Landlords, lenders face complicated paths navigating Hartford’s struggling office market

In another sign of trouble for downtown Hartford’s office market, M&T Bank is trying to sell a $28.25 million mortgage loan secured by the 30-story Goodwin Square office tower, at 225 Asylum St.

The entity that owns the 340,247-square-foot building — a limited liability company tied to Westport Capital Partners — is current on its loan payments but not willing to invest in tenant improvements or brokerage fees to recruit tenants going forward, according to a marketing brochure circulated by real estate services firm Newmark. The building is currently 76.1% leased, and the loan comes due in January 2026, according to the brochure.

The attempt to sell Goodwin Square’s debt is the latest in a series of dramatic moves by lenders dealing with the drop-off in demand for downtown Hartford office space, and an accompanying spiral of office values.

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At least four of the city’s class A office towers are being managed by court-appointed receivers, with three of those properties also facing foreclosure.

A deeper hole

Some experts estimate nearly 40% of downtown Hartford’s office space is available, counting existing vacancies and tenants that are expected to downsize when their leases expire in the near term.

Downtown Hartford — which has an estimated 7.4 million square feet of central business district office space, according to Cushman & Wakefield — has been through past cycles of collapsing office values, which have typically resulted in a wave of foreclosures and ownership changes before a rebound occurs.

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Brokers, bankers and other experts see a stiffer challenge this time around, given Hartford’s weakening status as a corporate stronghold and the wider acceptance of hybrid and remote work.

Chris Ostop, managing director of JLL Connecticut, is convinced new buyers will step forward for some of the distressed buildings, but he isn’t sure there will be enough tenant demand to go around.

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Chris Ostop

“It’s hard to predict, but I’m not sure there’s enough demand for all of the buildings to get their” vacancy rates back to normal levels, he said.

Insurers and other corporate employers have shrunk their presence in the city, and Connecticut in general, and Hartford in particular, have not had great success attracting new businesses capable of backfilling large chunks of empty office space, experts said.

“We didn’t have the kind of high-30s vacancy rate we have in the market now, with no real hope on the horizon for a big, white knight coming to save us,” said Andrew Filler, a principal with real estate services firm Avison Young.

The prevalence of commercial mortgage-backed securities loans will also reduce the prospects of negotiating debt out of foreclosure, Filler said.

David Fagone, who recently stepped down as CEO of real estate services firm RM Bradley Management Corp., said he worries flagging office space demand could lead to a “race-to-the-bottom,” as remaining landlords accept lower rents and steeper losses to fill buildings. While rents haven’t yet gone down, they have essentially remained flat since 1985, he said.

The average asking rent for Hartford class A office towers was $23.91 per square foot in the fourth quarter of 2024, Cushman & Wakefield data shows.

“I don’t know the remedy,” Fagone said. “Some of it will be market forces — some building maybe gets shuttered and comes off the leased market for some period of time until somebody has a vision that perhaps the rest of us don’t have.”

Blunting the impact

Adding to landlords’ challenges is the inability to refinance maturing office loans, especially for properties that have lost significant value and are underwater.

That’s creating issues for both property owners and lenders.

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Jason Soto

Webster Bank aims to help owners hang onto their assets when possible, said Jason Soto, an executive vice president and chief credit officer at the Stamford-based regional bank, which has $79 billion in assets.

He said Webster recently extended and adjusted the terms of a loan for an under-construction office building because the owners were willing to invest several million dollars in additional equity into amenities.

In the right situation, Webster might be willing to help owners convert office buildings into apartments, Soto said.

“We fundamentally want to assist in these situations where there is a good strategy to make a property successful and have cooperative owners,” Soto said.

When properties have gone underwater, and values are unlikely to rebound or owners are unwilling to invest, Webster has sold off loans, Soto said.

Webster Bank has cut its office loan portfolio by half, to $825 million, over the past two-and-a-half years “using a variety of measures,” he said.

“The reality is properties need to be taken out of the market, they need to be upgraded and then, hopefully, you will start to get some tailwinds, which you are starting to see from more employers calling more employees into the office more days of the week,” Soto said.

