December 22, 2017
ECONOMIC FORECAST: REAL ESTATE

Realty inventory shortages, pickier tenants will drive 2018

Christopher Ostop is the senior vice president and a broker at Jones Lang LaSalle LLC in Hartford.
Mark Duclos, President, Sentry Commercial
Candace Adams, President/CEO, Berkshire Hathaway HomeServices

Connecticut real estate will see many of the same trends that unfolded in 2017 continue to take shape in 2018, experts said.

Those trends range from the shortage of smaller homes for first-time and downsizing buyers to continued tightening of Greater Hartford's industrial-space market to re-imagining spaces where people live, work and shop.

Most important for Hartford and other communities is that the migration to living in or near downtown or town centers will continue.

Rising construction costs will temper development of smaller land parcels in favor of larger development projects like the Trader Joe's distribution facility under construction in Windsor, or the "spec'' industrial building landlord Griffin Industrial Realty is erecting on Stone Road in Windsor.

Three realty experts — Candace Adams, president/CEO, Berkshire Hathaway HomeServices New England Properties; Christopher Ostop, senior vice president/broker, Hartford office of Jones Lang LaSalle LLC (JLL); and Mark Duclos, president, Sentry Commercial in Hartford — shared their outlooks and assessments for the coming year.

Here are their top five trends to keep tabs on for 2018:

1. Shortages of certain realty inventory for sale or lease will continue

Adams: A shortage of inventory for sale in the entry-level residential real estate market will continue into 2018. Low interest rates and pent-up demand has lured first-time buyers to the table. The shortage of inventory will continue to impact the number of units sold in 2018.

The entry-level market now appeals to not only first-time buyers, but empty nesters and investors as well. Any property at lower price points in good condition sells very quickly. Interest rates continue to be historically low and present the perfect opportunity for first-time buyers to get into the market.

Duclos: We will continue to see growth in the e-commerce markets, logistics companies, industries that support the e-commerce markets and aerospace manufacturing. Expansion will be limited by the lack of available, quality industrial real estate.

Overall, Greater Hartford's industrial market vacancy rate is approximately 7 percent, however, institutional-quality space vacancy is below 4 percent. Large tracts of land will continue to be attractive to both developers and end-users. However, smaller tracts will continue to be less attractive and trail the market.

While facility closings are still happening (most recently Konica in Windsor) they are significantly less than the previous few years. Combined with the lack of speculative construction (at this writing there are only two speculative buildings under construction and one of those — Griffin Industrial's Stone Road facility — is largely spoken for) the available inventory continues to decline.

Additionally, much of the existing inventory remains to be sub-standard for today's user base. We do expect in some cases to see the re-use of well-placed industrial facilities, regardless of their relative obsolescence, as the e-commerce industry continues to struggle with the challenge of the 'last mile.'

2. Urban centers continue to appeal to young, old

Adams: There is a migration to urban communities and town centers with a strong emphasis on 'walkability.' Back country homes must be heavily discounted and in excellent condition to appeal to today's buyers. There is less demand for large parcels of land and large homes.

Not only does the cost and time of upkeep enter into the decision, but also these properties typically have higher taxes. Lifestyle preferences such as entertainment, transportation, restaurants and cultural opportunities are the driving force behind the migration to more urban centers.

Ostop: It's not just a Millennial thing. A vibrant life and full experiences are driving the trends of demographics and the economy at large in Hartford and across the country. Following the recession, a great focus was placed on cutting costs, reducing possessions, and on the experiences of life rather than the consumption of it.

As a result, urbanization will be a driving force in Hartford's revitalization. The recent addition of more than 1,000 residential units downtown is just the start. Expect a more dynamic environment to emerge as more new residential is built downtown.

3. Downtown Hartford retail will continue to evolve

Ostop: It's not enough to just provide people with places to live downtown, Hartford needs to give them places to spend their time as well. Cue new urban retail and a focus on retail as an experience.

Over the last several years, big-box and department store shopping has been on the decline for a variety of experience and economy-driven reasons. As a result, and in line with urbanization trends, retailers are focusing on the urban shopping and dining experience.

Pop-up and concept stores and new fast-casual dining have transformed downtown neighborhoods into new destinations. The right mix of retail and daytime-to-evening foot traffic can be the impetus that developers need to bring new office supply to Hartford.

4. Amenities are vital for homebuyers, renters

Adams: Buyers have a preference for upgrades and significant amenities over size and space. Smaller is better, with all the bells and whistles. Smart homes with automation of lighting, security, heating and cooling are becoming the most sought after product on the market. Builders are starting to meet those demands. Empty nesters are either leaving the Northeast or significantly downsizing. This trend will continue through 2018.

Although slowing down, multifamily (over five units) new housing permits continue to pace with single family. The rental market will continue to do well and investors are likely to continue competing for the entry-level housing. We will see more luxury rental projects become available in 2018 in Connecticut. This is driven by demand from empty nesters wanting low maintenance and a luxury lifestyle. The projects offer on-site amenities such as clubhouses, pools, spas and athletic centers.

5. Employers creating more worker “engagement'' spaces

Ostop: Just as multifamily developers and retailers are striving to create a unique and meaningful experience for residents and visitors, so too are employers working to provide an engaging experience at work. This is more important now than ever in Hartford.

As employers recruit and retain talent, they are doing so in a highly competitive environment. Today's Hartford professional is not only looking for a job in a city that provides the live-work-play experience, they're also looking for a job that provides an exceptional work environment with opportunities to learn and grow.

According to JLL's 2017 study on the human experience, which surveyed nearly 8,000 people globally, only 40 percent of the workforce is fully engaged. This costs employers in productivity, so companies here must think critically about how their workplace environments and cultures can be used as tools for growth.

A company, a city like Hartford, a real estate owner or investor must continually look ahead and be thinking about how to stay relevant through reinvention, especially as technology transforms the way we live and work.

Read more forecasts here.

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