Commercial real estate industry veterans are predicting major renovations of some of Connecticut’s older office buildings in 2007. High Ridge Office Park in Stamford (above) already has seen some work.
More companies building to suit in central Connecticut and sweeping renovations of older office buildings are some of the trends that will mark 2007’s office market, according to brokers.
Although the conditions in the residential real estate market remain uncertain this year, commercial real estate has found success recently as vacancy rates in many areas dropped and the market tightened up. That will continue in Fairfield County this year, according to Jim Fagan of Cushman & Wakefield in Stamford.
“We think the market’s going to continue to absorb space as the employment market remains robust,” he said.
In Fairfield County, and in Westchester County, N.Y., there is a great deal of office space that was built before 1990, Fagan said. And with tenants putting more emphasis on quality real estate, renovations abound.
“People are trying to upgrade their buildings,” Fagan said. “Tenants are becoming more discerning and starting to use real estate as a tool to attract and retain employees and enhance their corporate culture.”
High Ridge Office Park in Stamford is undergoing a renovation, and has already attracted U.S. Tobacco, which signed a lease for 140,000 square feet there and plans to move its headquarters there from Greenwich. Renovations at 1600 Summer St. in Stamford have attracted companies like insurance company Aon and electronics firm Philips.
That trend is continuing as buildings in Norwalk, One Main Place and other structures in Stamford, and buildings in the rest of Fairfield and Westchester counties undergo renovations.
Fagan said he also expects Stamford, which has experienced ups and downs in its office market for the past several years, to do very well in 2007.
“I think rental rates are going to increase by more than 10 percent,” he said.
Every time the market gets tighter, small changes in vacancy rates mean big changes in potential tenants’ options. If the vacancy rate goes from 12 percent to 10 percent, which seems like a small change, that actually means there is 18 percent less square footage on the market.
“That makes a big change,” Fagan noted.
When landlords know their building is the only one that can accommodate a potential tenant, “they have a free hand with the rent,” he said.
In central Connecticut, there is not a lot of existing space that can accommodate tenants on the lookout.
“The trend is more build-to-suits,” said Nick Morizio of Colliers Dow & Condon in Hartford.
But Morizio added that he expects the commercial real estate market to stay healthy this year.
“The economy is still going with us for 2007,” he said, noting that warehousing, not manufacturing, is the trend in Connecticut lately, in terms of industrial real estate.
Nationally, circumstances surrounding new parameters issued in December in the guidance of commercial real estate loans are concerning some in the industry. The National Association of Realtors last month described the guidance – which is designed to help prevent imprudent commercial real estate lending – as overly prescriptive and said it could cause many banks, particularly smaller regional banks, to be dissuaded from making sound commercial real estate lending decisions.
“NAR recognizes the important role bank regulators play in protecting the soundness of the nation’s economy,” NAR President Pat Vredevoogd Combs said in a prepared statement. “However, we are concerned that today’s actions may be more harmful to the commercial real estate industry than helpful. The commercial real estate industry remains strong and vital,” said Combs.
According to NAR, a record transaction volume of $213.3 billion in commercial real estate occurred on property valued at $5 million or more from January to October in 2006. Vacancy rates across the country remained lower than in previous years, and were still dropping in some cases, and investors continued to invest in the commercial real estate market.
In its Commercial Real Estate Outlook, which was released late last year, NAR said that transaction volume for office buildings was up by 31 percent over the year before, partly due to improved fundamentals.
“It is not unrealistic to suppose that the national office vacancy will be approaching 12 percent by the end of 2007,” according to the outlook. “These are vacancy numbers not seen since 2001. Long-term forecasts call for further gradual declines in the office vacancy rate.”
The national industrial market is still being affected by trade with China, which is increasing the demand for industrial and warehouse space on both coasts, according to NAR.
“The demand for new industrial space will continue in traditional ports and in and around inland ports or distribution hubs,” states the association’s outlook. “The need for industrial space suited for the most current logistical methods for moving goods will continue. The vacancy rate for industrial properties will continue to fall, possibly below 9 percent over the long term. Some would argue that the industrial vacancy rate is actually now below 9 percent after factoring out obsolete industrial real estate destined for other uses.”
