Positive Signs In Office Market

Greater Hartford Continues Slow Recovery From Recent Setbacks

February 27, 2005
By KENNETH R. GOSSELIN, Courant Staff Writer

There are reasons to be optimistic about Greater Hartford's office market this year.

Sales of prime properties are expected to remain healthy. Modest leasing has put the brakes on rising vacancies. Asking rental rates are holding steady.

And there is highly visible redevelopment in downtown Hartford, backed by taxpayer dollars and increasing private investment.

That's positive news for the area's office market as it continues to recover slowly from the real estate collapse of the early 1990s and the belt-tightening of the last recession.

Slow job growth and corporate downsizings remain a concern, however.

Connecticut gained just 8,400 jobs last year. And although that was a welcome reversal from a net loss of jobs in 2003, the state is still 53,000 jobs below the last employment peak, reached in July 2000.

At the same time, corporations continue to shed excess space.

For example, Bank of America late last year sold its headquarters at 777 Main St. in downtown Hartford for $18.3 million. The bank will continue to occupy two-thirds of the 300,000-square-foot, 26-story tower that was built by Hartford National Bank at the historic site where Connecticut's first bank was planned in 1792.

But the new owners - American Financial Realty Trust - will seek outside tenants for the remaining 90,000 square feet, marking a first for the 38-year-old building.

And last month, a new worry surfaced. MetLife agreed to acquire Citigroup's Travelers Life & Annuity, based in Hartford. Travelers employs about 2,000 people in downtown Hartford and leases nearly half a million square feet, much of it at CityPlace I.

MetLife has voiced commitment to Connecticut but has not provided any specific details on potential job cuts. Layoffs could be significant because MetLife expects to slice $150 million in costs.

Any layoffs - and subsequent subleasing of space - would have implications for the Greater Hartford office market. Not only would availabilities rise, but rental rates could be held down, especially in downtown Hartford.

In 2004, overall office availabilities - which include space being marketed for sublease - showed little change. But there was a modest decline in available Class A space, which has the newest, most modern floor plans and amenities.

According to the Hartford office of Cushman & Wakefield of Connecticut Inc.:

In Greater Hartford, available Class A space stood at 16.4 percent of the total Class A market at the end of 2004, down from 18 percent a year earlier. Average asking rents were $21.82 a square foot, essentially flat, compared with $21.56 a year earlier.

In Hartford's central business district, available Class A space was 14.4 percent of the total at the end of last year, compared with 16.6 percent a year earlier. Much of the decline, however, can be attributed to a change in the classification of 20 Church Street - the "Stilts Building" - from Class A to Class B, which covers older buildings in need of renovations, said Whit Osgood, a commercial broker at Cushman & Wakefield in Hartford.

In the suburbs surrounding Hartford, available Class A space fell to 19 percent of the market at the close of 2004, down from 20.2 percent a year earlier. Average asking rents were $21.17 a square foot, slightly down from $21.83 a year ago.

Availabilities fell in the suburbs west and south of Hartford, while they rose east and north of the city. The biggest change came north of Hartford, where availabilities jumped sharply by nearly 11 percentage points, to 29.9 percent.

The jump in the office market north of the city can be traced to Aetna's sale of the office complex at 575 Pigeon Hill Road in Windsor, said John M. McCormick, executive vice president at CB Richard Ellis-N.E. Partners in Hartford. The complex is no longer considered "owner-occupied," so roughly 350,000 square feet of vacant space was added to what's available in the market.

"That accounted for nearly all the increase in the market," McCormick said.

Although there is concern about MetLife's next move, commercial real estate brokers say that the Greater Hartford market reached some stability in 2004. Most say that they remain "cautiously optimistic" about this year - an observation often repeated in recent years.

There was a pickup in leasing at the end of last year, and if that trend continues, tenants will lose some of the upper hand they have had in negotiating in the past two years, said Chris Ostop, leasing manager at commercial broker Jones Lang LaSalle in Hartford.

"Then we'll see some tightening," Ostop said.

Building owners have been willing to accept less than the asking rate per square foot, sometimes knocking off a couple of dollars or more. Many have tacked on extra months of free rent to negotiated leases. Some also have agreed to pay larger portions of costs to outfit leased space to meet a tenant's needs.

A bright spot in the market in 2004 was the sale of Class A office properties, which far surpassed forecasts. And sales are expected to remain healthy this year.

Last year, buyers saw opportunity in a region that has a redeveloping capital city at its center, and took advantage of low interest rates.

According to CB Richard Ellis in Hartford, 17 Class A office properties were sold for $204 million. That surpassed the commercial real estate services firm's prediction that 10 office buildings would be sold.

The average sales price also rose to $84 a square foot, up from $80 in 2003.

For 2005, CB Richard Ellis projects that there will be at least 14 Class A office sales, going for an average of $102 a square foot.

There are now eight office buildings on the market in Greater Hartford, including Goodwin Square in downtown.

Commercial real estate experts say that smaller metropolitan markets such as Greater Hartford increasingly are becoming attractive alternatives to higher-priced markets such as New York City and Boston. Borrowing rates also remain affordable, and investors are willing to plunk down money to pick off prime office space.

Osgood, at Cushman & Wakefield, said that the Greater Hartford area is attractive because rents are lower than either New York City or Boston - although the cost of living is higher than other parts of the country.

"Bottom line," Osgood said, "the Greater Hartford area continues to be a relatively low-cost environment."