Steady as She Goes
The Local Commercial Real Estate Market is Defined by Stability
“How’s the market?”
That’s a question that area commercial real estate brokers are asked on an almost daily basis, sometimes several times a day. It’s a simple query, designed to gain insight into both the regional and national scenes — and often the answer comes in two parts, because sometimes, but not always, what’s happening on the larger stage doesn’t reflect what’s going on locally.
As for the Western Mass. market, my response is almost always, “good … stable … steady.” That’s because that’s what this market is like, with rare exceptions, and for reasons to be outlined here.
The ‘market’ is an amalgam of subsets that tend to function somewhat independently of one another. While they share very much in common, various factors impact some market segments differently than they do others. For example, the investment sales market is in lock step with interest rates, which in turn have little immediate effect on the office-leasing market.
When considered in the aggregate, the Western Mass. commercial market has a fairly solid history of stability. Over the past 15 years, since the disastrous market crash of the late ’80s and early ’90s (commercial real estate’s Ice Age), it has behaved somewhat like a missing link somewhere between a bear and a bull.
When the markets are hot in the New England region, conditions are pretty good here. And when the markets turn sluggish … it remains pretty good here. We enjoy an enviable insular equilibrium due to a combination of factors. These include our location, a comparatively attractive cost of living, the combined economic engines of MassMutual, Baystate Health, the region’s other major employers, and maybe the White Hut.
When dissected, the regional commercial real estate market component parts can be, and often are, in divergent conditions of health. The segments comprising the market include:
- The sale of tenanted properties as investments, such as shopping centers; single- and multi-tenant office, warehouse and manufacturing buildings; and multi-family housing;
- Office property leasing, which has subsets, including downtown and suburban areas, and their respective sub-markets of Class A, B, and C space;
- The development markets, both public and private, such as the pending redevelopment of the former Basketball Hall of Fame and the new federal courthouse; and
- The combination of retail leasing, warehouse and industrial leasing, and hotels and other hospitality properties, which play an important role as well.
This diversity within the realm of the commercial real estate market has a balancing effect on the sector as a whole, where the hot potato of risk is being continuously passed around.
While the real estate market is volatile like any commodity market, traditionally it is a lagging economic indicator. It’s like the last car in a multi-car fender bender. You can see the crash coming, but have no ability to avoid it. Therefore, while the commercial real estate sector may temporarily avoid the inevitable when the economy is in decline, the price it pays is often the heaviest.
The current overall stable and steady market is the result of the outstanding performance of some very hearty segments, others that are in economic cruise control, and lastly that portion on extended stay in the doldrums.
The investment sales market continues to be extremely robust. Due to the availability of investment opportunities with comparatively higher rates of return in the Western Mass. market, the area has experienced a surge of interest from investors outside of the market. The most notable examples are the sale/lease back of the Yankee Candle corporate headquarters in South Deerfield, the Potpourri Plaza office complex sale in Northampton, and the purchase of a large block of class B office properties in the Springfield central business district.
The most immediate factor that could calm this segment’s ferocity is a dwindling supply of investment property opportunities. For the time being, however, the push continues, and several pending transactions of significance will conclude in the next few months.
The vibrancy of the region’s hospitality sector is visible to everyone. Several new hotels have sprung up along I-91 recently. New hotels are planned for Northampton and Amherst. Judging by the always-packed parking lots at the Hilton Garden Inn and its neighbor, Uno Chicago Grill, business appears to be blistering.
Without question, the benchmark used most commonly to judge the overall condition of region’s commercial real estate market is the office component. Collectively the Class A office properties command the most attention because visually they dominate the landscape, symbolic of the region’s wealth and prosperity.
The office market is, and has been, controlled by two forces; one is the never-ending, musical-chair-like movement of office tenants from one building to another. While this has little beneficial impact upon market occupancy rates, it does create a nice ripple of new economic activity that beneficially impacts the building trades, the banking and legal communities, and a myriad of other enterprises, including, of course, real estate brokers.
The other compelling force is the absorption of vacant space by existing local companies expanding, new start-ups, and companies locating here for the first time. It’s the rare 100,000-square-foot lease that gets the media coverage, but it’s the small, 2,000-square-foot deals that are the foundation of the office market.
Overall, too much emphasis is placed on the office segment as a bellwether for the market in general. It just seems to get all the attention.
So, when asked, “how’s the market?” my answer will be, “solidly good, getting better, and always aspiring to be great.”
John Williamson is president of Williamson Commercial Properties; (413) 736-9400.