Guarded Optimism Frames Commercial Real-estate Picture
Doug Macmillan says real-estate activity won’t reach its potential until the fundamentals of the economy — especially the job picture — improve.
Kevin Jennings says he’s someone who tries to look on the bright side of the commercial real-estate picture. And this year, it’s a little easier to be optimistic.
“We have some traction, and I say that guardedly,” said Jennings, president of Jennings Real Estate Services in Springfield. “It’s a better feeling than last year. We had a similar feeling last year, better than past years, and there’s some evidence that good things are happening.”
At the same time, though, “on the flip side, there’s still some indecision, and people are still sitting on their hands, waiting,” Jennings noted, pointing to last year’s election season, the fiscal-cliff drama, and a new set of rules being implemented on March 31 as some of many factors causing uncertainty in the marketplace.
“So,” he said, “while there’s a feeling of some traction coming and deals being made, some people are still holding off on making major decisions.”
Doug Macmillan expressed the same sort of cautious optimism, noting that activity is up, yet economic uncertainly remains high, somewhat dampening the progress visible in various sectors, from industrial to retail to office space.
“We continue to be very busy, and I hope that translates into a long and durable good, but I’m a product of looking at the fundamentals, and when I look at the fundamentals of the overall economy, I don’t see an abundance of improvement,” said Macmillan, president of Springfield-based Macmillan and Son.
He also cited a mostly flat employment market and the still-largely unknown impact of federal healthcare legislation on employer costs as some of the many factors suppressing the kind of growth in companies that spurs real-estate activity, “and it’s translated into a lot of confusion. When you look at the overall economy objectively, the main thing we need is job creation, and there has not been a significant amount of that.”
For this issue, BusinessWest takes a look at what has been an uneven growth pattern in commercial real estate, but growth nonetheless — and what the coming year in the casino era might bring for the region’s brokers.
Setting Their Sites
Still, as the economy continues to emerge — slowly — from the Great Recession, Macmillan recognizes some positive signs.
“Overall, we’ve seen improved market conditions,” he said. “There’s a lot more activity in terms of showings and inquiries, and we’ve seen an increase in sales and leasing. There has been some absorption in some market categories, but still a lessening of historically high vacancy rates in office and industrial space.”
The industrial sector has been one of mixed messages, he added, with plenty of inventory in larger properties. “There’s an abundance of large industrial buildings still for sale, many of which have been available for a long time,” he said. “That market has seen a significant amount of oversupply and limited interest the past several years, and while there has been steady improvement in interest, overall market conditions would still be considered somewhat recessionary.”
That’s a plus for potential buyers, as prices have come down significantly for both sale and lease properties in the industrial market, he added. “Whether it’s plateaued yet, I don’t know. Some of the pricing is just so depressed, it gets into an exercise of, what’s it worth?”
Jennings agreed. “Last year there was, on the industrial side, an overabundance of inventory in larger-sized product, and in 2012, we saw a reduction in pricing, which flushed some of that inventory out of the market, for the better,” he said. “A lot of those deals were owner-occupant deals, because with that kind of pricing, $10 to $15 per square foot, it made a lot more sense for folks to buy than lease. That, along with aggressive financing terms, brings us to where we are today, where we’ve got a little less product on the market.”
However, he added, “the market is such that the smaller buildings — the 5,000- to 20,000-square-foot buildings — are generally harder to come by, so they typically retain their value.”
Meanwhile, Jennings said, the retail sector has been lively. “I think you’re seeing a lot of redevelopment of older-use sites; some of the car dealerships are getting redevelopments,” he noted, citing the new Aldi discount supermarket on Memorial Drive in Chicopee as one example.
In fact, “Memorial Drive is going crazy,” he noted, and it’s not the only noted knot of stores and restaurants to be growing. “Riverdale Street in West Springfield has historically been a smaller stretch of retail, but with the lack of opportunities in that stretch, people are going north of 91 and south of the movie theaters. The same thing is happening on Route 9 in Hadley.”
Of course, he added with a laugh, “some weeks, we’ll be quiet for a week, saying, ‘is this the week people are sitting on their hands?’”
The real excitement, however, may be taking place in the office market, particularly the class A space in downtown Springfield, where vacancies remain, but movement has been obvious.
“I think it was a good year there. We’ve seen some big signings downtown,” Jennings said, citing the relocation of Thing5 into multiple floors of One Financial Plaza — with the promise of generating 500 jobs — and Cambridge College’s move from Cottage Street to the ground floor of Tower Square, bringing more young foot traffic downtown to boost other businesses.
Jennings reports strong activity on the Main Street properties he controls from Harrison Place to the MassMutual Center. “We’ve signed a bunch of medium to smaller deals, and we’ve got a big proposal right now for a good chunk of space downtown.
“There’s a little bit of musical chairs in play,” he was quick to add. “We see people who are there looking for better deals and better terms, but want to stay there, and some new folks coming in, so a good combination of both. I haven’t seen it like this in a while, and it’s refreshing.”
Macmillan echoed those thoughts. “We’ve seen an increase in activity last year and this year, a lot of leasing activity in the downtown office buildings that we represent, which is refreshing,” he told BusinessWest.
“I’m a big fan of downtown Springfield, and for a long time, with the mass exodus to the suburbs, I wasn’t seeing that mindset be so prevalent,” he continued. “But lately we’ve seen, in the downtown marketplace, some new tenancies, some return of existing tenants, and some expansion of tenancies, which are all good things.”
Of course, any planned economic activity downtown must consider what Macmillan called “the wild card in the situation” — whether one of the two casino developers targeting Springfield will be granted a license to build, a decision expected to be made early in 2014 (see related stories, pages 17 and 23).
He was quick to add that the potential presence of a gaming resort is not putting many plans on hold so far. “I’ve heard a lot of discussions about it, but it’s not a determining factor as to where people decide to go or not go.”
Penn National, in conjunction with Peter Pan Bus Lines owner Peter Picknelly, has been promoting a casino along I-91 just north of downtown, while MGM Resorts International has submitted a proposal for about a mile south. The presence of either would change the tenancy game somewhat, Jennings noted.
“On an economic-development scale, if it’s the North End or the South End, there’s going to be some relocation of tenants, and hopefully those tenants stay in town,” he told BusinessWest. “It will be good for all the other landlords because vacancy rates will go down as people are displaced from the North or South End; that’s all good for Springfield.”
A Springfield casino is far from a done deal, however. The good news is that, in the meantime, businesses continue to move their real-estate pieces with greater enthusiasm than in recent years.
“We’ve been living in this lackluster economy so long,” Macmillan said, “that we’ve reached the point where people say, ‘look I’ve got to do something.’”
To some degree, they are, and that’s causing that sense of guarded optimism — which is better than no optimism at all.
Joseph Bednar can be reached at [email protected]