Hartford Business Journal

46 Hartford Business Journal • decemBer 26, 2016 www.HartfordBusiness.com Real Estate Trends point to more Hartford region growth in '17 By Suzanne Duca Director of research, CBRE/New England B ecoming an 18-hour city is a goal that Hartford can achieve. Significant progress has been made by the public and private sectors to revitalize Hartford's downtown scene and reposition districts that have untapped potential. Development has taken shape across multifamily projects in the core downtown region, retailers have expand- ed their footprint, and recent public transportation proj- ects have seen great success. As these projects make their mark, the economic landscape of the downtown region is well positioned to improve. Businesses often consider locating in urban settings because they present the opportunity to attract a skilled talent pool at a relatively lower relocation cost. If the Millennial-skilled workforce continues to populate downtown, office tenants operating out of Hartford's surrounding suburbs will begin the migration to the urban core as will out-of-market tenants who are looking for cost alternatives to locating in higher-cost cities. The 750 new downtown multifamily units that have come online since the sum- mer of 2015 have been met with strong demand exhibited by a tenant base of young, college-educated professionals. Developers have had success in attract- ing this tenant base by incorporating mod- ern finishes, amenity packages and con- cierge services into their unit offerings. The number of available units at three of the city's more notable new multifam- ily developments (The Spectra Boutique Apartments at 5 Constitution Plaza, 777 Main Apartments at 777 Main St., and Front Street Lofts at 20 Front St.) is scarce. With UConn's incoming downtown campus set to open in the fall of 2017, there could be an uptick in student demand for downtown living options. iQuilt, CTfastrak gains Projects coordinated by the public sector have been critical to the develop- ment of downtown Hartford's live, work and play culture. The iQuilt urban design plan and Intermodal Triangle project, both backed by $25 million of dedicated funds from the state's capital budget, have helped widen the promenades that run alongside Bushnell Park as well as walk- ways surrounding the areas of Union Sta- tion, Asylum Street and Pearl Street. These projects will help transform the city's walkability by connecting local historical landmarks and popular ameni- ties as well as ease transit flow between the traffic-dense areas of Main Street and Union Station. The CTfastrak was declared a success for the region after original ridership pro- jections were surpassed. The busway has been popular with downtown workers who are averse to traffic congestion. Many municipalities have found the busway to be advantageous to their local economies as developers and small businesses have gravitated to areas near corre- sponding stops. The Department of Trans- portation plans to build on ridership success by expand- ing their service east of the Connecticut River. Infrastructure is a topic that will soon be front and cen- ter on the agendas of state and city officials. The I-84 viaduct project and the CTrail Hart- ford Line study are both large-scale pub- lic outlay projects that propose to reduce traffic congestion and boost the region's economy. Businesses will closely moni- tor the trajectory of these projects as they consider future real estate decisions. Statistically, the Greater Hartford office market (a market CBRE/New Eng- land tracks by five subdivisions: north, east, south, west, and the central business district, or CBD) has shown stable real estate fundamentals in 2016. In Hartford's CBD, renewal transac- tions have dominated leasing activity over- all. Many occupiers in Hartford's CBD have found renewing in place to be cost effec- tive and in alignment with their business strategies. Three major renewals were signed in 2016; Lincoln Financial Group recom- mitted to approximately 185,000 square feet at Metro Center (385 Church St.), Prudential Financial renewed on its lease of approximately 250,000 square feet at 280 Trumbull St., and law firm McCarter & English renewed its lease of approximately of 33,000 square feet at CityPlace. In 2015, Hartford's office investment market saw strong demand with four CBD assets trading hands over the course of the year. Office investment sales activity slowed in 2016 as investor capital demonstrated a growing interest in investment-grade indus- trial property in the region. However, opera- tors have continued to remain confident on the foundation of the market. After winning the asset at auc- tion, the ownership group of Goodwin Square (225 Asylum St.) have instituted an extensive capital improvement pack- age that will reposition the office tower in addition to the adjoining 124-room boutique hotel and restaurant that are slated to open in early 2017. Barring major macroeconomic head- winds, Greater Hartford office market fundamentals should remain composed in 2017. n 2017 REAL ESTATE OUTLOOK Rising rates will pressure/dampen realty investment returns By Jay L. Morris Managing partner, Hartford County office for O,R&L Commercial T he year 2016 has been very active for commercial real estate in Connecti- cut and throughout the nation. All real estate has been the beneficiary of so many years of stimulus through incredibly low interest rates. In July, the 10-year U.S. Treasury yield hit a record low of 1.336 percent. The low cost of financing has stimu- lated a tremendous amount of commercial real estate sales across all commercial sectors including office, multifamily, medical office, retail and industrial. The volume of sale transactions and prices have finally reached levels not seen since 2007, before the last recession. The main area of commercial real estate in Connecticut that has been lagging the nation is the lack of new construction. I believe that this is because Connecticut is one of the most expensive states to do business in and we don't have a competitive economic incentive program. There are not enough businesses moving into the state and we have a hard time retaining our existing busi- nesses, which are being lured away by other states that are offering incentives and a lower cost of doing business. In Connecticut, the greatest obsta- cle affecting eco- nomic growth is our unfunded pen- sion liabilities and large pending deficits in the city of Hart- ford and the state as a whole. In addition, we still have an inheritance tax driving out our wealthiest residents, many from Fairfield County. As the highest income taxpayers move out of Connecticut, the state will continue to lose tax revenue, which will further weaken our economy. We need to come up with a more com- petitive economic development program and a lower tax structure. When I visit other cities throughout the country, I see cranes in the sky and new construction everywhere. In Connecticut, cranes are almost non-existent except for our only beacons of growth: health care and mul- tifamily residential development. We have an aging population and the demand for easy access to health care is greater than ever. Hospitals are trying to support their communities by locating medical services in the towns that they serve. The state needs to recognize that hospitals are a huge generator of employ- ment and economic growth, and they should be supported. As for multifamily develop- ment, Connecticut has a large inventory of older apartment complexes from the 60's and 70's. Today, there are many mul- tifamily developments under- way or in the planning stages in the majority of towns through- out the state. In fact, there are so many new units scheduled to open at the same time, we may soon be reaching a point of saturation. This multifamily explosion is not unique to Con- necticut — it is occurring everywhere. In fact, this may be the next national bubble. For the coming year, the new White House administration's goals are to stimulate the economy with job growth by reducing regulations and taxes. With employment and wage growth, the demand for commercial and industrial space should increase throughout vari- ous markets. This should continue to fuel commercial leas- ing and reduce vacancy rates. However, while the new admin- istration's objec- tives may be good for the economy, it could have an adverse effect on investment real estate because of increasing inter - est rates. As wage growth and infla- tion begin to creep up, the Fed will follow a policy of monetary tightening through higher interest rates to keep infla- tion in check. Since the election, we have already seen an uptick in interest rates from around 1.8 percent before the election up to 2.466 percent (as of Dec. 9). This is a tremendous increase for one month, and the Fed is expected to continue with moderate increases throughout 2017. Higher interest rates typically have a dampening effect on all types of real estate, but especially on investment real estate. Bottom line: To create economic growth in commercial real estate, Con- necticut must get its long-term obliga- tions and spending under control, and reduce the cost of doing business here so we are able to attract new businesses from other states and around world. n Jay L. Morris Suzanne Duca ▶ ▶ The volume of sale transactions and prices have finally reached levels not seen since 2007, before the last recession.

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