Market Data

Northeastern Exposure

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.

Boston

Hotel Living
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 of Boston's 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 expensive.

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 Plains, N.Y.

New Jersey

Industrial Fortifies

  • Vacancy rates 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 2004.
  • While two 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.
  •  Investors especially are interested in warehouse product as 3.1 million sf changed hands during 3Q05.

Source: Cushman & Wakefield

Pittsburgh
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.

Office Scramble
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 absorption.

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 report.

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 units last 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 the second-highest city, San Francisco, according to the NYU report.

Carolyn Bilsky

Area report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate. Contact her at (312) 321-4507 or cbilsky@cciminstitute.com.

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