Strong fundamentals help the region brave uncertain market elements.
During the second half of 2005, several of the
Northeast's metropolitan markets coasted on strong fundamentals.
Office absorption in Boston is up and vacancy rates are
decreasing. In Long Island,
N.Y., the office market looks
optimistic: Despite a slight vacancy increase, asking rents are rising and new
construction is in the pipeline. Philadelphia's
office market also is holding strong, with overall vacancy dropping 350 basis
points from 25 percent in 2004. In addition, class B properties are selling
quickly for condominium conversions, Cushman & Wakefield reports.
Condominium conversions are as hot in the Northeast as
they are in other parts of the country. One South Boston
project involves the city's first Leadership in Energy and Environmental
Design-certified condominium complex. The 143-unit Court Square Press Building
will be redeveloped completely and ready for occupancy by the end of the year.
While condominium conversions are a popular choice for
older office properties throughout the region, new construction is cropping up
in several areas as well. Two new retail and hospitality projects are underway
in Atlantic City, N.J., says Joseph C. French Jr., CCIM, senior investment
adviser with Sperry Van Ness in White Plains, N.Y. "After seeing the
retail success of Caesar's Atlantic City, which has one of the most successful
sales psf in the country, these two projects are going to try to replicate that,"
French says. Hartford, Conn., also has a large retail development in the works.
The city spent nearly $1 billion on a new downtown business and tourist
district that includes a hotel and a 540,000-sf convention center.
Retail registered strong performances throughout the
region. Several new retailers will move into the area in the near future,
French says. "They'll start by moving into Boston and Philadelphia and
then move into New York," he says. Big-box retailers such as Wal-Mart,
Lowe's, Best Buy, and others are looking to further penetrate the Pittsburgh
retail market, Grubb & Ellis reports.
Despite the momentum of other sectors, the Northeast's
industrial market is improving at a more modest pace. In New Jersey, asking
lease rates stagnated during the second half of last year, and availability
increased by 0.2 percent in 3Q05, CB Richard Ellis reports. In suburban Boston,
low interest rates are causing users to purchase their own properties thus
reducing the amount of quality for-lease space available.
In the coming year, the Northeast should continue to see
most market sectors improve.
The new InterContinental Boston, which will be ready for
occupancy later this year, includes 424 hotel rooms and 130 luxury
condominiums. The Residences at InterContinental are the first to be
incorporated into an InterContinental hotel property, joining a growing legion
of hotel-condominiums, which are cropping up in New York, Chicago, Miami, Las
Vegas, Toronto, and the Bahamas, among other markets according to USA Today.
The $310-million hotel is expected to catch the beginning
hospitality upsweep. The city's otherwise strong hospitality market took a dive
with the rest of the country in September 2001, but recently has seen signs of
a recovery, Northeast Real Estate Business reports.
The InterContinental Boston is located on Boston Harbor and is expected to open this fall.
photo: IC Hotels Group
CCIM Market Snapshot
"The retail market from New England to Philadelphia is just
sizzling. Capitalization rates just keep getting lower...I recently sold a
class B+, grocery-anchored retail property that was trading at a 9 percent cap
rate a year ago, and this year it's at 7 percent.
A lot of properties are getting unsolicited offers and
selling. In the New York City
boroughs everything is being bought. Favorable zoning changes are being made
for the entry of big boxes.
Development has been bullish, but stores have to open in
several local markets because of media costs, as advertising here is very
Increased energy costs shouldn't have a big effect on the
market. The shoppers here don't have to drive far, so the cost of fuel won't
affect that. We keep thinking the market will slow, but it's still a great
lending market and people are willing to spend.
Joseph C. French Jr.
, CCIM, senior investment adviser
Sperry Van Ness, White
decreased during 3Q05 falling to 6.3 percent in northern counties and 6.2
percent in central counties, down from 15.9 percent and 8.7 percent at year-end
speculative projects, the 251,000-sf Perth Amboy Business Center-Building A and
a 231,000-sf building at 300 Herrod Blvd. in South Brunswick, were added to the
central New Jersey market fully occupied after mid-year 2005, 2.2 million sf of
available industrial space also was added to the central New Jersey market.
2.4 million sf
of new industrial space is under construction including three
warehouse/distribution properties of more than 300,000 sf each.
especially are interested in warehouse product as 3.1 million sf changed hands
Source: Cushman & Wakefield
Retail Overcomes Obstacles
With several new developments in the pipeline, Pittsburgh's retail
market is thriving. Vacancy rates, at less than 6 percent, are at their lowest
levels in years, according to Northeast Real Estate Business.
But this strong market didn't come without challenges. Pittsburgh is full of
topographical development obstacles. Surrounded by the Allegheny, Monongahela,
and Ohio Rivers,
as well as the Allegheny Mountains, the city
faces several barriers to retail traffic. Still, development perseveres,
especially on vacant suburban land. In the Frazier Township
submarket, the Mills Corp. opened Galleria at Pittsburgh Mills and Village at
Pittsburgh Mills last year adding 1.1 million sf and 900,000 sf respectively,
to the retail market. To build these malls, more than 8 million cubic yards of
dirt had to be leveled, according to Shopping Centers Today. The malls mix both
indoor and outdoor shopping, feature more than 175 retailers, and cost $280
million combined to build.
Galleria at Pittsburgh Mall
photo: Mills Corp.
Fairfield County, Conn.
Last year a swirl of activity sent Fairfield County's
office market scrambling to recover. Space vacated by corporate decisions as
well as new construction caused negative absorption and higher vacancy, even
when coupled with high demand for office product, CB Richard Ellis reports. In Stamford, Conn.,
for example, office product demand doubled between 3Q04 and 3Q05, but available
space rose 8 percent over the same time period due to 243,280 sf of negative
Discounting Stamford, Fairfield County saw improved demand and
absorption countywide, CB Richard Ellis reports. Also helping to ameliorate the
county's office market is Royal Bank of Scotland's recent decision to
construct a 700,000-sf building and add 2,000 new jobs to the market.
Outside the central business district availability was 21
percent, but this is expected to fill in soon. Landlords encouraged by this
space shortage and a market edging toward recovery are raising rents. Since the
beginning of last year, rents have gone up 4 percent to $28.07 psf. If momentum
carries on, Fairfield
County should see
continued office improvement this year.
New York City
Multifamily Supply Struggles
As the employment rate in Manhattan creeps up, the apartment market is
keeping pace, Marcus & Millichap reports. Jobs in Manhattan were expected to increase by 21,000
at year-end 2005, primarily in the professional- and business-services sectors.
However, additional jobs mean additional need for affordable housing, which the
city lacks. The biggest housing problem New
York faced in 2005 was unaffordable housing.
"More than one out of every five renters in the city pay over half their
incomes in rent," according to a New York University
Renters aren't the only ones facing high costs. The
median price of cooperatives and condominiums in Manhattan increased 30 percent between
mid-year 2004 and mid-year 2005, topping out at $1.3 million.
Construction completions increased to 3,200
year, up from 2,500 in 2004, even though construction costs in New York
are 39 percent higher than the U.S. average and 8 percent higher than
second-highest city, San Francisco,
according to the NYU report.