The outlook for the commercial real estate market in 2016 is considered to be very good with a few minor areas of concern. Overall growth has been particularly strong over the past year. According to Real Capital Analytics there was a total of $533 billion in commercial real estate sales in 2015 representing a 23% gain over 2014. Last year also saw the second highest level of investment ever, trailing only 2007. Plus, the Moody’s/RCA Commercial Property Price Indices are predicting price increases of 12% this year over 2015. Nationally, steadily growing demand and declining vacancy rates are seen as signs that this upward trend will persist.
This should be good news for Connecticut. According to the real estate services firm JLL, Connecticut is a more business-friendly state, when it comes to taxes, than New York or New Jersey, although they remain unfavorably high compared to other regions. The state is busy addressing its tax issues, though, and Connecticut’s affluent consumer base, with household incomes among the highest in the nation, its highly educated workforce, stellar location and broad cultural amenities have historically served to offset these negatives and most observers expect they will continue to do so. After a sluggish recovery in the past few years, the state is starting to see real growth again with many businesses expected to expand their footprint. In a survey by the Connecticut Economic Resource Center this year, 50% of the respondents reported increased real estate inquiries.
There remains anxiety in some quarters, though, that all is not so rosy. Memories of the collapse in 2008 are still fresh. But optimists are quick to point out that that bubble was driven by residential, not commercial, real estate. Ongoing anticipation of potentially rising interest rates and uncertainty in Asian financial markets also contribute to some of this unease, along with the steady decline in energy-related earnings over the long term. On another front, historic shifts in the retail industry, which is facing increasing competition from online shopping ventures, and the spillover into the real estate market that has accompanied those difficulties are not lifting morale much in that sector either. Retail properties have seen their loan-to-value ratios soften nationally over the past several months, although Connecticut has seen a recent uptick in retail real estate activity.
Two commercial real estate sectors seeing reliable growth are the multi-unit apartment rental market, driven by the rise of millennials setting up their own homes, and downtown office rentals, likewise linked to the millennial preference for urban areas. The Hartford Business Journal has predicted that this urban growth trend will be very much part of the future in Connecticut. By way of contrast, growth in suburban commercial space is not as robust, but is seen as slow and steady. An interesting new sector that is emerging across the country and bears watching is the development of cooperative work and office spaces which cater to the needs of small companies and individuals for low-overhead, flexible solutions to their real estate needs, and these are expected to expand greatly with the ongoing growth of the start-up and gig economies.
Given the continued stable growth of commercial real estate in general, though, the mood can be described as one of guarded optimism among investors, but as any good investor knows, history tells us that all optimism needs to be guarded. Plus, the standard advantages of commercial real estate over other investments will always remain, including steady cash flow and a its long history of asset appreciation, along with the relative ease with which real estate investors today can adjust to inflation or other negative market effects through indexed leases. These long-term realities are not going to disappear in Connecticut or anywhere else.
Senior Vice President
Chief Lending Officer