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Property Value Carnage

Municipal revaluation shaves at least 15 percent off most values

Greg Bordonaro

March 26, 2012

Downtown Hartford's high vacancy rates have wreaked havoc on the property values of nearly all Class A office towers in the central business district, some of which have lost up to 70 percent of their value over the past five years, a Hartford Business Journal examination of city records has found.

Connecticut River Plaza, which has stood vacant since its prime tenant UnitedHealthcare left in 2010, had a market value of $59 million in 2006, a year in which real estate values neared their peak. But after Hartford's 2011 revaluation, the city slapped an $18.6 million valuation on the complex's 556,259 square office foot towers that overlook the Connecticut River.

Nearby, the empty Bank of America building at 777 Main St. was valued at $7.4 million in 2011. That's down 42 percent from its previous market value of $12.6 million.

But it's not just vacant properties that have taken a hit. All of downtown's largest office towers saw their values decline by at least 15 percent over the past five years, according to the city's recently completed revaluation. The exception is CityPlace I, which is about to be sold to a Boston real estate firm for $99 million.

"The new values are totally predicated on vacancy rates," said John Philips, assessor for the city of Hartford. "Values dropped uniformly for all general classes of property."

Philips said the city's recent revaluation, which is required by the state every five years, found that commercial properties in Hartford as a whole lost about 16 percent of their value, but the "big stuff downtown went down the most."

Residential real estate values took a similar hit.

It should be noted that 2006 real estate market values in Hartford, which is the last time the city did a revaluation, were phased in over a five-year period. As a result, the true value of properties from five years ago weren't reflected on the city's grand list until 2010. That is what led to Hartford's grand list increasing by $3.74 billion that year.

Today, the central business district has an office vacancy rate hovering around the 30 percent mark, an above average mark being driven in large part by multiple empty buildings.

In the aftermath of the Great Recession Hartford has seen a slow economic recovery, at least from a commercial realty standpoint as existing downtown tenants, some of which shed space in recent years, have been slow to expand, and new tenants to the city have been sparse.

High vacancy rates erode property values because they negatively impact cash flow on buildings. Fewer tenants mean less rental revenue to cover operating costs.

At the same time, stiff competition to retain or steal tenants from other office towers has forced some Hartford landlords to offer discounted rents or high tenant improvement allowances, putting further pressure on income.

All this is happening while operating costs continue to rise. The high cost of doing business in the city isn't helping either, realty sources say.

And as properties lose value, it makes it more difficult for building owners to refinance, which has put further stress on the market and helped drive several major office downtown buildings into foreclosure.

Of course, Hartford is not alone in seeing its real estate values take a hit. Other Connecticut cities and towns that have recently undergone revaluations have also seen declines, although commercial properties in Hartford seem to have been hit harder.

In many ways, the declines aren't surprising. Current revaluations are adjusting property values derived near the peak of the real estate market in 2006.

Since then, the Great Recession and slow economic recovery that followed has taken its toll on both residential and commercial properties in many parts of the state.

East Hartford, for example, saw the value of its real estate decline 16 percent, but most of that was driven by a 25 percent fall in residential real estate values, said town assessor Brian Smith.

Commercial properties fared better, Smith said, with most office buildings in East Hartford maintaining similar values to 2006. Vacancy rates for the town's sparse office space are relatively low, while rents have remained stable, Smith said.

Still, total real estate in East Hartford was valued at $2.2 billion at the end of 2011, a $424 million decline compared to the town's previous assessment.

The largest real estate holders in East Hartford include United Technologies Corp., Fremont Riverview, and Cabela's, whose total taxable properties were assessed at $319 million, $26.9 million and $26.1 million respectively in 2011.

Meanwhile, Manchester saw its property values decline by $413 million, or 11 percent compared to 2006, with residential property values waning at a steeper rate than commercial properties, officials said.

In West Hartford, real estate lost about 6 percent of its value in 2011, largely driven by declines in residential real estate. Commercial properties actually saw a 4 percent bump up in value, helped by increased interest and demand in apartment building investment, said town assessor Joseph Dakers.

Even still, the town's 2011 grand list of $5.9 billion was below the 2006 mark of $6.2 billion.

Kevin Maloney, a spokesman for the Connecticut Conference of Municipalities, said real estate values have begun to stabilize, but most cities and towns that have done a revaluation since October 2008 experienced a decline in value of some type of real estate.

"I don't think there is any community that has escaped it," he said.

That has created headaches for town managers and mayors trying to manage their community's finances, Maloney added.

A drop in property values could lessen the tax bill for commercial and residential property owners, but that is not guaranteed. Assessed values are only part of the formula to calculate a tax bill. In cities and towns with steep declines in property values, officials can offset some or all of those losses by increasing the mill rate, which is the tax levied per $1,000 of assessed value on a property.

That is something the city of Hartford is considering, as lost property values and the elimination of a surcharge on commercial buildings has put the city in a $56 million budget hole next year.

Of course tax bills also depend on whether a municipality increases or decreases annual budgeted spending.

Meanwhile in Hartford, office towers with at least some occupancy that saw the largest decline in value are all owned by Northland Investment Corp. The Massachusetts development company, which has faced foreclosure on three of its downtown office towers, is protesting the assessed value of two of its properties, arguing the city overestimated their worth.

That includes CityPlace II, which is in foreclosure and has a vacancy rate of about 25 percent. The city assessed the market value of the 290,542-square-foot tower at $20.2 million, which is 38 percent less than its 2006 value of about $32 million.

But Northland says the building is worth even less, putting the figure closer to $16 million. Northland's other office towers — Goodwin Square, 242 Trumbull St., and 100 Allyn St. — saw their values decline 56.7 percent, 56.5 percent, and 28.6 percent respectively.

Northland declined to comment for the story.

Other noticeable declines include the 280,000-square-foot Metro Center on Church Street, which was valued at $12.8 million at the end of last year, down about 50 percent from its previous revaluation.

That building was formerly owned by Northland and then taken over by a lender after being foreclosed. The building has a vacancy of about 18 percent, but the lease of its primary tenant Lincoln Financial Group expires next year and it's not clear if the company will stay there.

Complicating the situation further for downtown Hartford landlords is the fact that a fair amount of real estate is up for sale. Just last week Capital Properties and GE Capital put six of the office buildings in Hartford's iconic Constitution Plaza on the sales block.

The nearby Travelers Education Center is also for sale, while the owners of The Bank of America building, Connecticut River Plaza and Metro Center are also looking for potential suitors.