Issue link: https://nebusinessmedia.uberflip.com/i/479617
18 Hartford Business Journal • December 22, 2014 www.HartfordBusiness.com Industry Focus E c o n o m i c F o r E c a s t Q&a CT's realty outlook strong Realty outlook Q&A with Nicholas Morizio, president of Colliers Interna- tional in Hartford. Q: W h a t ' s y o u r outlook for central CT's real estate mar- ket for 2015? A: The market is slowly getting better. More money is available to bor- row so companies can buy and/or expand their busi- nesses. Banks real- ly want to lend to small businesses. Q: Which segment of the commercial market do you see performing strongly next year and why? A: Industrial/warehouse, retail and office space — all three, but not strongly. Industrial real estate is probably the strongest but there are very few small buildings for sale or lease in the market. Vacancy rates for industri- al, office and retail decreased in the third quarter of 2014, while rental rates increased slightly due to lack of construction. Q: Which segment will be the weakest? A: Older, Class C office space and older, multi-story, low- ceilinged industrial space. Q: With interest rates expected to remain low through next year, how will that impact the flow of investor capital into this market? A: It would have a good impact. It lets companies know that they can expand and where the rates would be. I believe interest rates will remain low throughout 2015. Q: What's your biggest worry about the performance of the local realty market next year? A major company moving out, which would affect many smaller companies that supply larger companies. When Pratt & Whitney has a strong year, all companies that provide services to Pratt grow and expand. n Real Estate ExpErts cornEr 2015 should be a good tipping point for real estate deals By Hugh F. Kelly S mall but accumulating changes can bring the economy and the real estate markets to a tipping point where it seems like the whole picture has changed suddenly and profoundly. After an economic recovery that has been fairly characterized as disappointingly slow, with employ- ment and earnings lagging and expansion uneven from state to state, 2015 is shaping up to be the kind of year where people will be saying, "Wow. Times seem better — and where did that come from?" Take the economic indi- cator that is the most fun- damental for most house- holds: jobs. Since the great employment collapse of 2008, with a loss of 8.7 mil- lion jobs over a two-year span, slack labor markets have held the attention of everyone from the head of the Federal Reserve to the ordinary Joe and Jane searching for work and finding themselves com- peting with friends, neighbors, and people they'd never met for that elusive paycheck. Joe and Jane have been more successful of late — although there are still 4 million underemployed workers in the economy — and the number of unemployed workers per job opening has dropped from 6.8 in late 2009 to just 2 in Sept. 2014. Job open- ings have now gotten back to pre-recession levels. Many have watched with some surprise as the official unemployment rate has dropped to 5.8 percent. It is widely understood that once you count in discouraged workers and the underem- ployed, that rate is much higher at 11.8 percent. But even this figure has been trending downward in parallel with the jobless rate. But here's the startling news ahead: We are in the process of a change from a labor-surplus economy to a labor-shortage economy. Each year for the bal- ance of this decade there will be more and more retirements coming from the Baby Boomer genera- tion, and fewer and fewer Millennials replacing them in the workforce. The sentiment that "you should feel lucky just to have a job" will give way to "what can we do to sweeten the pot so you take this job?" That suggests a multitude of shifts. Incomes should be making up some of the lost ground still remaining from the recession (real incomes are still 5 percent lower than in 2007). The terms of debate on immigration will be reversed as employers repeat Ronald Reagan's "tear down that wall" plea, only this time the wall is along the Rio Grande. And in all likelihood the "space cramdown" that has seen company after com- pany reduce the quantity and quality of office workspace will give way to an understanding that attractive offices can be used as a recruiting tool. User-market fundamentals (supply and demand indicators for commercial space) have been steadily moving toward equilibrium for three years now. As in the labor markets, we should be seeing that rebalancing show up in pricing: in this case, rents for offices, shops, ware- houses and the like. Prices have already risen in anticipation of high- er occupancy and rent levels. While some under- standably worry that property is being "priced to perfection" (meaning that all the upside is already in the current price) and that a new bubble may be forming, it appears that for 2015 anyway the risk of a downward price shock is very small. If the Blue Chip Economic Consensus of above- trend growth is accurate, and the unemployment rate indeed dips as forecast below 5.5 percent by mid-2015 (that is the consensus as of November), this should be a good year for real estate. There remains an abundance of capital orient- ed to commercial real estate investment, and the annual "Emerging Trends in Real Estate" survey indicates that both debt and equity capital will be amply available in the year ahead. Domestic or international, institutional or privately raised, or in Wall Street securities like real estate investment trusts (REITs) and commercial-backed mortgage securities (CMBS), there is no shortage of money — though there may be a shortage of suitable property. That brings up another Ronald Reagan saying we may be hearing in the year or so ahead: "There you go again." Under the pressure of capital seeking product, underwriting standards are starting to soften and the price of risk is starting to diminish. Lenders in particular have seen their spread shrink to de mini- mis levels. That is not necessarily a good thing. That, however, is a fairly normal market phe- nomenon. After tough times come good times, but every upcycle sows the seeds of its own reversal. So while 2015 is looking good, wise market veter- ans are already strategizing for the cyclical down- turn that will inevitably follow. n Hugh F. Kelly is a clinical professor of real estate at New York University's Schack Institute of Real Estate. NiCHolaS Morizio President, Colliers international ▶ ▶ We are in the process of a change from a labor-surplus economy to a labor-shortage economy. Hugh F. Kelly