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Spruce Up Or Sell Out?

By GREG BORDONARO

December 10, 2012

After a wave of high-profile foreclosures, downtown Hartford is now home to a host of new landlords, many of them financial institutions with few ties to the city, but whose decisions on what to do with their recently acquired assets will have major ramifications on the central business district's commercial realty scene.

Class A office towers ranging from Constitution Plaza and the Metro Center on Church Street, to CityPlace II and Goodwin Square on Asylum Avenue have changed hands recently after their original owners defaulted on their mortgages and lost the properties to their lender.

Each new building owner, realty sources say, will likely have to take a different approach with their respective property, with a decision on whether to sell, hold, or invest in a particular office tower based on many factors including vacancy rates, improvement costs and the health of the overall market.

Shawn McMahon, the executive vice president for Jones Lang LaSalle in Hartford, said that when a lender forecloses on a property, new ownership typically has two options. If the new owner has no interest in being a landlord, they can try to sell the building quickly, but it may be at a steep discount depending on the health of the building. Or the owner can hold onto a property, invest in upgrades to attract more tenants and sell the property once its occupancy rate is stabilized.

"If you can spend a little bit of money on common areas and basic building upgrades to create a better work environment, I think it pays dividends," McMahon said.

Recent deals in the Greater Hartford suburbs could offer a window into some of the strategies that will or should be taken by new landlords in Hartford's central business district.

McMahon and his team, for example, were hired last year by Minnesota financial services firm Thrivent Financial to lease and manage a Windsor property Thrivent foreclosed on in May 2011.

The 69,300-square-foot office building at 100 Corporate Dr. was nearly half-empty at the time of foreclosure and in need of a facelift after more than 25 years of wear and tear.

McMahon said the new owners could have put the property up for sale immediately, but were advised to hold onto it instead and invest in renovations. Improvements included upgrades to common areas, lobbies, mechanical systems, restrooms and the installation of new store front systems.

Since the renovations, Jones Lang LaSalle has been able to boost occupancy in the building from 59 percent about 18 months ago to 94 percent today, with the remaining 3,800 square feet of vacant space likely to be absorbed in the next few weeks.

McMahon said 100 Corporate Dr. has even been able to attract new businesses to the Connecticut market: Riley Power, a Worcester-based manufacturer of steam generators and fuel firing equipment, has leased 7,800 square feet in the building.

The building's owner, McMahon said, will likely put the property up for sale soon, after drastically improving its occupancy rate and market value.

"The building was run down and not leasing," McMahon said. "We've been able to turn it around. People want to be in a nice work environment."

Of course not all foreclosing entities have the cash to try to turnaround a property. The situation becomes even more complex when a mortgage has been securitized and sold to bondholders because the foreclosing entity — typically known as a special servicer — has to convince the investors to put up cash to make the investment.

Special servicers also aren't in the business of owning real estate.

In Rocky Hill, for example, a special servicer that represented bondholders who foreclosed on an office complex at 100-200 Corporate Place decided to sell the building quickly rather than make the estimated $4.5 million investment in renovations that was needed to improve the property's value.

The office complex was only 35 percent leased at the time of its foreclosure in March. It was recently put up for auction and sold to Cheshire real estate investor Ralph Carbone for $3.5 million. That was less than half the price the previous owner paid for the property in 2005.

John McCormick, an executive vice president at CBRE/New England in Hartford, said the special servicing firm that handled the foreclosure, C-III Capital Partners, decided it was a better strategy to auction the property quickly.

"There was a significant capital budget that was needed to upgrade the building," McCormick said. "The servicer did not want to raise the money from bondholders."

From an investor's perspective, buyers of commercial real estate are looking for properties with long-term, stable, credit worthy tenants not in consolidation or downsizing mode, said Pat Mulready, a senior vice president with CBRE/New England in Hartford.

And a higher occupancy rate increases a building's value, since cash flows from rental income weigh heavily on the future earning potential of a building, Mulready said.

But even if a property owner chooses to invest in a building to improve its value, getting a return on that investment is never guaranteed, particularly when market conditions, including national and local economic conditions, can significantly impact property values.

