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October 10, 2022

Greater Hartford leaders convene working group to plot future uses for increasingly vacant office space

HBJ PHOTO | MICHAEL PUFFER MetroHartford Alliance CEO David Griggs with downtown Hartford’s City Place I office tower in the background.
Click below to see a list of recent shocks to the Greater Hartford office market.
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United Healthcare and Prudential Financial are dramatically reducing their downtown Hartford footprints, giving up hundreds of thousands of square feet of leased office space.

Voya Financial recently put up for sale its 470,000-square-foot Windsor headquarters. The Hartford, in June, announced plans to sell or lease its 457,396-square-foot office building, also located in Windsor.

With a drumroll of large corporations shrinking their physical footprints in and around Hartford, area economic development directors, industry experts and others are coming together to brainstorm a response.

“The first order of business is to get the biggest communities together and agree that, yes, this is a regional problem and, yes, this is a path we want to go down,” said David Griggs, president and CEO of the MetroHartford Alliance. “I’m hopeful we will be able to … first build a room where people are able to talk and share and come up with ideas and find solutions we can all use.”

Griggs is spearheading an office space working group. There was a meeting in September with just a handful of participants. Griggs plans to recruit more experts from the business community.

He should have no shortage of takers.

Phil Gagnon

Philip Gagnon, a principal with brokerage firm Colliers in Hartford, said the Alliance’s broad planning effort is a good idea, so long as it “brings all the stakeholders together.” That means inclusion of the transactional professionals — brokers, landlords and tenants, he said.

“They are the boots on the ground telling you where the demand is coming from and isn’t coming from,” Gagnon said.

Gagnon said he would suggest an effort to convince employers of the need to return workers to centralized offices.

“We are still seeing the large Class A occupiers are taking advantage of the work-from-home trend and not insisting that employees return to the office in a big way,” Gagnon said. “Is that trend going to continue? I think it’s going to continue as long as nobody is incentivizing the issue of back to the office, as long as the CEOs are not saying: ‘Hey, we need you back in the office to preserve the culture.’ ”

Rising vacancies

CBRE’s second-quarter report on the Greater Hartford office market paints a picture of atrophy.

Hartford and surrounding towns saw negative absorption of 171,010 square feet of office space, according to CBRE. Office vacancies saw a slight uptick in the quarter to 20%, according to CBRE.

Vacancy rates are highest in the northern section of Greater Hartford — Bloomfield, East Granby, East Windsor, Enfield, Windsor and Windsor Locks — at a staggering 40.5%. Downtown Hartford’s Class A office vacancy rate is 20.1%, CBRE data shows, a number that is expected to climb as leases expire.

“Demand for office space continues to feel the aftershocks of the pandemic as large employers who once accounted for nearly half of the occupied footprint in the Greater Hartford region are further embracing remote and hybrid work and giving back significant amounts of space,” reads a portion of the CBRE report. But it also notes an “uptick” in foot traffic in Hartford and the suburbs.

Photo | HBJ File
Capital Region Development Authority Executive Director Mike Freimuth.

John McCormick, executive vice president of CBRE, said more companies are beginning to return staff to offices for longer portions of the week. While there may be a drawdown in the amount of space leased, the number of people working in many office buildings is on the rise.

In the summer of 2021, only about 20% of leased office space in Hartford was being used, McCormick said.

“And now I would say it’s 30% to 40%, and that’s an improvement,” McCormick said. “I think they are encouraging employees to come back whenever possible.”

McCormick predicts the return will pick up momentum at some point. Employers will recognize mentoring and collaboration are efforts best accomplished in physical proximity. And as more staff return, there will be a greater pull for others to follow, he said.

“I think the advantages of bringing someone back into the office are going to be more visible to those employees maybe six, nine, 12 months from now when coworkers are more comfortable coming back and you are the odd person out if you are not coming in,” McCormick said.

Housing conversions considered

State and economic development officials often speak about the addition of market-rate apartments to downtown Hartford filling some of the gap left by absent office workers. Gagnon is skeptical, however.

“Will one-eighth of the population be able to support the same amount of amenities?” Gagnon said. “It can’t. It just can’t. Someone has to start saying: ‘What is the Hartford workforce? What’s the population? And what’s the plan to get that population back to Hartford?’ That’s the mission statement if you will.”

David Lehman, commissioner of the Department of Economic and Community Development, said apartment conversions are a key response to Hartford’s office vacancies.

HBJ File Photo
David Lehman speaks to a business audience pre-COVID-19.

“I think the question is, how do you further diversify the city, and to me the answer continues to be residential and the work that (the Capital Region Development Authority) has been doing,” Lehman said. “The question in my mind is how much more residential do you need and how many more of these buildings could you convert to residential from office. That doesn’t work for every office, but it does work for some.”

Conversions will be increasingly appealing as office vacancies persist and rents remain stagnant, Lehman said.

“I think we just need to continue that work,” Lehman said. “Is that 5,000 more units? 10,000? 20,000? I don’t know what the number is. The vibrancy needs to continue to be built and that will reduce the structural vacancy.”

