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HARTFORDBUSINESS.COM| JANUARY 9, 2023 21 INDUSTRY OUTLOOK | REAL ESTATE HBJ PHOTO Industrial real estate market remains hot, but threat of slow down looms By Greg Bordonaro gbordonaro@hartfordbusiness.com T he industrial commercial real estate market has been hot in Connecticut for years and 2022 was no different, but there are some signs of a slow down. Some e-commerce companies, like Amazon, halted certain new construction projects or major leases amid tightening demand coming out of the pandemic and other market pressures, like higher interest rates, supply chain issues, labor shortages and rising material costs. Mark Duclos, president of Hart- ford-based Sentry Commercial, said Greater Hartford industrial vacancy rates remain at all-time lows. High-bay, Class-A vacancy rates in the region are below 5%, he said. At midyear 2022, the region had an overall industrial vacancy rate of 3.7%, with companies adding 1.3 mil- lion square feet of space through the first six months of 2022, according to brokerage firm Newmark. However, inflation has increased annual rent hikes (in the 3% to 4% range), and higher interest rates have softened the industrial invest- ment market, Duclos said. That has reduced the number of bids on for-sale properties and sent some sellers to the sidelines. Even still, Art Ross, Newmark's executive managing director, said Greater Hartford saw over 2 million square feet in new industrial construc- tion in 2022, as well as out-of-state companies committing to the market. For example, department store giant Target recently signed a lease to occupy a new 530,000-square- foot industrial building in Windsor at 500 Groton Road, while Columbus, Ohio-based Safelite Group, parent company of Safelite AutoGlass, has signed a long-term lease to occupy 165,625 square feet in the Baker Hollow Logistics Center, at 105 Baker Hollow Road in Windsor. As we move into 2023, here are some industrial real estate market trends to keep an eye on. Impact of potential recession Duclos said he expects activity in the region's industrial market to remain strong (as compared to his- torical averages) in 2023, but it will likely continue to slow. "The question is, are we going from 120 mph to 100 mph or to 50 mph. Much of that depends on the econ- omy and the 'R' word," he said. At the end of 2022, Ross said there were five or six users looking for 500,000 square feet to over 1 million square feet of industrial space in the southern New England market. Countering recessionary fears, Ross said, is the state's strong defense and commercial aerospace sector, particularly the long sub- marine manufacturing pipeline at Electric Boat. The Groton-anchored company has plans to hire thousands of workers as it builds a new ballistic missile submarine fleet for the U.S. Navy. That work could translate into significant space needs for Electric Boat's local vendors and suppliers. Meantime, Ross said developers have told him they still plan to build new warehouse facilities on spec next year, despite the threats of recession. "It will be interesting to see how many, if any, proceed to construction prior to landing an actual tenant com- mitment," Ross said. Possible reshoring boost Another potential boost to the industrial market is the reshoring trend being considered by some U.S. manufacturers in the wake of supply chain headaches experienced during the pandemic. Some companies are leaving China, or at least reducing their reli- ance on Chinese manufacturing and looking for new markets to strengthen their supply chain, Duclos said. "What is unknown is how many will relocate their operations to other parts of Europe or Asia and, if they reshore, how much of that will come to the U.S. or end up in Mexico and Canada," Duclos said. NIMBYism threat Meantime, after years of steady growth in warehouse development without much zoning pushback, 2022 GREATER HARTFORD INDUSTRIAL MARKET SNAPSHOT (AS OF 2Q 2022) 90.3 million square feet Total inventory 817 The number of industrial buildings 3.7% Vacancy rate $5.76 Rent per square foot 1.3 million Industrial space absorbed by tenants during the first six months of 2022 Source: Newmark Randy Salvatore revive retail and entertainment options, in areas like Pratt Street, Kenny said. He has been encouraged by the results yielded by the city's Hart Lift program, which offers matching grants of up to $150,000 to offset costs of outfitting retail and restaurant spaces. A lot will also depend on the broader economy, Kenny said. A recession could cause building material suppliers to tighten their belts and lower costs. RMS Cos. CEO and President Randy Salvatore, developer of Hartford's North Crossing mixed- use apartment project near Dunkin' Donuts Park, said 2023 will be a challenging year for developers as economic hurdles continue to mount. However, experienced and well- funded developers could find a balance that will help the long-term profitability of quality projects. Construction costs and interest rates will remain challenges this year and demand will be in question if the econ- omy falters, Salvatore said. At the same time, a slower econ- omy could tame rising interest rates and construction costs. "I think construction costs and supply chain will ease a little bit as things slow down toward recession," Salvatore said. "These are normal economic trends." Tighter inventory Thuyan Tran, vice president of commercial investments with Van- guard PCG, said multifamily property sales began to cool entering the third quarter of 2022 as buyers paused to see how the market settles. Rising interest rates, soaring property val- uations and general market volatility will be the three biggest fac- tors in the multifamily sales market heading into 2023, Tran said. "I believe that the increased interest rates and general market volatility will cause a decrease in acquisitions," Tran said. "If interest rates continue to increase, sellers will have to reset their expectations, as most savvy buyers will wait until the market evens out." Soaring property assessments during the pandemic will mean higher tax bills for multifamily owners, damp- ening the enthusiasm of out-of-state buyers, Tran added. "While rents have certainly increased, the common consensus has been that the tax burden out- weighs the higher rents collected," Tran said. The higher rates and shrinking pool of buyers could also tighten the inventory of available multifam- ily properties, as investors decide to hold onto assets until the market rebounds, Tran said. "Ironically, this will lead to a short- age of inventory, which will increase prices over time," Tran said. "I believe the multifamily sector will subtract moderately through 2023," she added. "It will still be easy to liqui- date due to the supply chain shortage, and those buyers will see solid returns coupled with appreciation. Finally, there is still a strong demand for rent- als as it is still more affordable to rent than purchase at today's rates." Thuyan Tran Art Ross is the executive managing director of brokerage firm Newmark's Hartford office.