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Stilts Building, CityPlace II deals ripple through downtown

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9/8/2014
HBJ Photos | Brad Kane
HBJ Photos | Brad Kane
The Stilts Building at 20 Church St. in Hartford was valued at $45 million when the office tower was recapitalized by a Brooklyn investment firm in July. Last month's auction of Hartford's CityPlace II office tower started bidding at $6.5 million and closed at $19.6 million, which was on par with the sales price local brokers were expecting.
Downtown Hartford's commercial real estate market is heating up and it's not just Connecticut investors taking notice.

Two recent deals — the $20 million sale of CityPlace II and $45 million recapitalization of the Stilts Building — were led by investors outside Connecticut, who may not be done shopping for Hartford real estate.

Downtown brokers and property owners say they are now keeping a close eye on Constitution Plaza, which recently went up for sale and has also garnered interest from outside money. If the 665,000 square foot, Class A property sells at the high end of its projected market value it could trigger other downtown office building owners to test the market as well.

"Other downtown owners should be encouraged by these two transactions," said Patrick Mulready, senior vice president and partner for real estate services firm CBRE/New England.

CityPlace II's $19.6 million auction sale late last month drew a lot of attention, but it wasn't the only major deal to occur in downtown Hartford this summer. In July, Brooklyn-based Shelbourne Global Solutions quietly bought out investors for a 95 percent equity stake in the 410,000-square-foot skyscraper at 20 Church St. — better known as the Stilts Building for its unique design. New Jersey's Hampshire Real Estate Cos., which bought the 23-story property in 2006 for $19 million, maintains operations and a minority stake in the building. Shelbourne's recapitalization of Hampshire's mortgage valued the property—with 7 percent vacancy— at $45 million, or $109 per square foot.

CityPlace II's $65 per-square-foot sales price was on the high end of what realty brokers said they were expecting for a building with a 35 percent vacancy rate, especially given the marketing costs to lease the empty spaces.

Jay Wamester, principal and manager for Hartford brokerage Colliers International, who was the listing agent on the CityPlace II auction, said the sale attracted investors from as far away as California, which is rare for the Hartford market. Wamester would not disclose the identity of the buyer because the deal isn't expected to close for three more weeks.

"A lot of the people that were looking at CityPlace II were also looking at Constitution Plaza," Wamester said. "I would anticipate there will be a lot of interest in Constitution Plaza."

Constitutional Plaza outlook

Constitution Plaza owner MetLife, which seized the property through foreclosure in 2012 from GE Capital and developer Richard Cohen, is listing for sale six of the complex's buildings at an undisclosed price. The property includes a mix of Class A office towers and low-rise buildings totaling nearly 665,000 square feet. Built in the 1960s, Constitution Plaza is older than CityPlace II and the Stilts Building; it has a 20 percent vacancy rate.

A sale would be expected to close sometime in 2015, brokers say. MetLife unsuccessfully tried to sell the property in 2012 as well.

The hope is that the strong interest in CityPlace II carries over to Constitution Plaza, particularly since there were investors who lost out on the auction, but still looking to invest their unspent capital.

If Constitution Plaza garners strong investor interest, it could spur other downtown property owners to consider selling as well, brokers say.

"The market is typically defined by the most recent deals done," said Joel Grieco, executive director of Hartford brokerage firm Cushman Wakefield. "Every deal has an impact on the market because it is a reflection of the market."

The owners of the Gold Building at One Financial Plaza, which is home to Fortune 50 company United Technologies Corp., Travelers and People's United Bank, will be closely watching a potential Constitution Plaza sale to see if it's the right time to test the market, said Kevin North, chairman of Talcott Realty Investors, which bought the office tower in 2000 for nearly $60 million.

"We have a general plan as owners: We buy properties, lease them up, and then sell them at an opportune time," said North. "At some point, we will evaluate the sale of One Financial Plaza."

Constitution Plaza is closer in age to the 41-year-old Gold Building and also has a similar parking situation, making the plaza a good comparison for Talcott, North said. The Gold Building, however, has the advantage of being fully occupied. Talcott previously tried selling the building in 2006, hoping to reel in a buyer willing to pay as much as $77.7 million, but a deal never materialized.

North said Talcott is constantly evaluating its options, but there are no specific plans right now to list the Gold Building for sale.

Another property that could soon hit the sales block is Goodwin Square, which is owned by the same entity — LNR Partners — that controlled CityPlace II. The 30-story, Asylum Street building has a higher vacancy rate than CityPlace, making it a harder sell.

Typically, the best time to sell a commercial office building is when the vacancy rate is at its lowest and when tenants are in the early years of their leases. That gives potential buyers the most guaranteed revenue. Investors usually hold onto a commercial office building for about five to seven years.

When CityPlace I sold in 2012, it was practically fully occupied, and the sales price was $112 per square foot. The CityPlace II auction, by comparison, fetched $65 per square foot.

Wamester said he was expecting CityPlace II to sell between $18 and $20 million.

Despite concerns over its 35 percent vacancy rate, Wamester said he believes the new owners should do quite well on their investment. CityPlace II's vacancy rate was high because the building was in foreclosure proceedings since 2009, and LNR had limited ability to make deals with potential tenants, he said.

The building benefits from occupying the same block, sharing a lobby with, and having a similar feel as CityPlace I — the state's tallest building and largest Class A office tower — which makes finding tenants easier.

"CityPlace, as a project, is the most recognizable development in Hartford," Grieco said.

Downtown's vacancy rate recedes

The vacancy rate for Class A office space in downtown Hartford at the end of the second quarter was 16 percent. That's slightly better than downtown's average vacancy rate over the past two decades and trending in a positive direction, CBRE's Mulready said.

That vacancy rate was helped dramatically by the state's $34.5 million purchase of Connecticut River Plaza and its plans to occupy the building with 2,500 workers starting next year.

The state overpaid at $62 per square foot for a building that was completely empty, but the move has yielded positive results for downtown commercial real estate, Grieco said. With the vacancy rate down, property owners have less competition to woo tenants.

The city's and state's moves to convert other vacant office space into residential units — such as the 777 Main St. high-rise into 285 apartments — has helped commercial properties as well, said Wamester, because it's encouraging more businesses and residents to seek out downtown locations.

"By and large, a lot of the steps that the city and the state have taken are starting to pay dividends," Wamester said.

Those dividends will be even higher if Constitution Plaza and the rest of downtown's commercial real estate continues to attract interest from outside investors, who may be priced out of other major markets like New York City and Boston, Grieco said. More interested parties means more competition for space and higher sales prices.

"It is encouraging to have outside investors," Grieco said. "They see Hartford as a value opportunity where they can get on the elevator going up."n