/unemployment figures at 3 year lows of 5.4%) that renewed growth and business expansion, carefully kept in check by the Feds, is underway.

Office/Industrial Markets – Trends and Numbers

Office Market Trends – Vacancy rates for Class A & B space (both direct and sublet) peaked at 17.8% in the 4th qtr. of 2003 having risen from 3 year lows of 14.5% at the beginning of 2002 – up 23%. Since that peak the market has experienced negligible positive net absorption with vacancy rates through the first 8 months of 2004 now at 16.2% or 2,100,000 SF of available space throughout New Haven County.

Rent Rates (Gross $/SF) during the current 3 year cycle peaked for Class A & B space on average at $22.48/SF in the 2nd qtr. of 2002 and tumbled to a low of $21.02/SF during the last qtr of 2003 as vacancies hit their peak of 17.8%. Through August of this year there has been some tightening of the office market as corporations anticipate an economic recovery. Subsequently we have seen rates climb almost 5% ($1.00/SF) during the first 8 months of 2004 to $22.03/SF gross. Since leasing activity has however historically come “from within” and not from outside the County there is no anticipation that any significant drop in vacancies or rise in prices will occur through 2005.

Industrial/Flex Markets – Vacancy rates (Class A & B) continues its lackluster trend though there are some hints that the bottom has been reached as investors have started bidding on and purchasing product. With vacancies peaking at 20.6% (872,500 SF) at the start of this year this market as a whole has since experienced a modest vacancy rate drop to 19% (805,000 SF). Two important factors that will impact the near-term must be noted: a) over half (54% or 429,657 SF) of all availabilities in the county is concentrated in spaces larger than 50,000 SF and b) YTD figures shows 68,075 SF leased and overall absorption of vacant space posting a meager positive net of 22,800 SF.

However, when the 68,075 SF is juxtaposed against only 375,313 SF available in spaces smaller than 50,000 SF we see that leasing activity is occurring at a modest pace in over 18% of these properties. Combined with the fact that the average size space leased in 2004 was 6,500 SF the near-term forecast is not as bleak for owners of half the availabilities in the County and further suggests that investments in properties that can support small-mid size users will fare better than those that cannot.

Rent rates (Gross $/SF) – the overall trend across the market has been downward since reaching a high of $8.34/SF during the 2nd qtr. of 2002 bottoming out at $6.37/SF mid-way through the current 3 year cycle and hovering around $6.50/SF ever since with the first modest gains (6%) only being posted this quarter pushing rates above $7.00/SF for the first time in almost two years.

As corporate streamlining, mergers and acquisitions and closures reach the end of this current cycle this market segment should stabilize with overall availabilities declining and a modest upward trend in rates being posted.

New Haven CBD – While even modest leasing in the office and industrial markets eludes the city of New Haven (much like the rest of the county) the city’s Central Business District, supported in large measure by the city’s stable base of college students and highly paid professionals in the medical, pharmaceutical and educational sectors, continues to experience robust re-development and the adaptive reuse of scores of properties that up until 3 years ago had been dormant. The apartment, retail and restaurant sectors continue at a very steady pace and New Haven has indeed been “discovered” - as outside investment and development groups consider properties a bargain in this city when compared to other regional opportunities. Of particular note, besides the high profile projects like the opening of Ikea’s 300,000+ SF facility on Sargent Drive, and the highly publicized, hyped and delayed conversion of the Chapel Square Mall, significant transactions and new projects broke ground this past year.

The success of the Smoothie building’s conversion in 2001/2002 to apartments initiated the current wave of residential conversions across the CBD including the “adaptive re-uses” of 227 Church Street (SNET’s former headquarters – 140 units), 900 Chapel Street where several mid-level floors of this office tower have been converted to apartments, the Cutler Building (84 units) at the corner of Church and Chapel and the transformation of 80 Temple Street (former United Illuminating headquarters) by Bow-Tie Partners of New York. This latter ambitious project will not only house market and upscale apartments (44 units) on its upper floors, but also have ground floor retail space for an upscale restaurant and lounge and perhaps most notably will house a new 5 screen multi-plex theater.

The delay of the Chapel Square Mall conversion and the lack of “reasonably” priced product are the only negatives slowing the pace of New Haven’s CBD revival. As the economy gains momentum and major national retailers again embark on expansions, the development of this major downtown piece of real estate should trigger other local projects and cap off what has been a remarkable turnaround for this City.

East Shore Development from New Haven through Madison must be addressed. Though historically the smallest commercial sector in the county this market has experienced a flurry of activity as developers have responded to market demand.

Medical activity has been hot with Yale New Haven Hospital (YNHH) leading the way with the opening of its 80,000 SF facility in Guilford. Developers and institutional players have followed suit with St. Raphael’s consolidating and expanding operations (10,500 SF) within a new 24,000 SF facility in Branford and Middlesex Hospital doing like-wise (3,000 SF) in Guilford. In addition, entrepreneurs recognizing opportunities in the retail and medical sectors have broken ground on several new projects. Stony Creek Medical Center in Branford, a joint effort of partners Alex Klutch and Dr. Carmen Balzano, is scheduled to open early in 2005. With steel barely in the ground the demand from local/regional physicians groups has been robust with 25,000 of the 30,000 SF already spoken for. Guilford likewise has experienced unprecedented demand for medical space as groups scramble to locate near the YNHH hub.

Retail and Office activity has also been steady as developers like Madison’s Dowler Group, LLC, in anticipation of the need to meet pent up demand, began land banking and construction several years back on multiple new and “adaptive–reuse” projects in Town. Their recent successes at - The Crossings (10,000 SF retail), Scranton & Bushnell Houses (10,000 SF), Parkview of Madison (32,000 SF office) and Marketplace of Madison Phase I (20,000 SF retail/office) - have lead to new proposals to construct an additional 22,400 SF of retail in the Hammonasset District (Marketplace Phase II). With projected upward population trends continuing along the East Shore commercial development should remain steady in this market with the area’s conservative town leadership keeping the pace and size of these projects in check.

H. Pearce Commercial Real Estate specializes in Connecticut’s central, south-central, and Shoreline markets, with offices in North Haven and Rocky Hill. Commercial property offerings can be found in color on the web at www.HPearceCommercial.com.