New Downtown Deals Could Reverse Progress In Vacancy Rates
March 13, 2007
By KENNETH R. GOSSELIN, Courant Staff Writer
Prudential Retirement's announcement last week that it will renew its lease at a major downtown office tower was welcome news for a city facing the loss of a major employer, MetLife.
But the deal also showed why the central business district is locked in a constant struggle to reduce vacancy rates.
Prudential will lease 257,000 square feet at 280 Trumbull St., which includes 25,000 square feet more than it had previously occupied. However, as part of the same deal, CIGNA will vacate 75,000 square feet that it had subleased from Prudential.
In recent years, the city's office market has seen a string of similar deals in which an established company may stay downtown, but in less space than it previously occupied or controlled.
That's what makes the loss of MetLife - and the potential for 373,000 square feet at CityPlace I to come onto the market at one time - so troubling: It comes on top of the under-the-radar erosion that has taken place in smaller deals.
"It's tough to see where leasing for that kind of space might be coming from," said Richard Mulready, president of Servus Brokerage Co., a leasing agent in Hartford.
As of Dec. 31, overall vacancies in downtown Hartford - including space offered directly by landlords and by tenants for sublease - amounted to 21.1 percent - essentially unchanged from a year earlier, according to Cushman & Wakefield of Connecticut, the commercial real estate broker.
Vacancies in prime, Class A office space - representing 73 percent of the total downtown office market - saw more improvement, declining from 15.3 percent to 12.5 percent, according to Cushman & Wakefield.
The improvement came largely because of Travelers leasing 300,000 square feet in the central business district as part of an expansion in the city.
If MetLife leaves downtown Hartford for the suburbs, the Class A vacancy rate could jump to 18.5 percent, erasing all the gains of the Travelers leases, brokers say.
Even with the Travelers leases and declining vacancy, landlords haven't gained much negotiating power. Average rental rates slid in the last three months of 2006: The average rate for Class A space in downtown was $22.27 per square foot, compared with $23.22 per square foot for the same period the previous year, according to Cushman & Wakefield.
That has meant good news for tenants renewing or leasing new space. But landlords are increasingly under pressure from rising energy costs and property taxes and unable to demand higher rates to absorb those costs and also remain competitive.
Typically, improving office markets - marked by declining vacancy rates - see rising average asking rates. So far, that hasn't happened in Hartford.
When vacancies dip below 10 percent, new construction often follows because of strong demand, a sign of economic vitality. Commercial real estate brokers in Hartford, however, say the more important indicator downtown will be rising asking rates. For new construction to be financially feasible downtown, asking rents will have to rise above $30, they say.
Although the possible loss of MetLife grabbed attention, at least two other leases were signed by well-known, established tenants in downtown Hartford in the past six months that featured a reduction of space:
Lincoln National Corp. renewed its lease at Metro Center on Church Street in October for 190,000 square feet, 10,000 square feet less than it previously leased.
Day Pitney - the former Day, Berry & Howard law firm - is moving to smaller, 74,000-square-foot quarters at 242 Trumbull St., 10,000 square feet less than it occupied at CityPlace I.
Jay Wamester, a broker at Collier's Dow & Condon in Hartford, said the reduced space needs are not necessarily because the companies are laying off workers, but rather because the businesses simply needed less space in the electronic age.
"The overall trend has been for less space footage per employee," Wamester said.
According to a study by BOMA International, the former National Association of Building Owners and Managers, companies are now squeezing more employees into each 1,000 square feet they lease, up to 5.5 workers from the four that had been standard in the industry.
Despite the downsizing of some leases, there remains optimism in the downtown office market as publicly financed building projects in and around the central business district are completed.
Real estate investors, for instance, continue to see downtown Hartford as a desirable place to buy commercial real estate.
The Hampshire Real Estate Cos., the new owner of 20 Church St. - the former One Corporate Center informally known as the Stilts Building - is sinking millions into a renovation of the 23-story tower that had fallen into decay. Hampshire has already signed at least one lease for 20,000 square feet to FirstLight Power Resources, which the electric generation company will use for its headquarters.
In addition, Travelers has confirmed that it is seeking additional space downtown. A spokeswoman declined to say how much, but industry sources say it could be between 50,000 and 100,000 square feet.
At 100 Constitution Plaza, insurer XL America announced that it will take on another 12,000 square feet.
Jonathan K. Putnam, a broker at Cushman & Wakefield in Hartford, said the potential loss of MetLife on the office market can't be minimized.
But the impact will likely be spread out because MetLife's lease doesn't officially expire until the fall of 2008. By then, there could be tenants who might become interested in that space, he said.
Reprinted with permission of the Hartford Courant.
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