🔒Higher interest rates, economic uncertainty sink CT commercial realty sales volume

Spending on Connecticut commercial property sales plunged 67% during the first half of 2023, as higher interest rates and other factors reduced deal flow and prices.

The decline in activity signals a slowdown in Connecticut’s economy, which recorded one of the lowest first quarter GDP growth rates (0.3%) in the U.S.

The office market saw the largest drop in sales volume by dollar amount, down 82% year-over-year, according to data aggregated by realty brokerage and consulting firm CBRE. But even sectors that saw significant investor activity coming out of the pandemic, like multifamily and industrial, saw double-digit declines in deal activity.

Overall, $850.9 million in office, apartment, retail and industrial property sales were recorded in Connecticut during the first half of 2023, compared to $2.6 billion in deals during the year-ago period, CBRE data shows.

Much like homeowners, commercial property holders are reluctant to sell off properties, knowing the money yielded will not be enough to buy comparable real estate given recent jumps in interest costs, said CBRE Vice Chairman Jeffrey Dunne.

“Unless they have a reason to sell, they aren’t selling,” Dunne said.

Multifamily and industrial properties remain the most durable investments, Dunne said, but even those asset classes have taken a hit. Connecticut saw $1.5 billion in multifamily sales during the first six months of 2022, but only $475.4 million in apartment deals during that period this year.

Industrial property sales slumped during the first half of 2023 to $129.2 million vs. $287.9 million in the year-ago period.

Most deals getting done either have assumable debt involved in the transaction, or are smaller in nature, Dunne said. He expects deal activity to pick up significantly in the second half of 2023, but at lower dollar amounts.

“My pipeline is a lot better for the second half,” Dunne said.

Michael Goman, co-founder and principal of East Hartford-based real estate consulting firm Goman+York Property Advisors, said there is a widening gulf between what buyers are able to pay and sellers are willing to accept.

“This is pretty typical of these kinds of times,” Goman said. “You have this search for value. We see this in everything we are doing now. There is still a lot of economic uncertainty over where we are going in the future.”

Many investors who sold on the high side of the market over the past two years will wait to see if prices hit a new low before putting money back into the market, Goman said.

James C. Smith, former CEO of Webster Bank and owner of banking consultancy JCSmith Advisors, said bank regulators are increasingly concerned about lenders’ exposure to commercial real estate.

“It’s deemed to be more risky than it was a few years ago,” Smith said. “There is good reason to be cautious because what is it worth? The real issue is the big gap between the bid and the offer. What does the buyer think it’s worth? What does the seller think it’s worth? If they can’t get to terms on that, there’s going to be no financing either.”

Jayne D. Kelly, executive vice president and chief commercial banking officer at Ion Bank, said the Naugatuck-based lender closed a record $220 million in commercial real estate loans last year, largely focused on residential development.

Ion seems to be on track to come close to that mark in 2023, she said, closing $109 million in commercial real estate loans during the first two quarters.

Ion includes single-family, for-sale projects in its commercial real estate loan tally. These projects, as well as multifamily, have held strong in 2023, but other commercial real estate categories have slowed, Kelly said.

To diversify its portfolio, the $2.1-billion asset bank is pursuing opportunities in self-storage, light industrial and mobile home parks, she said.

“We are watching our concentrations,” Kelly said. “We are looking to balance and remain diversified in the portfolio.”

Ion is also tightening its credit underwriting standards, Kelly said.

KeyBank Chairman and CEO Christopher M. Gorman said the slowing economy increased caution about new purchases.

“As the economy slows down, obviously – whether it’s buying additional space, leasing additional space or buying additional equipment – people just put that on hold as we evaluate what the next 12 or so months look like in the country,” Gorman said. “And so, I do think people have dialed back capital spending both in terms of real estate, but I would also say property, plant and equipment.”

KeyBank’s nonperforming loan portfolio was essentially flat during the second quarter of this year, but the major Connecticut lender set aside significantly more money ($167 million vs. $45 million in the year-ago period) to cover loans that could go bad in the future.

Gorman said KeyBank, with $195 billion in assets, has been “very proactive” in building reserves in the last three quarters.

“We obviously feel we’re very appropriately reserved,” Gorman said. “We feel very good about our loan book. Having said that, because the economy is slowing down … we’re at a point in the cycle where I think it’s appropriate to build reserves.”

Frank Amodio, managing broker of Farmington-based Amodio & Co., said sales volume might have slowed, but he is still getting calls for new assignments.

Good companies will expand. Owners will look to sell. There are still opportunities in multifamily, self-storage, big-box retail and the industrial space, he said.

“Just when I say things are slowing down, I get inundated with other work,” Amodio said. “There’s always opportunity in real estate, whether the market is good or bad.”

Veteran real estate professionals will remain busy, but will have to lean on reserves and get creative as deals take longer than usual to close, said Waterbury-based industrial broker Tom Hill III.

“All the veterans are still very busy, but we are all learning how to overcome problems with the market, i.e. financing,” Hill said. “To be in this business you have to have patience and be good at overcoming obstacles, which means permits, financing and lawyers that don’t talk to each other.”

Hill said rising rates have lowered property values, a hard reality for some sellers to accept. With deals taking longer to close, Hill has branched out into real estate coaching, advisory work and even partnered on residential deals. He also recently spent six months on a temporary assignment as a morning talk show host on Waterbury-based WATR 1320 AM and 97.7 FM radio.

Robert Gaucher, senior commercial specialist with O,R&L Commercial, said rising interest rates have slowed some deals and killed others.

“It doesn’t work unless owners are willing to drop the price, and owners are not yet ready to drop the price,” Gaucher said. “Some can’t because they don’t yet have enough equity in the building.”

The office deal pipeline has fallen off due to employers’ slackening demand for space and higher vacancy rates. There are still plenty of buyers looking for industrial space, but there’s “no supply,” he said.

Rising rates and construction costs are also killing office deals. It’s too costly for owners to outfit buildings for would-be tenants, Gaucher said. Slackening demand means lower lease rates that aren’t keeping pace with maintenance costs, he said.

“The people who make money are people with no mortgage, long-term owners,” Gaucher said. “You can make money today. It’s not easy. It’s harder.”