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Office Rental Rates Hint At Stabilization

One Firm Reporting Uptick In Net Rents; Others Say ‘Not Yet’

By Greg Bordonaro

October 11, 2010

Greater Hartford’s commercial real estate market seems to have finally hit rock bottom and rents may have actually seen a slight uptick in the third quarter for the first time in more than two years, according to one research estimate.

But there is still a long, sluggish recovery ahead, as local employers remain skittish about adding jobs and expanding their real estate holdings in the region.

The average effective rents for Greater Hartford, and parts of Middlesex County, which includes concessions by landlords, stood at $16.78 per square foot in the third quarter, a slight 0.4 percent uptick from previous quarter, according to Reis, a New York-based research firm that tracks the industry.

That represented the first increase in effective rents in the region since the second quarter of 2008.

Conversely, real estate brokerage firm Cushman & Wakefield’s latest third quarter stats show a slight decrease in average asking rents for Greater Hartford. Cushman, whose data does not take into account concessions such as free rent, and also doesn’t include Middlesex County, reports a third quarter average direct rental rate of $19.45 for the region.

What both firms do agree on, however, is that there has been stabilization in the Greater Hartford office market, which has been hemorrhaging since the start of the downturn.

Effective and asking rents are not declining as rapidly, while vacancy rates have likely reached near or at the bottom. Cushman lists Greater Hartford office vacancies at 20.3 percent, while Reis said 22.5 percent of office space remains unoccupied.

“I think it is misleading to suggest that our market is seeing rising rents,” said Joel Grieco, the executive director of Cushman & Wakefield in Hartford. “However, I do agree that we are seeing stabilization, inasmuch as the negative absorption of space has slowed its pace.”

Grieco said the future health of the Hartford commercial real estate market depends on the economy and jobs. If employers begin to hire again, it will likely mean they will search out more space to house the extra bodies.

But Connecticut’s economic recovery has been slow and painful. In fact, the unemployment rate actually ticked up in August, back over 9 percent.

And, even if employers begin to hire again, there is a question of how much new space they’ll be willing to take on.

“Companies are fitting employees into smaller footprints and encouraging work-at-home, so expect a lag between rising employment levels and falling vacancy levels,” Grieco said. “And with the state’s unfavorable business environment, we can strap in for a long slow ride.”

Overall, Greater Hartford has more than 25 million square feet of office space, nearly 40 percent of which is located in Hartford. Through the first half of the year, tenants vacated about 239,000 square feet of space in the region, according to CB Richard Ellis. That was mainly spurred by large employers, like insurance companies and law firms, which decided to cut back on space to save money.

At the end of the third quarter vacancies in prime, Class A space stood at 21.7 percent, about double the rate for what is considered a healthy market, according to Cushman & Wakefield.

Nationally, office vacancies inched up slightly in the third quarter to 17.5 percent, while the effective rent rates remained stable at $22.05 per square foot, according to Reis.

Jay Wamester, a principal with Colliers International in Hartford, said the suburbs seem to be showing more signs of life than downtown Hartford. In particular he’s seen some recent leasing activity in surrounding towns like Glastonbury and Windsor.

Health insurer Cigna, for example, recently leased space in the 122,000-square-foot office building, 3 Waterside Crossing in Windsor.

That activity, even if it is relatively modest, means suburban landlords aren’t being forced to make as rich concessions to prospective tenants as they did a year ago, Wamester said.

“Glastonbury is rebounding. Downtown Hartford is still at a bottom,” Wamester said.

Part of the problem with downtown Hartford, Wamester said, is that operating expenses continue to climb, coming closer to the actual asking rents.

High property taxes and energy costs are the driving factors. Some estimate that landlords are paying $6 per square foot in real estate taxes alone for Class A space in downtown.

“When you compare operating costs in similar markets, they are much higher here,” Wamester said. “Downtown still does not have enough deal flow to effectively say there is a recovery. It’s still bad; it’s just not getting worse.”

Recent movement in the city has largely been by employers trading spaces.

That activity has included the recent movement of about 2,100 UnitedHealthcare employees from Connecticut River Plaza on Columbus Boulevard to CityPlace on Asylum Street. UnitedHealthcare now occupies 18 floors of the Hartford skyscraper.

CityPlace will also soon welcome Bank of America employees, as that company moves its Connecticut banking headquarters out of 777 Main St. Bank of America will occupy a total of 100,000 square feet in CityPlace, cutting its downtown Hartford footprint in half.

The move will also leave the office tower at 777 Main St., essentially empty.

Meanwhile the new owners of the Connecticut River Plaza office complex, which was bought this summer for $6.7 million by FBE Limited and Cammeby’s International, are preparing to invest millions of dollars in improvements to draw new tenants to that empty property.

McElroy, Deutsch, Mulvaney & Carpenter, the law firm formerly known as Pepe & Hazard, also recently moved out its space in Goodwin Square to the 24-story, 500,000-square-foot office tower known as One State Street.