Sections Supplements

Signs of Improvement?

Commercial Market Remains Sluggish, but the Skies Are Brightening

Kevin Jennings

Kevin Jennings, seen in Chicopee at what will be the home of a distribution center, says the market is picking up after two years of relative stagnancy.

Area commercial real-estate brokers say the local market remains in a slump, with vast amounts of inventory and many business owners still reluctant to make investments. Many of the moves being made are upgrades to better space in this region, what one observer called “a game of musical chairs,” but there are some indications that conditions are improving and a healthier 2011 is in the offing.

Kevin Jennings was talking about speed bumps.
He used that term while discussing commercial real-estate deals and, more specifically, how much more difficult they are to consummate than they were before this sector entered its prolonged slump roughly two years ago.
“There are a lot more speed bumps now — everything’s slower and more methodical,” he explained. “Deals that used to take maybe 30 to 45 days to complete are now taking 60 to 90 days.”
And many are taking much longer than that, he continued, adding that there is much more scrutiny of the fine print these days, especially on the part of the tenant-to-be, who is still in the driver’s seat in most respects, and is pushing for every break, or concession, possible.
“Even after the fact, after the deal has been negotiated,” said Jennings, president of Springfield-based Jennings Real Estate, which handles a wide range of properties, but especially industrial and retail, “they still think they can chisel and grind.”
John Williamson, president of Williamson Commercial Properties in Springfield, agreed. “No one’s leaving anything on the table,” he explained, referring to rate or any other aspect of a lease. “And that’s why it’s taking much longer to get deals done. It used to get down to dollars per square foot; now it’s down to nickels and dimes per square foot.”
But the good news is that deals are, in fact, getting done, said brokers who spoke with BusinessWest, while noting early and often that things are still quite slow in this market and will be until more business owners gain the confidence to move ahead with expansion or relocation plans.
Indeed, Jennings used the phrase ‘optimistically cautious’ to describe the current picture, which is a considerable improvement over ‘stalled,’ which is how he would have classified this market a year or even six months ago. “There’s a fair amount of activity happening across the board,” he said. “We’re seeing some improvement.”
Bill Low, a broker with Springfield-based NAI Plotkin, concurred.
He said current market conditions are far from anything approaching what would be considered normal, but there is movement in some sectors and communities. He noted success with efforts to fill several vacant floors at One Financial Plaza in downtown Springfield (see related story, page 58) as one example, and said that there are some retail deals being inked, especially in what he called ‘B’ locations, where there are more opportunities, and transactions, than on the major retail strips such as Riverdale Road in West Springfield, Memorial Drive in Chicopee, and Boston Road in Springfield.
“It’s been a funny market,” he said. “It’s been extremely slow the past 18 to 24 months — the market’s been as bad as I’ve ever seen it. However, over the past year we’ve done a lot of office deals.”
Said Williamson, “it’s not gangbusters, but we’re seeing a steady stream of deals. It’s not the Mississippi River, but it’s at least one of its tributaries; there’s life out there.”
For this issue, BusinessWest takes a long look at the state of the current market and what should be expected next.

