The First Union Bank Building at 205 Church St. in New Haven is renovating its Class B offices in response to demand for more Class A space.

While other cities and markets suffered in 2002, New Haven County’s commercial market appears to be in the middle of a growth spurt, according to industry analysts.

A few significant purchases, outside of the usual efforts from Yale University and its supporting agencies, helped keep the market strong last year. Those included Ikea’s purchase of the long-vacant 500 Sargent Drive property, which raised leasing in the New Haven Central Business District 112 percent from last December to 509,910 square feet.

Countywide, leasing rose 32 percent during 2002 to 851,310 square feet, according to Insignia/ESG, a commercial real estate service provider with a New Haven office.

“We’re not a big market but certainly an active little market,” said Rich Guralnick, managing director of Insignia/ESG’s New Haven office. “We’re just extremely affordable, as opposed to [markets] just 20 minutes down the road in Fairfield County.”

Frank Micali, vice president of C.A. White, a commercial real estate firm based in New Haven, said, “I think the New Haven office market has weathered the economic downturn very well and was able to edge out the neighboring markets. Fortunately, we didn’t have a lot of dot-com space come back on the market, and the apartment market is so strong now it’s unbelievable.”

“[The] New Haven market is not a vertical market, but it has a lot of different segments to it,” said Guralnick. “When the economy crashed because of financial services and techs, New Haven was fairly balanced and wasn’t as affected.”

In the New Haven business district, which includes the central business district (CBD) and non-CBD, has 35 Class A and B office buildings with a total of 4.2 million square feet of space.

“I think majority of our growth has to do with Yale University having a steady and more responsible impact,” said Micali. “There are a lot of biotech companies spinning out of Yale.”

Yale University, with upward of 10,000 students, also has a major impact on the retail and housing sectors of the city and county.

Both Micali and Guralnick said that New Haven was fortunate to have a diverse market and a minimal number of dot-com businesses that were typically the hardest hit in the last few years.

“We’re kind of an interesting little city, mainly because of Yale and the biotech industry,” said Micali. He noted that Pfizer Inc. has made a commitment to build a 60,000-square-foot pharmaceutical center.

Lyme Properties, a Cambridge, Mass.-based biotech real estate developer, has been hired by the board of directors of Science Park Development Corp. to rehab the facility. Building #25 will have its 250,000 square feet of space gutted to make smaller spaces inside.

Micali reports that the Science Park projects will include the construction of new facilities over the next 10 to 15 years totaling more than 1 million square feet.

“Our bio-med and biotech markets are fledgling compared to Boston, but are definitely on the rise,” said Guralnick. “A lot of different pockets of real estate are all percolating right now and firing on all cylinders.”

In the office market, a level of equilibrium has existed in Class A and Class B office space for the last few years. Of the approximately 12 commercial buildings along Church Street and Whitney Avenue, all are in single-digit vacancies. In older buildings, landlords are renovating to recapture shares of the market because there is limited space out there.

In older buildings, such as the First Union Bank Building at 205 Church Street, landlords are renovating their Class B space to recapture shares of the market because there is such limited space.

“Landlords in B spaces have been very proactive,” said Guralnick.

Creating Space

In other sections of the CBD, developers have been working to create new space. A building at 700 State St., just outside of the CBD, was built and is already 90 percent occupied. In the same area, a building at One Audubon St. is being constructed. At 55,000 square feet, the six-story building is being constructed on speculation, but Guralnick believes that as the economy picks up the space should be filled by the end of 2003.

“It truly is waiting to be occupied,” he said.

Also contributing to the low vacancy rates is the fact that several buildings have been taken off the market. In most cases, former industrial buildings have been converted to luxury apartments.

The former Strouse, Adler Smoothie factory near Wooster Square was purchased last year by College St. LLC and converted to 180,000 square feet of luxury apartments.

“Before they opened the door every apartment was rented out,” said Guralnick.

Another group of investors purchased 205 Church St., which was the former Southern New England Telephone building. The multi-story structure with 140,000 square feet is also being taken off the office market and converted to apartment space.

Downtown New Haven was also greatly affected by Ikea’s purchase of the Pirelli building at 500 Sargent Drive. The site originally was proposed as the Long Wharf Galleria, but plans for the mall were blocked and Ikea, the Swedish furniture company, decided to move in.

The Pirelli building has 180,000 square feet of office space that is temporarily off the market after Ikea closed the deal in December of 2002.

“At this point, Ikea is going to build a 300,000-square-foot building on that site,” said Guralnick. “They target young professionals, college kids, and Fairfield County. That project is sailing along and is going to boost retail in downtown.”

Also in downtown, Williams Jackson Ewing of Baltimore, who handled the renovations of Baltimore’s inner-harbor retail center as well as Grand Central Station in New York City, bought 900 Chapel St. and the Chapel Square Mall.

Formerly an indoor mall, Chapel Square will be renovated into an outside mall. On top of that, 900 Chapel St. has 180,000 square feet of space facing the Yale green. Five floors of the building will be converted to apartment space while the rest will be left for offices.

In suburban, non-CBD areas, there has been a lot of giveback of space for sublease. Sublease space either has expired and come on as direct space, or leased out at low rates.

“There has been a good decline in sublease space in non-CBD. There is still a lot of space out there and a lot of opportunity,” said Guralnick. He noted that investors have come in and purchased a couple of large blocks in order to break them down into smaller chunks of space.

“These opportunistic investors are subdividing units to meet the market demand for smaller spaces,” he said.

Both Micali and Guralnick see the market continuing to thrive in 2003, but both remarked that the latter half of the year will see the most activity. With buildings still under construction, including an 800-car parking garage in downtown New Haven, it is too early to tell what the absorption and vacancy rates will be this year.