In our previous blog, we took an early look back at 2013 to review the Connecticut commercial real estate market. The net was that despite concerns about unemployment, budget deficits and various financial crises, the New England economy continued on a path of slow growth recovery.
When we take a look at the number of new projects either being started or finished throughout the region, there are bright spots that are in sync with national trends — inventory, sales and median prices are all up compared to one year ago.
But will we have the same perspective a year from now? I’ve dusted off the crystal ball to take a look at what the market will look like in 2014, focusing on a number of key factors.
Multifamily Fundamentals Will Remain Strong
The housing bust and recession prompted a wave of homeowners to become renters. Apartment landlords are continuing to raise rents, but there are signs that the pace is slowing. The weak labor market and income growth both continue to hold apartment rent growth in check.
Job Growth is the Key to Sustainable Growth
Investors look to job growth as a leading indicator to a rebound in asset values. Regrettably, the environment for meaningful job growth in Connecticut is lacking.
That said, new hiring in New Haven-Fairfield is already supported the creation of new rental households. Throughout 2012, nearly 5,400 workers were added to payrolls, contributing to the net absorption of more than 1,000 apartments over that time.
Moving forward, total employment in the New Haven-Fairfield County region should expand 1.5% in 2013 with 11,500 new jobs. The major job creators are in the leisure and hospitality, trade, transportation and utilities areas.
Supply & Demand Balance is Shifting
Developers are expected to complete the construction of 160,000 new apartment units in the top 54 metropolitan areas this year — more than double the amount added to the market last year, according to CoStar. A further 350,000 more apartments could be finished by 2015. A glut of units could force landlords to cut rents, particularly if the economy weakens.
Locally, more than 20,000 new units are expected to become available in New York City and its suburbs between 2013 and 2015 (CoStar). For comparison, in 2012, 4,000 new units hit the market. In Connecticut, developers will deliver 1,370 new units in Fairfield County by year end, with 600 new units in Stamford alone.
However, the demand for new units will fall short, temporarily lifting vacancy rates.
In time, the new units will be absorbed as the region continues to grow and gain additional commuter residents. Additionally, employees will migrate to New Haven and Fairfield Counties to take advantage of reason¬able rents, particularly at new luxury apartments.
Rising Interest Rates Will Impact Values
The prospect of higher interest rates continues to emerge as the most significant headwind facing the economy in 2014 and could weigh on the housing recovery and consumer spending. As interest rates inevitably begin to rise again, apartment building owners may find it difficult to grow the property’s net operating income (NOI) fast enough to compensate for the impact of increasing Cap rates, and property market values will likely flatten out or may even drop commensurately.
Financial Underwriting Will Prevail
Investment real estate values will continue to be driven by actual NOI, rather than Cap rate compression and/or pro forma rent growth. For investors considering acquisitions, it’s best to let the real estate fundamentals drive the decision-making process, rather than the current availability of low interest debt.
With offices in Connecticut (and New York and Massachusetts), our investment sales teams are well positioned to support investors looking at commercial property in the Connecticut market. If you’re a property owner or an investor in the mid-market segment and want to discuss our forecast for next year and how we can help you meet your investment goals, please give us a call.