The Lease They Can Do
When asked to characterize what’s happening in his sector, Williamson cited a recent deal — actually two transactions — he completed in Hatfield that sums things up very effectively.
This was the sale of the Danish Inspirations complex just off I-91 to some local investors, and the subsequent lease of 10,000 square feet to Lumber Liquidators. Both deals were a long time in the making, and would best be described as ‘complex.’
The lease deal that brought the national retailer to the 413 area code was negotiated over more than 18 months, said Williamson, noting that the Virginia-based corporation wanted a presence in this market and wanted to be in that location. The trick was getting the space to work, which both parties were finally able to do.
The sale, meanwhile, took nearly four years to finalize. The original asking price was $2.8 million and was somewhat inflated, said Williamson, noting that the property finally went for $1.8 million.
Looking at those deals and how they were done, Williamson said they provide evidence of many things. For starters, they show that transactions are being made, and that there are opportunities for both investors and tenants looking to capitalize on a market where prices have come down and sellers are willing to negotiate.
“There are companies out there that are obviously thinking ahead to better times and taking advantage of pretty attractive lease rates and locking them in for seven years,” he said, referencing the term for the Lumber Liquidators lease. “For investors, this is a time to be opportunistic.”
But they also show how much more difficult it is to get signatures on the bottom line, said Williamson, who echoed Jennings when he said, “we’re doing some pretty substantial deals; it’s just taking twice as long to bring them to a conclusion. The kiss of death is when someone says, ‘this could be a quick deal.’ There are no quick deals these days.”
There are no easy deals, either, he continued, adding that both sides in transactions, and especially tenants and potential tenants, are being cautious in negotiations and, on the tenant side, understandably demanding.
“The deals are there; it’s just more difficult, and it takes longer to put them to a conclusion — if there is a conclusion,” he said. “One of the things I always loved about this business is that there’s an enormous amount of creativity involved, figuring out how to get over and around obstacles. These days, it takes even more creativity.”
In most all ways, this remains a tenant’s market, said those we spoke with, noting that this bodes well for business owners looking for more favorable terms to stay where they are — landlords are willing to be flexible to avoid creating more vacant space to fill — or to upgrade.
Indeed, Low told BusinessWest that much of the activity in the Western Mass. office and retail market involves what he calls “musical chairs,” companies already in this market moving to different, usually better, spaces. “I’m not sure the overall occupancy rate is any higher — it might have gone up a little bit,” he explained. “There’s still a lot of people just trading within the market.”
Most of these moves are upgrades, he said, meaning people exchanging Class C space for Class B, or B for A, and often getting rates comparable to what they were paying before, plus much more.
“Tenants are getting a lot more concessions,” said Low. “Tenant-improvement allowances are up, people are getting moving allowances, they’re getting cancellation rights in the agreement, all kinds of things.
“These days, companies want flexibility,” he continued. “They’re willing to pay halfway-decent rates, but they want flexibility, they want build-out, and they want all the amenities.”
On the industrial side of the ledger, Jennings noted that, while large-scale deals are still few and far between — an obvious sign of caution on the part of many business owners and managers — many smaller transactions have been completed “when the price was right.”
They include a 10,000-square-foot building on Doty Circle in West Springfield and a 4-acre parcel of land in one of the Westover industrial parks for a 33,000-square-foot distribution facility.
“There is some activity out there,” he said, noting, as other brokers did, that the region has suffered from a lack of movement from outside the market.
On the retail side, there have been some new arrivals to the region, Jennings continued, adding that this bodes well for a segment of the market has been hit hard by the recession.
“You’re starting to see some small signs of some of the retailers coming back,” he said. “Many of the discounters are expanding right now — the Family Dollars of this world — and that could give the region a boost.”
Looking ahead, the brokers we spoke with were in general agreement that the worst is probably over for this sector, and that, eventually, the pendulum will swing back in favor of landlords and rates will start to climb again.
“I think we’re at the bottom now,” said Low. “Most of the leases we’re signing now are beginning at a rental number that’s discounted to get them in here, but a lot of them go up over time. It’s hard to predict, but within six to 12 months we might be back to a halfway-decent, healthy market.
“Things are starting to turn,” he continued, “but they’re turning very slowly. I think we’ve reached the bottom, though.”

Space Race
In the meantime, though, expect more use of the phrases that have come to define this sector over the past few years: ‘tenant’s market,’ ‘musical chairs,’ and, yes, ‘speed bumps.’
As Jennings and others said, there have been more of them to navigate in the pursuit of deals larger and small. But if their projections for the road ahead are accurate, and the bounce back from the bottom has begun, then the ride ahead will certainly get much smoother.

George O’Brien can be reached at [email protected]