In other words, office conversions to residential won’t just bring new residents and their buying power, it will reduce the glut of office space.

“… At some point in time it’s a smaller office market that’s needed, because of hybrid work or remote work,” Lehman said. “You want to have an exciting downtown that is alive 18 or 24 hours a day, as opposed to a traditional commute in and commute out. I think that’s where the world is going.”

Over the past eight years, the Capital Region Development Authority (CRDA) has committed about $156 million — mostly low-interest loans that will be repaid and recycled into future projects — to help apartment builders add more than 2,200 units to downtown Hartford.

As for the exodus from mammoth office complexes north of Hartford, Lehman sees that as an opportunity for the private market rather than a problem demanding new government solutions.

Lehman said there are existing government grant programs — such as the $100 million CT Communities Challenge — that could be tapped to support new uses, even residential, for former offices.

“I don’t think (state government is) the best arbiter of that,” Lehman said. “I’d like to see the private market address that. … It’s not clear to me there is a formulaic strategy that the state should have as it relates to these suburban properties, that there is risk of obsolescence. So, they may need to be repurposed.”

Federal help possible

Amid the continuing struggles in the office market, Congressman John Larson (D-1st District) is hoping to revive a proposed federal bill that would grant a tax credit — worth 20% of project cost — to support metro area office building conversions into mixed-use residential properties.

John Larson

That bill would have required some housing in the converted buildings be set aside as affordable. It had bipartisan support, as well as staunch backing from the U.S. Conference of Mayors, but stalled in Congress. Larson blames a logjam in the Republican-controlled Senate.

Given office markets are suffering broadly in red and blue states, Larson said he has some hope it may be attached to a continuing resolution that just passed the Senate and is now before the House.

“In a lame duck session there is an awful lot that can happen,” Larson said. “And that is nonpartisan and there is a lot of concern in all districts across the country.”

CRDA Executive Director Michael Freimuth said there is a need to continue the conversion of office buildings, but probably not as many as landlords would hope.

Like Lehman, Freimuth is wary of attempts to push back macroeconomic trends with one-size-fits-all answers. Part of the working group’s task will be to contemplate other practical uses, he said.

“There may be uses for buildings other than residential that we don’t understand,” Freimuth said. “There may be growth curves that we are just not aware of.”

Real-time impacts

Michael Seidenfeld, chief operating officer for Shelbourne Global Solutions — Hartford’s largest landlord — said there needs to be a multipronged response that begins with cutting the city’s high tax rate (68.95 mills) on commercial properties.

Seidenfeld also advises a dramatic increase in marketing by the city and state. Recent apartments added to the downtown have filled far more quickly than would have been imagined three years ago, so there are obvious strengths to advertise, he said.

Seidenfeld said it would be a good idea to convert one or two downtown Class A office towers to residential, but it’s not likely possible under current conditions.

The buildings would have to be gutted, and their plumbing and electrical systems completely reworked. That would mean buying out existing tenants and maintaining the buildings without cash flow during an expensive conversion, he said.

Such an undertaking would require “major” tax incentives, he added.

“If the only hope for the office market is conversions, then the state and city have to step up very quickly,” Seidenfeld said.

Shelbourne’s recent struggles are, at least partially, a consequence of the stresses that have come with the remote work trend.

In June, Wells Fargo Bank filed a foreclosure action alleging Shelbourne has missed payments since February on a $31 million mortgage on the 420,000-square-foot office tower at 20 Church St., better known as the Stilts Building.

John McCormick

“If people don’t start leasing space, you will see more defaults and more buildings in jeopardy,” Seidenfeld said.

Shelbourne, over the past eight years, has acquired — wholly or through a partial ownership stake — a portfolio of 20 city properties with more than 2.5 million square feet and values of more than $250 million, Shelbourne Managing Member Ben Schlossberg reported this summer.

Seidenfeld said the average occupancy in Shelbourne office buildings is currently in the low 80% range — compared to occupancy “in the 90s” just prior to the pandemic. More tenants will be moving out next year, with most simply reducing space and not moving to other area buildings, he said.

“It’s way down from before COVID and, again, that’s actual rentals to date,” Seidenfeld said. “We know Travelers over the next three, four years is going to move out of one of our buildings. We know CareCentrix is going to move out or downsize substantially.”

A collective punch

In Farmington, Economic Development Director Rose Ponte agrees a regional approach makes sense, with every area collaborating to make the best joint use of individual strengths in marketing, and perhaps the targeting of development.

Before the pandemic, Farmington was a “very stable” office market, Ponte said. However, her concerns about remote work trends are manifesting in largely empty parking lots at Raytheon’s Farm Springs Road office complex and elsewhere.

Ponte hopes to expand a nascent bioscience sector around the UConn Health center, perhaps with the help of government incentives.

“We have a lot of kindling and a lot of wood, maybe the government could be the spark that sets it aflame,” she said.

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