The Mill River Apartments property at 277 Chapel St. in New Haven, a historic mill structure built in 1917, now consists of 45 residential units.

What at first glance looked like a lackluster 2003 turned out to be a year full of activity, as adaptive reuse projects ruled the apartment market, new firms brought industry to the state and downtowns started to grow once again.

Jeffrey Livingston, managing director of CB Richard Ellis’ Connecticut operations in Hartford, said it was a slow but steady year for the commercial and industrial market.

“I would say that the market was better than anticipated at the end of 2003,” said Livingston. “There were some very large leases in downtown Hartford, not the least of which was Shipman and Goodman, [which] leased 100,000 square feet at Constitution Plaza.”

Livingston also cited a pending deal with the University of Connecticut to move its M.B.A. program into Hartford’s downtown, as well as ConnectiCare’s relocation from Farmington into 50,000 square feet at 100 Constitution Plaza in Hartford, as significant leases in 2003.

“Those are some of the bigger deals that punctuated the fourth quarter,” he said. “In general, if you look at 2003, there was a lot of repositioning of existing tenants, but I wouldn’t call it a flight to quality.”

He also noted that the commercial market enjoyed a good year, given the normal expectations of a recovering economy and the traditional lag of the real estate market.

Typically, real estate lags about six months behind the rest of the economy, and it’s the first-tier markets that see life first; a second-tier market such as Connecticut is even further behind. Therefore, some insiders believe that for the state to have seen so much activity in 2003 is a positive sign, and they predict an even better, more stable market for 2004.

The industrial market outside Hartford saw a fair amount of activity, with significant building projects as well. Ford Motor Co. erected a large distribution center in Windsor Lockes, and HomeGoods constructed a 500,000-square-foot, build-to-suit facility in Windsor.

Also, a new 160,725-square-foot facility at Great Pond Drive in Windsor will now house company operations, client services, a call center, engineering, state-of-the-art production and a new research and development area for ADVO, a direct marketing firm. Ground was broken in October with completion scheduled for this spring. The facility will house approximately 225 employees and is located on a 29-acre parcel.

Bristol Industrial Association, purchased the Bristol Business Center located at 780 James P. Casey Road in Bristol for $23.5 million from SF Bristol LLC. An investor group that rehabbed the facility and brought it back to market as a multi-tenant facility purchased the former General Motors facility several years ago; about 300,000 square feet of space in the 735,000-square-foot building has been leased.

“If you look at these deals, like at the Ford operation, that is new growth to this market. That facility and tenant are brand new. A huge company is locating a distribution center where they didn’t have a presence before,” said Livingston. “ADVO already [has] facilities near Hartford and an office in Windsor, so [it’s] starting a campus construction.”

Livingston said that despite predictions to the contrary, 2003 has “quietly been a pretty exciting year.”

‘Looking Positive’

The year also saw the renaissance of major downtowns, with Hartford finally seeing some new residential facilities, New Haven seeing a boom in retail and restaurants, and Waterbury bringing everything from movie theaters to inns to offices into its downtown.

“One of Hartford’s greatest challenges has been a lack of residential housing for people who work there – the middle- to upper-income people and recent college graduates,” said Livingston. “Hartford, purely by design, forces new hires and people to live in the suburbs. But now we have several projects kicking off, not the least of which is the former [Southern New England Telephone] building at 55 Trumbull St. Couple that with the visibility of the convention center under construction and it almost appears as if there are signs of life. For someone in my position, things are looking positive. I think 2004 will be a great year for Hartford.”

Keith Kumnick, managing principal of Colliers Dow Condon in Hartford, wasn’t as quick to call 2003 an exciting year, but noted there were many positive signs in the market.

“I guess the year started off very slowly,” said Kumnick. “Leasing activity was very flat, but we really felt a pickup in activity here in the fourth quarter, which dovetails in with the economy in general. Assuming there are no unexpected shocks, we expect 2004 and 2005 to be much better.”

Kumnick added, however, that Colliers was involved in some of the most significant transactions in its history this year. There was a major sale of the General Motors Corp. facility in Bristol, as well as the ADVO lease.

On the office end of things, it was mainly a story of existing tenants swapping spaces. Renewals or space swapping were the norm in 2003, as evidenced by the reported largest office lease transactions of 2003. Greater Hartford County saw the continued commitment by such prominent companies as Aeltus ING, Travelers Life & Annuity, Shipman & Goodwin, Insurity and Reid & Reige.