Webster is currently foreclosing on the 12-story, 293,639-square-foot Metro Center office building in downtown Hartford, at 350 Church St., and a neighboring parking garage. The current owner, Shelbourne Global Solutions, bought the properties for $49 million in 2017, as values were recovering from the Great Recession of 2008.

Shelbourne, Hartford’s largest landlord, is also facing foreclosure on its 23-story, 419,612-square-foot “Stilts Building” office tower at 20 Church St.

Michael Seidenfeld, Shelbourne’s chief operating officer, said the realignment of work patterns and office demand following the pandemic makes the current office market downturn different and more troublesome than past cycles.

He said the Metro Center receivership is standard procedure for owners unable to refinance.

“A confluence of factors has created the conditions for this: the absence of any meaningful leasing activity in Hartford’s office market, downtown’s 40% office space vacancy rate, and the total freeze of the capital markets,” Seidenfeld said. “Unfortunately, some banks and lenders continue to maintain unrealistic expectations and an approach that is out-of-touch with the harsh realities of the current market. Nevertheless, Shelbourne continues to pursue all avenues to retain and revitalize its portfolio.”

Limited exposure

All banks are working through some level of concern with their office loan portfolios, said Luke D. Kettles, president and CEO of Windsor Federal Bank, which has $803.3 million in assets.

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Luke Kettles

Some banks are working “aggressively” to push office borrowers out, while others are extending loan terms, he said.

There is some light on the horizon, given a noticeable trend of corporations and government bodies requiring a return to work, Kettles said. Even so, it’s too early to tell when that will register positively on the market, especially in Connecticut, which has been particularly hard-hit by the remote working trend, he said.

The challenges facing Connecticut’s office market will be compounded by lenders’ ongoing reluctance to lend into it, Kettles said.

However, there is some good news — Connecticut-based banks have only limited exposure to the office market, especially in Hartford, according to John Carusone, president of the Bank Analysis Center.

Most of the major commercial buildings in Hartford are financed through real estate investment trusts, partnerships or limited liability companies, rather than banks, Carusone said.

Meanwhile, Connecticut banks have greater capital strength, cleaner loan portfolios and better reserves compared to past office market downturns in 2008 and 1992, he said.

The 29 banks headquartered in Connecticut reported 1.16% of their nonfarm, nonresidential commercial real estate loans as nonperforming at the end of the third quarter of 2024, according to Federal Deposit Insurance Corp. data.

By comparison, Connecticut-based banks reported nonperforming loan ratios of 0.66% and 8.02% in 2008 and 1992, respectively.

Vision for future

Hartford Mayor Arunan Arulampalam, who is in his second year in office, said he’s pushing on multiple fronts to attract new business to the city as he continues to support construction of new apartments.

He’s leading a Hartford-based team to secure part of a $100 million state grant pool to create an artificial intelligence hub downtown that supports the city’s bedrock healthcare and insurance industries.

Downtown Hartford has also attracted some new tenants in recent years, including environmental engineering firm Fuss & O’Neill, law firm Gordon Rees, PES Structural Engineers, and insurers Talcott Resolution, Selective Insurance and SunLife Financial.

Arulampalam said he hopes for a significant piece of a proposed $50 million “Greyfields Revitalization” fund contained in Gov. Ned Lamont’s recently proposed state budget.

That fund would provide incentives to either demolish underused and derelict retail and office properties, or convert them into multifamily housing.

“We’ve got the largest struggling commercial office sector in the state,” Arulampalam said. “And so, I would expect that greyfields program would benefit Hartford more than any other municipality in the state.”

A working group involving top state and city officials has been meeting to create a plan to “right-size” Hartford’s office footprint, Arulampalam said. Their work includes identifying space that is or will become vacant, and figuring out ways to fill it, including potentially by conversion to multifamily or some other use.

Arulampalam said he hopes converting smaller office buildings downtown might push companies into the larger, class A towers, which are critical to the city’s tax base, to stabilize them.

“Our goal is to right-size our downtown for now, and then adapt to the needs of the future as they come,” Arulampalam said.