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Connecticut Industrial Sector Sees Steady Demand from Tenants, Investors

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Timothy D’Addabbo, Cushman & Wakefield

The Connecticut industrial market has changed. The days of large corporate surplus assets littering our industrial parks, mid-teen vacancy rates and discounted lease rates are over — or at least on a hiatus. In the last few years, the market has tightened with many of the larger blocks of space absorbed by various local and national tenants.

The last 20 to 25 years saw corporate consolidations, downsizing and the move to cheaper markets dominate our industrial landscape. Left behind were inefficient, large manufacturing facilities in a market losing its manufacturing base. As time went by, these idle, surplus assets were acquired by local and regional investors who eventually made these properties functional again. Over the years, steady absorption has chipped away at vacancy rates, and quality available product has become increasingly difficult to find for tenants.

Traditionally, an industrial tenant needing 100,000 square feet or greater would have numerous alternatives to consider and a wide range of quality too. This gave tenants enormous leverage, allowing them to negotiate more flexible and favorable terms and conditions. The relatively recent shift in tide has allowed landlords to control the process and we’ve seen a corresponding upward tick in lease rates. The sales side has also benefitted from the tightening of the market. Although demand is steady at best, the lack of quality product has increased building prices. Still far short of replacement cost, buildings constructed within the last 10 to 20 years are witnessing all-time high sales pricing on a per-square-foot basis. The industrial investment community is also seeing lower cap rates and stronger sales terms. For many years, there were only a handful of industrial investment players and most were local. In recent years, additional buyers, mostly from Boston and New York, have become very active, reviewing many of these new market opportunities.

The lack of quality industrial space has landlords, investors and developers viewing the overall Connecticut marketplace differently: lease rates have risen, cap rates have fallen and build-to-suit activity has increased significantly in recent years. Even speculative construction is being contemplated by some, although time will tell on that front. Connecticut’s nickname is “The Land of Steady Habits,” and for years, nothing could be more true relative to its industrial marketplace; however, if market conditions continue to strengthen, a few of the traditional habits might be broken in years to come.

— By Timothy D’Addabbo, Senior Director, Cushman & Wakefield. This article originally appeared in the June/July 2016 issue of Northeast Real Estate Business magazine.

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