“On first glance, everybody looks back at the year and sees it as a negative, but I think it was a good year. There wasn’t a lot of velocity, but it was still a good year. The business economy is cyclical, and we’re heading into the upside of the trough,” said Kumnick.

In fact, things went so well for Colliers Dow Condon that the company opened up a New Haven office in November.

“Interest rates are still at an all-time low, which is great for investors and for companies looking to expand. I think that a lot of the economic incentives like tax cuts and rate cuts are timed to be felt going forward between now and the next [presidential] election, so next year we’ll really start to feel those things,” said Kumnick. “If you ask us to back up our perception that 2004 will be a great year, we can only point to the risk we took in opening up our New Haven office.”

“On average, recently reported corporate earnings are healthier than they were a year ago; the Dow is regularly flirting with the 10,000 level, while Nasdaq should push through 2000 shortly. That’s good news,” said Jim Stanulis, broker with Colliers. “[A recent] Consumer Confidence Survey reported current business conditions improved significantly in November 2003 and is now at its highest level since the fall of 2002. A sustained period of growth is not yet measurable but has to start somewhere; let’s pretend we are at that embarking spot.”

Stanulis reported that while there is still significant vacancy in Greater Hartford County – roughly 20 percent – Manpower Inc. recently reported more U.S. employers are expecting to increase hiring efforts in the first quarter of 2004 than those reducing jobs.

“This is the first time in five years that hiring expectations rose between quarter-four and quarter-one reporting periods,” he said. “No one is arguing against the office markets remaining soft for the immediate future. However, we do see the levels of sublease space easing. Rents will probably continue downward another 2 to 5 percent for the next several months until they level off at the end of 2004.”

Victor Nolletti, director of the National Multifamily Housing Group at Marcus & Millichap in New Haven, said Connecticut’s apartment market had a very active year.

“There was not an overly abundant product supply, but what was on line traded at aggressive capitalization rates,” he said. “Due to a lack of investment alternatives, multifamily proved to be a stable long-term investment vehicle, and I see that trend continuing.”

In 2004, Nolletti predicted, there will be an aggressive product flow and more product coming on the market. Without any significant yield options on the horizon, he said, apartments will remain a solid investment for private and institutional investors.

Occupancy of apartments appears to be stabilizing. Nolletti reports a cyclical blip for 2003 where already high occupancy rates dropped slightly.

“The rates were so strong in 2001 and 2002, running as high as 97 and 98 percent in some areas. So if you have a blip, it means they’re dropping down to 93 or 94 percent, which are still solid occupancy levels,” he said. “I think as those numbers firm up, we’ll see moderate rent increases because there are still assets out there under-priced or under-rented.”

New multifamily units in Connecticut are still hindered by barriers to construction, causing developers to wait anywhere from two to five years to get a building approved. That led to a trend in 2003 of adaptive reuse, which became very popular in urban areas.

New Haven, in particular, saw a large share of adaptive reuse projects, with former office buildings transformed into luxury apartment complexes. Approximately 400 new units have come on line in that city alone in the last few years.

“New Haven saw a lot of adaptive reuse – it’s just all over the place,” said Nolletti. “Where rents support it, it’s a great alternative and also I think it’s somewhat less arduous for developers. They get local support to take a functionally obsolete property and make it a functionally usable residence.”

Back in February, College Street LLC purchased the former SNET building at 55 Trumbull St. in Hartford for $3.4 million. The building consists of 194,000 square feet on 1.2 acres located in downtown Hartford. The new owners have converted the building into apartments called 55 On the Park in an effort to bring more residential space to downtown.

The Mill River Apartments building in New Haven, which has 45 residential units, was sold last year for $2.55 million. The property was an obsolete mill building located on 0.84 acres at 277 Chapel St., near the Wooster Square District and a short distance from Yale University. Originally constructed in 1917 and converted into residential condominiums in 1988, it was subsequently undeclared and renovated in 2002.

For 2004, Nolletti sees a fairly consistent, stable market, and more of the same positive trends continuing throughout the New Year.

“My gut feeling is that rates may tick up a little, but I don’t see any reason for significant movement either way. The economy is recovering, which is good news for everyone, and you still have very stable investment vehicle in multifamily,” he said.