September 11, 2017
FOCUS: Real Estate/Architecture

Realty pros show housing-market optimism; pessimistic about office/retail space

Erron Smith Associate director, business development, Connecticut Economy Resource Center

Q&A talks about the state of the commercial realty market with Erron Smith, associate director of business development at the Connecticut Economy Resource Center.

Q. The Connecticut Economic Resource Center recently unveiled its semi-annual online survey of the state's commercial real estate conditions, which found that realty professionals are generally optimistic about the real estate market. There was, however, pessimism about conditions in the office and retail markets? Why do you think that's the case?

A. The pessimism about the condition of the office and retail markets is a result of the transition that we all have been experiencing over the past eight to 10 years. The internet and advancements in a variety of communication tools (ie. Skype, GoToMeeting, WebEx, mobile phones, etc.) has eliminated many barriers of peer-to-peer engagement. These new methods of communication have allowed many employees that would otherwise need to be physically in an office to fulfill their daily obligations, to work from home or other non-office locations without losing accessibility or productivity.

With Wi-Fi becoming more widely available, employees can just as easily complete and submit a proposal to clients and colleagues from a local café, train, or rest stop on an interstate highway, as they would from an office.

As a result, fewer people are required to be in a traditional office setting, which has resulted in decreased demand for office space.

Q. There is a major threat of funding cuts to cities and towns, which could lead to higher property taxes for many municipalities. Yet, 71 percent of survey respondents said they were enthusiastic about the residential market in their primary geographic market place. Is there a disconnect there?

A. There are two main reasons there is still optimism in the residential market. First, interest rates are still reasonably low. Second, as Baby Boomers begin to sunset their careers and reach retirement, they are beginning to search for smaller housing options (i.e. moving into condos/apartments) with less maintenance responsibilities.

At the same time Millennials are beginning to start families, or have plans to grow their existing family, which would require larger space (i.e. moving out of apartments or condos). These circumstances make for fitting solutions for both sellers and buyers.

Q. In the survey, you said the "data signals the shift from brick-and-mortar to click-and-order." What does that mean and what impact is it having on the real estate market?

A. Retail markets are experiencing a similar transition as the office market — the difference coming by way of a change in consumer spending methods and retail delivery expectations. Consumers are not spending less on goods and services, but the method in which they shop and with whom they patronize has changed.

In previous years (pre-Great Recession), the threat to many small brick-and-mortar retailers (think Ace Hardware or the like), was a larger brand name retailer such as a Home Depot or Lowes locating a facility within one or two miles of their location. Today, brick-and-mortar retailers of all sizes must grapple with how to compete with the emergence of online shopping; or at least how to create a formidable online presence of their own.

Click-and-order refers to the consumer method of spending and product delivery. The online consumer experience today is one that allows a customer to search for their product of interest via the retailer website, pay for the item with a few key strokes and a click of the mouse, and expect to have the item shipped and received within two to three business days.

This evolution of consumer spending has impacted both the retail and industrial real estate market sectors in different ways. The growth of e-commerce has increased the demand for additional warehouse space and fulfillment centers in locations that give them the capacity to respond to online orders and deliver products quickly.

The traditional storefront retailers that have managed to remain solvent during this transition have responded by adopting a hybrid approach where they are retaining less inventory on-site (if at all) by incorporating the click-to-order consumer behavior, and utilizing the floorspace to showcase the products they are marketing, and enhancing the one-to-one shopping social experience.

Q. What did the survey find in terms of the availability of financing in commercial development projects?

Respondents found that the availability of financing for commercial projects was sufficient and mentioned existing creative alternative financing solutions to fill gaps such as tax increment financing, historic preservation tax credits, tax assessment agreements, and other means.

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