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Updated: July 27, 2020 Focus: Real Estate

Hartford’s office market in limbo as COVID-19 uncertainty delays expansions, renewals

HBJ Photo | Joe Cooper Two former Morgan Stanley investment advisors have opened a new firm in Downtown Hartford's CityPlace (right) office tower.

GalaxE.Solutions Inc., Hartford’s newest IT services firm, entered 2020 with an ambitious plan to hire up to 200 workers by summer in newly leased office space, and was even considering buying a tower downtown.

But those plans were made months before COVID-19 began to spread across Connecticut, and as offices and businesses largely closed downtown to limit the spread of the novel coronavirus.

While Connecticut has become a leading state in curtailing the virus, downtown offices, including GalaxE’s 24,000-square-foot space at the CityPlace I skyscraper on Asylum Street, remain largely empty as positive cases spike nationally and companies find success working remotely.

Chandra Dyamangoudar, Vice President, GalaxE.Solutions

“There’s no indication when we will go back into the workplace,” said Chandra Dyamangoudar, vice president of GalaxE’s Hartford office, which employs just over 50 people downtown. “We will continue to aim for [hiring 200 employees]. COVID-19 has definitely impacted some of those expectations, and how we will achieve some of those strategies.”

GalaxE is one of many companies either delaying or rethinking expansions downtown as the health pandemic casts uncertainty over economic conditions and when and how it’s safe to return to offices.

Hartford HealthCare, parent of Hartford Hospital, in a statement said the “tremendous financial burden” created by the COVID-19 outbreak has forced the health system to reassess how to relocate 400 employees and hire another 300 for its newly leased space in downtown’s 100 Pearl St. office tower.

Indian tech company HCL Technologies, which plans to open a global delivery center in Hartford, recently said its Capital City expansion is “delayed because of the initial outbreak of COVID.” It did not provide additional comment on when it plans to lease or occupy downtown space.

HBJ Photo | Joe Cooper
A sign outside Hartford Stage and the 20 Church St. office tower warns residents to stay safe during the COVID-19 pandemic.

Moreover, new office leasing and renewals are also being disrupted because many companies have implemented a hiring freeze until the pandemic subsides.

Downtown brokers say there are few new office leases being signed due to tenants fearing a second wave of new COVID-19 cases in Connecticut. Larger employers, they say, have not yet made any long-term leasing decisions, but those could be on the horizon.

According to the Brookings Institution, more than half of U.S. employees worked from home during initial COVID-19 shutdowns, and companies like Google, Twitter, Facebook and Morgan Stanley plan to continue allowing workers to telework until the pandemic is over. That could result in a major downsizing of the $2.5-trillion office market and the bars, restaurants and housing options that surround them.

In Worcester, a similarly sized city to Hartford, insurer Unum recently announced plans to close its office there and direct 400 employees to permanently work from home.

Jonathan Putnam, Executive Director, Cushman & Wakefield Inc.

Hartford’s office market could face a similar experience depending on when leases end, if another wave of positive cases further delays Connecticut’s phased economic reopening, and how soon a COVID-19 vaccine is widely available, experts say.

“Overall, [leasing] activity is down substantially,” said Jonathan Putnam, executive director of commercial real estate broker Cushman & Wakefield Inc.’s Hartford office. “There aren’t many people that are out actively looking in the market. The summer is slower anyway in most cases, but it’s more noticeable now for us.”

Leasing uncertainty

With many expansions and lease renewals on hold, area brokers expect downtown’s first-quarter vacancy rate of 17.7% to tick upward slightly by year-end.

Just how high vacancies go, they say, will depend on a few key factors, including: whether or not landlords invest in new touchless and air-filtration technologies, and how that might impact confidence in returning to the office; how positive cases trend in Connecticut; and whether tenants sign short-term lease extensions for additional time to evaluate long-term investments.

“I think technology will solve many of the problems related to the office environment to make it safer, or less likely people would be sharing germs,” said Putnam, just days after an undisclosed client leased new office space at the Goodwin Square office tower on Asylum Street. “But I certainly had hoped by now we’d be in a much better place nationally.”

[Read more: New Hartford office tower owner, Congressional candidate Askar staying course during quiet leasing period]

Downtown employers have largely had success pivoting to remote-working models, he said, but some have experienced headaches with the change as younger staff may be juggling child care or other distractions during business hours. Tenants have also reported that teleworking has made it difficult for new hires that would otherwise benefit from in-person training to advance their careers.

“For some, they will have to go back to an office environment,” Putnam said. “It’s very hard to get noticed or stand out amongst your peers if you are limited to interactions on the phone and Zoom meetings.”

Christopher Ostop, Managing Director/Broker, Jones Lang LaSalle LLC (JLL)

Christopher Ostop, a managing director/broker of Jones Lang LaSalle LLC (JLL), estimated that downtown’s vacancy rate could reach “upwards of 20%” as office leasing has grinded to a halt, and as many larger employers have told staff to work from home until Jan. 2021. Elsewhere downtown, insurers Aetna and Travelers Cos. have ordered staff to work remotely through at least Labor Day.

JLL, meanwhile, is not yet requiring employees to return to the office, and Cushman & Wakefield’s Hartford office is currently operating at 25% capacity, Ostop and Putnam said.

“Everyone is kicking the can,” Ostop said of the lack of office activity downtown. “Nobody wants to make a multi-year decision based on what’s happening today.”

Unlike the retail market, he said most office tenants are locked into five- to 10-year leases they can rarely break in terms of duration or payment.

Tenants sitting on excess space that were previously waiting for new business to hire additional employees are likely to shed that square footage.

“I’m not expecting catastrophic changes to our tenant roster in downtown Hartford, but I would suspect over the next five years, as tenants come up for renewal, that most will likely renew for less space,” Ostop said. “I don’t think anybody is responding to COVID saying we need to spread out, and take more space.”

Bob Gaucher, a senior commercial real estate specialist at OR&L Commercial LLC, says he’s seeing the same level of leasing uncertainty in Hartford’s suburbs — where the vacancy rate is 19.8% — as tenants are postponing their expansions.

Several O,R&L clients, he said, are reluctant to relocate to office buildings where they would have to share elevators, smaller office quarters, or amenities like cafeterias, lounges and fitness centers.

“Some of these amenities are not as important anymore,” Gaucher said.

Signs of life

Adam Stark, President, Stark Office Suites

Prior to March, New York office landlord Adam Stark said he was fielding a record number of leasing inquiries since acquiring his 18-story, century-old skyscraper at 750 Main St. three years ago for $4.3 million.

“When things struck in March we were in the middle of conversations on a number of leases and expansions,” Stark said of the 128,334-square-foot tower, which straddles the prominent corner of Main and Pearl Streets downtown.

HBJ Photo | Joe Cooper
Tenants have been slowly returning to the 750 Main office tower (right).

Stark said the tower, which was 75% occupied prior to the pandemic, recently started to book office showings for expansions, including with a few existing tenants. That comes just weeks after nearly all leasing negotiations there stopped.

“Some of the prospective tenants that disappeared are starting to come back, as well as a whole bunch of new ones,” he said.

Stark is bullish that only two tenants at the roughly 100-suite tower have had to shed space or pass on renewing their lease during the pandemic. He’s also optimistic because occupancy at the tower, which is partially occupied by Crosskey Architects, The Connecticut Forum, several law firms and startup Aquiline Drones, had been trending upward earlier this year.

“When you are looking at things from a long-term perspective, there’s always short-term bumps that need to be overcome,” Stark said. “It doesn’t change our underlying feeling that Hartford is an exciting place.”

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