October 1, 2012

Office market rebound

HBJ File Photo
SOLD: Alexion

When a Massachusetts real estate investment trust paid $102 million to buy the CityPlace I office tower in downtown Hartford last April, it was an early signal that the Greater Hartford office market could be showing signs of life.

Now, six months later, it appears 2012 will be a banner year for the region, at least in terms of sales volume.

Commercial real estate office sales in central Connecticut are likely to hit or even surpass pre-recession levels in 2012, a good sign for a market that has been battered by the aftershocks of the 2008 financial crisis.

So far this year, 12 office buildings in central Connecticut have sold for $186.2 million, well above the eight deals completed in 2011 that were worth a paltry $31 million, according to data provided by realty consulting firm CBRE-New England.

In 2009 and 2010, annual office sales volume in Central Connecticut didn't surpass $80 million.

Meanwhile, there are several significant deals still in the pipeline that are expected to close in the coming months. That could add an additional $83 million in sales for 2012, which would push sales volume well over the $250 million mark for the year and represent the largest deal flow in central Connecticut since before 2005, CBRE-New England data shows.

Realty experts say the increased activity is a result of several factors, including pent-up demand from sellers and buyers, increased availability of financing combined with the low interest rate environment, and itchy investors who are looking for solid returns but are being priced out of primary markets.

"More deals are happening," said Pat Mulready, the senior vice president of CBRE-New England. "We are starting to see normal sales from investors with stabilized product going out to market."

Mulready said one of the encouraging signs is that more outside investors are showing interest in the Hartford market, mainly because prices in core markets like Boston and New York City are getting overheated.

The best example was Massachusetts-based CommonWealth REIT purchasing CityPlace I in April for $102 million, or about $117 per square foot.

That deal represented the largest office deal in downtown Hartford since 2007, and helped significantly increase sales volume for the year.

Mulready explained that over the past three years, following the 2008 financial crisis, the sales market in many secondary cities like Hartford didn't exist, as many investors turned their focus to managing existing portfolios and putting out fires where they existed.

That's starting to change.

"If you look at the market from 2009 to 2011, investors of office product in secondary markets were shell shocked," Mulready said. "Equity dried up all around the country and there really wasn't a sales market."

Christopher Ostop, executive vice president at Jones Lang LaSalle in Hartford, said now that the economy is improving, sellers and buyers have more confidence. Many property owners or fund managers are also holding onto properties that are aging in terms of their investment life cycle and owners need to sell them, which is also helping drive activity.

Typically real estate investors will hold properties for seven to 10 years, then look to sell, Ostop said. But in the three years after 2008, many fund managers decided to hold onto properties longer, either because they couldn't find a buyer or weren't getting attractive offers.

"There is a lot of pent up demand," Ostop said.

Joel Grieco, executive director of realty brokerage firm Cushman & Wakefield in Hartford, said the stronger numbers in 2012 office sales volume are a good sign for the market, but he wouldn't call it a full fledged recovery yet.

Some of this year's sales were to "users," meaning the buyers bought buildings for their own operations. Also, the CityPlace sale skews the numbers a bit because it was such a large deal, Grieco said.

Still, the needle is starting to move in the right direction, he added.

"There is a lot of money out there looking for real estate opportunities, and it has been encouraging to see new investors believe in the Hartford area," Grieco said.

Other big deals in 2012 included the $32 million acquisition by Massachusetts development firm Winstanley Enterprises of Alexion Pharmaceuticals' headquarters on 350 Knotter Drive in Cheshire. Alexion recently received a $51 million incentive package from the state to move its headquarters to New Haven, where it will add 300 jobs.

Windsor has seen some significant activity of late. Three buildings part of what is known as the "Valassis" portfolio were recently sold by Michigan realty development firm The Hinman Co. That included two office towers — 1 and 10 Targeting Centre — which were acquired in separate deals by Select Income REIT and Litchfield investor Mark Greenberg for $12.1 million and $2.9 million respectively.

Greenberg also purchased a 162,900 square foot office building at 80 Lamberton Rd. in Windsor for $7.65 million from New Boston Fund.

Meanwhile in Wethersfield, JMM Properties LLC bought the 39-year-old, vacant four story office building at 1290 Silas Deane highway for $2 million.

The new owner plans to completely renovate the 90,000-square-foot building, including a new roof, heating, ventilation and air conditioning system, windows, common areas, elevators and landscaping, to restore it to Class A status.

On the lending front, Mulready said most buyers are financing their acquisitions, and low interest rates are making office investments look more attractive.

Banks and the commercial mortgage backed securities market are also becoming more active, although borrowers are being required to put more skin in the game.

The days of 80 percent to 100 percent loan to value ratios are gone, particularly in secondary markets, Mulready said. Now, typical loan to value ratios required by banks are in the 60 percent to 70 percent range, which means borrowers can't leverage asset purchases as much as they used too.

In terms of future outlook, realty brokers say 2013 could shape up to be an even more interesting year, particularly for downtown Hartford where several major properties are likely headed on the market.

That includes three Class A downtown office towers formerly owned by Northland Investment Corp.: the 280,000 square foot Metro Center on Church Street; Goodwin Square on Asylum Street; and the 18-story CityPlace II office tower on Asylum St.

Northland lost all three of those buildings to foreclosure.

Mulready, of CBRE/New England, said the companies controlling all three buildings are not long term real estate holders and will likely try to sell off the properties sooner rather than later.

A deal for Metro Center could come first, since that building recently resigned its anchor tenant, Lincoln Financial Group, to a five-year lease. The building is over 80 percent occupied and was foreclosed more than a year ago.

Goodwin Square has a much higher vacancy rate and may need to attract more tenants before it's put on the block, realty sources say.

Private equity investors, particularly from Boston or New York, may show the most interest in those properties, Mulready added.

Meanwhile, the state of Connecticut is also actively looking to purchase Hartford office towers as part of a plan to consolidate state agencies downtown. The state has been actively negotiating with the owners of Connecticut River Plaza and 55 Farmington Ave., to potentially purchase those properties.

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