Despite steep cuts in interest rates the past six months, real-estate experts do not expect a hike in new construction planning to take advantage of lower borrowing costs.
That is in part because even as rates have eased, borrowing restrictions have been stiffened by banks seeking better guarantees on the money they lend, following the stunning collapse of Bear Stearns which was a major underwriter of credit for commercial real estate transactions.
“In July (2007), you might buy a property and put down less than 10 percent,” said Jim Fagan, senior managing director of Cushman & Wakefield of Connecticut Inc. “Today you are putting down 25 percent to 30 percent.”
Two commercial buildings totaling 400,000 square feet of space for multiple tenants are currently under construction in Fairfield County, and Royal Bank of Scotland is building a new regional office in Stamford.
While several more projects are in the planning phases, those deals are dependent on developers finalizing construction loans.
“I think it”™s going to be hard for some projects to get out of the ground, but we knew that was going to be happening anyway due to the price of commodities,” Fagan said.
Prices for building materials may not ease until after China completes construction for this summer”™s Olympic games, said Peter Gioia, vice president and economist of the Connecticut Business and Industry Council.
“I talked to a (contractor) in Bridgeport just the other day,” Gioia said. “He can”™t get imported steel, imported concrete ”“ it”™s not available at any price.”
After a 16 percent rise in nonresidential construction nationally in 2007 to $630 billion, the Associated General Contractors of America (ACG) expects the sector to gain just 4 percent to 8 percent this yea ”“ with a 5 percent increase at best for offices.
Some observers cite a rule of thumb that commercial construction trends lag the residential figures by 18 months, according to Ken Simonson, chief economist of the Arlington, Va.-based AGC. Simonson theorizes that while such lags occurred in two of the past three recessions, those circumstances could have been caused by high interest rates and unemployment at the time, economic factors that have yet to resurface in the current slump.
Help for the commercial real estate sector could be on the way in another form ”“ an accelerated tax write-off for property improvements, which is part of the new Economic Stimulus Act.
With the new law, building owners and tenants will now be able to write off half the cost of qualified improvements in the first year of any renovations, and the rest over a 15-year cycle.
Since 2001, building owners have been only able to take a 2.5 percent write-off for improvements, with the rest spread out over four decades.
Merritt 7 Corporate Park in Norwalk, whose owner last month filed notice of $1.5 million in renovations for tenants FactSet Research Systems Inc. and General Electric Co., will likely look to take advantage of the tax break for future work, according to Keith Crosby, who runs the property”™s ADP Service Corp. renovation unit.
For the time being, Fagan and Gioia both noted that Fairfield County and Connecticut avoided the overheated construction pace of the early 1990s, which should help assuage any collapse in building values that in turn could discourage new building. Fagan estimated that the county has increased its office inventory a mere 8 percent since that period.
Couple that fact with the newly lowered rates and a diverse economy that Gioia thinks will grow 1.5 percent this year, and the hope exists that the economic slowdown will not grip Connecticut for an extended period as did the previous one.
“Existing terms are still pretty good ”“ there is still a lot of activity out there,” Gioia said. “The sky is not falling.”
