Commercial Real Estate Conditions Moving In Tandem With Overall Economy

HARTFORD — The latest survey of Connecticut commercial real estate conditions shows that a slowdown in overall economic activity has essentially translated into weaker levels of aggregate commercial real estate activity during the third quarter of 2012.

According to new survey results, the McGladrey Commercial Real Estate Index (newly renamed) fell to a level of 16.3 in the third quarter, representing a drop of about six index points from the second quarter reading.

“Modest economic recovery thus far has basically meant fewer new hires and lackluster performance within many sectors, helping to create an underlying sense of uncertainty in the state’s commercial real estate sector,” said Peter Gioia, vice president and economist at Connecticut Business and Industry Association (CBIA).

Current conditions within the Connecticut commercial real estate market also fell. Specifically, the Current Conditions Index component was recorded at 14.8 in the third quarter, representing a decline of about five index points from second quarter readings. The Future Expectations Index component also decreased, falling to an index level of 17.7, down seven index points from last quarter.

Relative to one year ago, readings on both current conditions and future expectations were only modestly higher. The good news is that the 3Q2012 index figure is six index points above the level realized one year ago

“It’s difficult to assess the economy when there is a presidential election, uncertainty about the EuroZone bailout agreements and unrest in the Middle East,” said Alissa DeJonge, director of research at Connecticut Economic Resource Center.

The latest objective measures, however, appear to show only modest improvement within the Connecticut economy. Not surprisingly, perceptions about the state’s economy during the third quarter, according to survey results, can be characterized as being “lackluster.”

Only five percent of those polled thought that the state’s current economy was either “excellent” or “good” in the third quarter survey, while 45 percent labeled it as being “poor,” and 49 percent said it was “fair.”

According to Don Klepper-Smith, chief economist with DataCore Partners LLC, “Connecticut’s commercial real estate sector is holding it’s own at this point, but the combination of only modest job improvement, meager income gains, and economic recession in parts of Europe is creating a very challenging environment for many businesses. Even exports, a source of strength in recent years, have been hit. It’s one of the most dynamic economies I’ve seen in 30 years.”

The latest data reflects a commercial real estate market that is facing challenges in the form of high gasoline prices, which are now topping $4 a gallon in many parts of the state, impacting prices for both consumer and business goods. Consumer spending power has also been held in check, and is now down a modest 0.8 percent thus far in 2012 given six months of data, well below the four to six percent gains seen during more robust economic expansions.

“This is a clear indication that area retailers are competing for a smaller pie of consumer discretionary dollars,” said Steven F. Kirn, CPA, partner at McGladrey LLP — new sponsor of the index.

Other findings include:

*The environment for Connecticut investment real estate continues to outperform relative to other commercial sectors as the overall economy slowly improves and profit margins remain relatively healthy. As has been the case in the last several surveys, investment real estate had the most favorable readings on “present situation” and “future expectations.”

*Fundamentals surrounding the Connecticut office market continued to be affected by sluggish activity within the local labor markets. According to many economists, in the current two percent economic growth mode now being experienced, employers have tendency to “make do” with their existing workforce and do not add workers until demand for products and services becomes more tangible.

*The state’s industrial market, which had been buoyed by healthy export growth in recent years, is now facing pressures stemming from recession in various parts of Europe.

*Connecticut’s retail picture continues to be affected by subdued consumer spending power, lagging levels of consumer confidence relative to prior recoveries, and tepid job growth. Rising gas prices, now generally above the $4 mark, are clearly a factor.

The most recent survey was conducted during July–September 2012 timeframe and polled real estate professionals in all eight Connecticut counties, asking for opinions and perspective regarding local real estate conditions in both the residential and commercial markets.

There were a total of 81 respondents who participated in the most recent survey, and included real estate brokers, real estate developers, bankers, appraisers, and economic development officials from around the state.

The executive summary of this quarter’s CT COMpREhensive and McGladrey Index is available at www.cerc.com and www.cbia.com.