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Downtown Discount

Appraisals cut value of some Hartford offices by half

By Greg Bordonaro

February 07, 2011

Downtown Hartford’s rock bottom commercial real estate market is wreaking havoc on some property values as high vacancy rates, a down economy and the cost of doing business are taking their toll.

In some cases, downtown Class A office towers are being valued at half of what their owners bought them for.

The 18-story CityPlace II office tower on Asylum Street, for example, was purchased by Northland Investment Corp. in 1999 for $33 million. Recently, its value was appraised at $13.4 million.

The neighboring 330,901-square -foot Goodwin Square property — which includes the 30-story office tower and historic 124-room Goodwin Hotel — was appraised at $22.3 million in September, nearly half of the $41 million Northland paid for that property in 2005.

“It’s depressingly low,” said Joel Grieco, the executive director of Cushman & Wakefield in Hartford. “It concerns me, but it doesn’t surprise me.”

There is no data available that outlines current market values of all downtown Hartford commercial real estate, but it’s likely other office buildings — especially those with high vacancy rates — have taken a similar hit. Current values of commercial properties aren’t known unless a building has been sold or appraised.

But the recent appraisals of Northland’s two properties, which are in foreclosure, and other recent sales suggest that some downtown commercial property values are taking a beating.

And the devaluation comes at an inopportune time for the city. Hartford is scheduled to conduct its state-mandated revaluation this year. Steep declines in commercial property values could cut deeply into the tax base.

“The economy is going to have an impact on the overall valuation across the city,” said David Panagore, Hartford’s chief operating officer.

Panagore did say, however, that Hartford saw a slight 4 percent increase in its grand list for 2010. But that boost was mainly a result of a phase-in of the 2006 revaluation.

Grieco said one the key problems in the market is high vacancy rates, which eat away at commercial property values because it negatively impacts cash flows on buildings.

About 30.2 percent of all the office space in downtown Hartford — or 2.4 million square feet — is empty, according to a recent report from the CB Richard Ellis brokerage.

At the same time, asking rental rates — or the list price for rents — are also on the decline. Cushman & Wakefield’s latest fourth quarter statistics show an average asking rental rate of $22.97 for the region, compared to $23.53 a year earlier, a decline of 2.4 percent.

“That’s significant in a market where operating expenses continue to rise,” Grieco said.

But that’s not the only problem weighing down on the market. “In my opinion, property values have been hurt mostly by high taxes in Hartford, and by a couple buildings that have lead the race to the bottom with a combination of low rents and high tenant improvement allowances,” Grieco said. “It’s like cutting off the branch you’re sitting on.”

Jay Wamester, a principal with Colliers International in Hartford, said property values are clearly down, but it’s a situation occurring in many hard hit cities. He said the bigger issue is the tenant side of the equation. Wamester said buildings that have cash flow will maintain decent value, but vacant buildings will sell at pennies on the dollar.

That was the case with the Connecticut River Plaza, the recently vacated 556,000-square-foot office complex on Columbus Boulevard that sold last year for a paltry $6.7 million.

“This is what you get in a small market of big tenants where we only seem to steal tenants from other buildings, and towns five miles away can lure tenants away with incentives,” Wamester said.

Property owners also are seeing their finances eroded by high vacancy rates that cut into cash flows. And property owners who are facing an impending maturity date on a mortgage could have a difficult time refinancing, especially if their building has lost significant value putting the mortgage underwater, meaning the value of the loan exceeds the value of the property.

In Northland’s case, both of its remaining foreclosed properties are well underwater, which has it made it difficult for them to refinance.

CityPlace II, which has an occupancy rate of 72 percent and was appraised in September at a value of $13.4 million, has a $25 million mortgage that was due to mature in December 2011.

Northland’s Goodwin Square property, with an occupancy rate of 52 percent, was recently appraised at $22.3 million and has a $33 million mortgage that matured late last year.

Nationally, about $3.1 trillion of outstanding commercial property debt began coming due in 2010, which has sparked concerns about the financial health of the overall market.

Of course rock bottom property values — and even vacant buildings — can also be an investment opportunity for a savvy developer, Panagore said.

That was the strategy behind FBE Limited and Cammeby’s International’s acquisition of the two-building Connecticut River Plaza. The new ownership group is investing up to $10 million to renovate the now vacant property, with the hope of landing corporate tenants.

The Bank of America building at 777 Main St. will also soon become vacant.

At the same time, the recently foreclosed Metro Center property also will likely be looking for a buyer.

“What looks like a vacant building today could look like a good investment tomorrow,” Panagore said.