In Hartford, strategies for all the recently foreclosed office towers are not crystal clear. And some buildings will be more complicated to sell than others, especially since many of the properties had securitized mortgages.

Metro Center

The 12-story, 293,639-square-foot Metro Center office building may have the clearest future. It was recently put up for sale about a year and a half after its current owner, CWCapital, foreclosed on the property.

The building, erected in 1986 on downtown's northern fringe, was formerly owned by Northland Investment Corp., which lost property to foreclosure in 2011 after failing to pay off a $25 million mortgage, which had been securitized and sold to investors.

Northland bought Metro Center for $10 million in 1997.

The building went up for sale for a short period after its initial seizure, but was taken off the market while its anchor tenant Lincoln Financial analyzed its future office needs.

Lincoln occupies 60 percent of the building, but its lease was scheduled to expire in 2013. If Lincoln decided to move out of the building, the property's value would have plummeted. That left the building's owner little choice but to hold the asset until Lincoln decided its future, realty sources say.

This summer, Lincoln signed a five-year lease extension, stabilizing the property and putting it in a much better position to be sold.

Thomas Dobrowski, the managing director of New York's Rockwood Real Estate Advisors, which was recently hired to handle the sale of the building, said Metro Center is currently 83 percent leased and has already received letters of interest from about 60 potential investors.

While no firm asking price has been set, the owners will be looking for bids close to $23.5 million — about $80 per square foot — Dobrowski said.

Goodwin Square/CityPlace II

The 330,000-square-foot Goodwin Square office tower — also formerly owned by Northland — represents a more challenging real estate strategy. The building, now controlled by LNR Partners, a special servicer, is nearly half empty and has an attached hotel that has stood vacant since late 2008.

It's not clear what renovations may be needed in the property, built in 1989, or what state the hotel is in. There's also a question of whether to market the office tower and hotel separately or as a package deal. Northland bought both the office tower and hotel from the state pension fund in 2005 for $41 million. It shuttered the money-losing hotel at the end of 2008, and eventually lost the entire property to foreclosure a few years later.

CityPlace II — another property Northland lost to foreclosure — is owned by the same entity that controls Goodwin Square but likely doesn't require as much of a capital investment in renovations, realty sources say.

Cushman & Wakefield executive director Joel Grieco said the lender of both properties is being patient and sees the benefit of stabilizing the buildings before putting them on the market. The lender may invest in base building and deferred maintenance improvements, and spruce up the buildings to make them more attractive to tenants.

"There is a big push to improve the condition of these properties," Grieco said. "The lender has an owner's mindset with regard to deal-making. They are responsive and they have the teams in place (brokers, architects, property managers, lawyers, and contractors) to nimbly navigate through the leasing process. This is in contrast to how lenders handled foreclosed properties 10 or 20 years ago — back then the focus was on selling and getting out."

Grieco said the approach of stabilizing a building before selling it is based on the belief that there is embedded value in a property that "can only be nurtured through leasing the property and getting it to a point where it shows well and has a viable economic story to tell."

Constitution Plaza

The sprawling Constitution Plaza was recently foreclosed by life insurer MetLife, which has a major presence in Bloomfield. MetLife, which seized the property from its former owners GE Capital and Richard Cohen, has hired Jones Lang LaSalle to manage and lease the building, which is actively seeking new tenants, said Christopher Ostop, executive vice president at Jones Lang LaSalle.

MetLife now controls One, 10, 100, 248, 250 and 260 Constitution Plaza, which have a collective 82 percent occupancy rate. One Constitution Plaza, fronting Market Street at the corner of State Street, is the flagship tower.

Ostop said if MetLife were able to boost occupancy to 95 percent, it would likely put the building on the market, but there are other long-term considerations.

The region near Constitution Plaza could soon undergo a major redevelopment with plans to convert the old Sonesta hotel into apartments, the state likely purchasing and occupying Connecticut River Plaza, and the movement of UConn's West Hartford campus to the nearby Travelers Resource Center.

If all those plans go forward over the next 18 to 24 months, it could significantly boost the value of the entire Constitution Plaza area, possibly giving MetLife some incentives to hold the property until then.