Hartford's Office Vacancy Rate May Hit 23% Before Rebound
Dark Days For Offices
By Becky Bergman
March 22, 2010
Vacancy rates for Class A office space could soar as high as 23 percent while rents continue to inch lower before the Hartford commercial market turns around later this year, according to area real estate experts.
“Nationally this has been a pretty severe downturn, but I think we’re seeing the bottom now,” said Bob Firger, an attorney and partner at MacDermid, Reynolds & Glissman, a boutique law firm in Hartford that focuses exclusively on the commercial real estate market.
“It’s important to note that Hartford has never shot up like other parts of the country. It doesn’t fall as hard either and it experiences slower recoveries,” said Firger.
Joel Grieco, an executive director at Cushman and Wakefield in Hartford, agrees. While there will still be “pockets of problems” in 2010, he is optimistic that leasing activity will improve and sales transaction will pick up towards the end of this year.
“The office market is like a sleeping shark,” said Grieco. “It’s moving slowly and is obviously alive, but there’s no bite. I believe we have hit the bottom and the worst is behind us. From a rental rate standpoint, hitting bottom in Hartford County is like falling off a curb. There just wasn’t that far to go.”
Greater Hartford’s vacant office space increased from 21.2 percent in 2009 compared to 18.2 percent one year earlier. The average asking rent for office space in the region was $19.21 per square foot in 2009, down from $19.90 in 2008, according to Cushman and Wakefield.
The area has more than 25 million square feet of office space, 45 percent of which is located in the city of Hartford. Average asking rent for “prime” Class A office fetches $21 to $25 per square foot, according to Cushman and Wakefield’s fourth quarter 2009 Market Beat report.
Companies like Aetna, CIGNA, The Hartford and Travelers occupy millions of square feet of offices they own, but vacancy statistics do not account for that space. Those corporations also lease space and most have pulled back significantly in the past year.
Problem extends to the for-sale side of commercial real estate too.
“The sale prices of buildings is a different story but there are so few sales that it’s hard to say just how far we have fallen,” said Grieco.
Currently the two-building Connecticut River Plaza is on the market. Former Whalers owner Richard Gordon constructed the 575,000-square-foot complex at 450 Columbus Blvd. in 1984.
The property’s major tenant, United Healthcare, plans to move later this year to CityPlace.
But real estate leaders say it could take awhile for River Plaza to sell. The last major office building to trade hands in the city’s central business district was also a two-towered office complex at 100 Pearl St. in 2008. Records show New Boston Fund fetched $18 million for the property — or $64 a square foot — about half of the $32.7 million the investor paid for it in 1999.
Firger said buying real estate remains difficult, although some investors are getting back into the market. His firm received three calls last week from potential investors looking to snap up space in the Hartford area.
Firger wouldn’t disclose where his callers were looking.
“One call came from a large, private real estate group that is buying all over the country right now,” said Firger. “We’ve also heard from a few banks recently we work with that told us they are interested in lending and doing business. But it’s a tough market out there.”
Financial institutions that once sought a mere 10 percent down payment now require up to 50 percent to close the deal, said Firger.
“I work with one client who owns shopping centers that are free and clear of any debt or mortgage and any time he approaches the lender, they require a substantial portion of equity from him. People are not going to find deals on the cheap like they did before, but strong companies that need to expand, this is a good time to lease or buy office space,” said Firger.
Grieco said leasing trends in Hartford reflect the struggling job market and a high tax rate. Office occupancy levels are dependent on employment.
Grieco believes that once insurers stabilize and max out on the number of people working from home, office leasing for new space will start up again.
The tax issue is particularly a problem in downtown Hartford, according to Grieco. “There is no reason for the city to have one of the highest tax burdens in the U.S. Downtown Class A buildings are paying almost $6 per square foot in real estate taxes.”
“I know several landlords in Hartford who structure leases that lose money after they pay taxes, operating expenses, build-out costs and commissions in the hopes they lose less money than if they kept the space vacant,” said Grieco. “The dynamics are awful and the high operating expenses in downtown Hartford will continue to suppress investment values.”
“As the saying goes, it’s hard paying for a dead horse,” said Grieco.
Despite the economic downturn, new lease agreements for 2.2 million square feet of office space were inked in 2009. In July, Alstom snapped up two buildings totaling 352,000 square feet in Windsor for 10 years.
Nationally, the vacancy rate on office product rose to 14.7 percent, its highest level since the second quarter of 2005, when it was 13.7 percent, but is still below its decade high of 15.5 percent. The vacancy rate increase during the second quarter coincided with a 19 percent decline in overall office leasing activity, which totaled 8.6 million square feet. That compares to 10.6 million square feet in the first quarter of 2009.
“With unemployment at a 26-year high and nearing 10 percent, that inevitably translates into reduced demand for available office space, which has been reflected in the vacancy rate, leasing activity and absorption statistics year-to-date,” said Maria Sicola, executive managing director and head of Americas Research for Cushman and Wakefield.