Lincoln Financial Group's decision to renew its office lease in downtown Hartford is a victory for the city, which is able to retain a major employer. But the deal may prove to be just as big a victory for the owners of the Metro Center office tower, where Lincoln will continue to occupy 190,000 square feet of space through 2018.
The Class A office building, which is controlled by U.S. Bank National Association, was taken off the sales block last year because of the uncertainty surrounding Lincoln's future. As the office towers' largest tenant, Lincoln's decision to stay or leave the building held major implications for the property's value on the market.
"With Lincoln's renewal, the building is now stabilized which should position it for sale," said Joel Grieco, the executive director of realty brokerage firm Cushman & Wakefield in Hartford.
Grieco, who represents the owners of the building, said the office tower is likely headed back on the sales block soon. And realty sources say there will be strong interest in the building and a deal could happen in a relatively short period of time.
Metro Center was formerly owned by Northland Investment Corp. before the Massachusetts-based development company lost the property to foreclosure in 2011.
The Class A office tower has been controlled by a special servicer since Northland lost the property. The building went on the sales block for a period shortly following the foreclosure, before being taken off the market while Lincoln Financial determined its future office needs.
Lincoln Financial came to downtown Hartford 14 years ago after the company bought its life insurance business from Cigna Corp. Originally, that business resided in Bloomfield, but Lincoln moved those operations to Hartford's Metro Center in 1998.
The company occupies more than 60 percent of Metro Center, whose other main tenant includes the Connecticut Business & Industry Association, which takes up about 40,000 square feet of space. Another 52,000 square feet remains vacant.
One of the key attractions of Metro Center is its attached parking garage with more than 1,200 spaces. Parking is always a significant issue for companies looking to do business downtown, particularly for employers with a larger workforce. Metro Center's attached garage gives it an advantage in the market.
It's not totally clear what the market will be like for a Class A office tower in downtown Hartford because there have been few recent sales of large office buildings. The downtown office vacancy rate also remains high, hovering near the 30 percent market.
The only recent significant deal was the sale earlier this year of the 38-story CityPlace I office tower to Commonwealth REIT, which paid $101.5 million, or about $117 a square foot. But CityPlace was nearly 100 percent leased at the time of the deal, and had major Fortune 500 tenants — including UnitedHealthcare — locked up in long term deals.
The owners of six buildings within Constitution Plaza, which contain 650,000 square feet of office space, put that chunk of real estate up for sale in March, but realty sources say offers haven't been attractive enough for a deal to be made, and its unlikely a sale will occur anytime soon.
The 280,000-square-foot Metro Center has an occupancy rate in the 80 percent range. When Northland bought the property in 1997 it paid $10 million. In 2006, its value had risen to $24.9 million. During its most recent revaluation, the city tagged Metro Center's market value at $12.8 million.
Pat Mulready, the senior vice president of CBRE-New England, said he has noticed more outside investors showing interest in the Hartford market, mainly because prices in core markets like Boston and New York City are getting overheated.
"Groups are interested in Hartford," Mulready said, adding that pricing levels aren't as high as they were in the mid 2000s, but closer to prices investors paid during the late 1990s and early 2000s.
In terms of a deal for Metro Center, Mulready said a potential buyer will have an easier time finding financing now that Lincoln has signed a long-term lease. Higher cap rates and the low interest rate environment will make a potential purchase even more attractive, he said.
"The amount of financing available is related to length of leases," Mulready said. "Now that Lincoln has a five-year lease, that's going to make a big difference."
Meanwhile, Lincoln Financial's decision to stay downtown assures the city that its office vacancy rate won't go any higher.
In recent weeks, downtown has gotten some good news with several major lease announcements. That includes golf lifestyle startup Back9Network's decision to lease 6,500 square feet of space in Constitution Plaza, where it plans to open a new TV studio. East Hartford-based CareCentrix was granted $24 million in state incentives to move its office location to 20 Church St. in downtown Hartford, where it will occupy 40,000 square feet.
But the office vacancy rate in the city still remains high and actually experienced more negative absorption during the second quarter. CBRE-New England tagged the central business district office vacancy rate at about 30 percent at the end of the second quarter, while Cushman & Wakefield put it at 26.4 percent.
The vacancy rate is being driven higher largely because two major properties — Connecticut River Plaza and the Bank of America building at 777 Main St. — are completely vacant.
But that could change soon. The realty community continues to wait for the state to complete its expected acquisition of multiple downtown Hartford office towers, so it can move some state employees to downtown.
Sources familiar with the state's plans say the Department of Administrative Services is in deep negotiations to purchase Connecticut River Plaza and 55 Farmington Ave., which was recently put up for sale by the Hartford Financial Services Group. But there is no clear timetable as to if or when a final agreement will be reached.