Please do not leave this page until complete. This can take a few moments.
Hartford’s largest downtown landlord says it’s reevaluating the continued ownership of some of its properties amid widespread concerns of a national commercial real estate crisis that’s expected to hit the office market particularly hard.
Shelbourne Global Solutions owns, wholly or in part, more than 2.8 million square feet of commercial real estate in downtown Hartford, including four Class A office towers and more than a dozen smaller office and apartment buildings.
Shelbourne and landlords nationally are facing a wave of commercial office loan maturities that will require them to pay up, refinance or renegotiate debts. Nearly $1.5 trillion in commercial mortgages are coming due in the next three years, according to real estate tracker Trepp Inc., at a time when interest rates have soared and many office buildings have lost tenants and value.
That will make it challenging to refinance office properties, putting both landlords and lenders in a tricky spot, and also posing a risk to the overall economy.
Check out related story: Private equity could play larger role in office lending market
Ben Schlossberg, managing member of Shelbourne, said foreclosure isn’t the threat it used to be for landlords, who are increasingly unwilling to spend years chasing the recovery of underwater properties.
Shelbourne is currently facing foreclosure actions on several of its downtown Hartford holdings, including a Class A office tower and several smaller office buildings on Pratt Street it purchased to convert into apartments.
Schlossberg said his Brooklyn, New York-based real estate investment firm is hoping to renegotiate terms, but acknowledges landlords are no longer “married to their buildings.”
“There are buildings that are sometimes closed down, given back to lenders in order to make sure your company stays strong,” he said. “We are looking at that across our portfolio. In Hartford, we have to go through a very careful analysis of what deals still make sense. We are hopeful they all make sense. But there are situations where lenders are not going to be reasonable, and we will do what we have to do to protect our interests.”
On the flip side, lenders of struggling office properties have to decide whether it’s best to foreclose and take on building ownership and maintenance costs, or work out a deal that might require them to take a haircut.
“We’ve seen a handful of deals where we are already in discussions with banks about extending terms and requiring landlords to post additional security, things of that nature in order to work out a pending maturity where the value is not there to refinance,” said Brion Kirsch, a Hartford real estate attorney with law firm Pullman & Comley.
With the Federal Reserve signaling two additional rate hikes this year, building owners and landlords will be well-advised to start looking over their obligations and working out loan extensions or other deals early, at least 12 months before a maturity date, Kirsch said.
Kirsch said it won’t be easy for some landlords to simply walk away from their buildings because they have personal guarantees on their loans. Such guarantees were required by many lenders — particularly community and regional banks — following the 2008 financial crisis.
According to real estate tracking website CoStar, hundreds of Connecticut commercial properties have loans due to mature over the next three years.
Several key Hartford office towers, including CityPlace I — downtown’s tallest skyscraper whose largest tenant, UnitedHealthcare, is giving up several hundred thousand square feet of space — and Constitution Plaza have upcoming loan maturities, according to Trepp.
During a commercial real estate conference last month in West Hartford, Capital Region Development Authority Executive Director Michael Freimuth described the looming office loan maturity wave as a “ticking time bomb.”
“If you are in the real estate business, you are probably losing sleep on this,” said Freimuth, whose quasi-public agency provides low-interest loans for apartment developments in downtown Hartford. “There is going to be some wreckage.”
Freimuth said the situation will put pressure on the Federal Reserve to halt interest rate increases, or even decrease rates, and could inspire public policy changes to deal with a glut of empty office space.
Many lenders will likely “kick the can” down the road with short-term loan extensions that pretend office building values haven’t precipitously declined, Freimuth said.
Ultimately, he predicts a significant number of floundering Class B suburban office buildings will have to be demolished. Meanwhile, he said he’s in discussions with some downtown Hartford Class A office landlords about residential conversions.
That could repurpose obsolete and underused properties, while driving up demand for a smaller pool of remaining office space.
However, many Class A office buildings don’t lend themselves to residential conversions, Freimuth warned, because of their physical layouts and issues related to plumbing and utilities. For example, deep floor plates within office buildings make it difficult to create apartments with window access.
“I was one of the folks saying ‘wait, I don’t have a magic potion,’” Freimuth said. “Will we convert some to residential? We are having those discussions.”
Hartford lawyer Eric S. Goldstein said he’s hearing more talk of commercial loan workouts.
Cycles of real estate value crashes and recoveries are a normal part of the economy, he said, but this time the aftermath is harder to predict.
“What is unique about this one is that interest rates are up, plus we have this significant change in demand for office space not driven by companies trimming back because of the business cycle, but because of a societal shift in how people go to work,” said Goldstein, a partner who leads law firm Shipman & Goodwin’s workout, restructure and bankruptcy practice group.
Chris Ostop, managing director of advisory and brokerage firm JLL Connecticut, said many Hartford landlords with debt will struggle to refinance without providing more equity.
“The issue is the building’s income is likely less than it was when the original loan was written due to an increase in vacancy, plus higher operating expenses while rents remain flat,” Ostop said. “Also, lenders are not providing the same amount of loan-to-value as they were 10 years ago. This isn’t a Hartford issue. This is everywhere.”
Schlossberg said lenders have as much, and perhaps more exposure to market conditions than building owners. Banks don’t want to own buildings at a time when office tenants and buyers will be scarce, he said.
Check out related story: Private equity could play larger role in office lending market
“There is going to be a big reset nationally, and probably in the city of Hartford as well, to reset the basis of your building by having to go back and renegotiate loans,” Schlossberg said.
Shelbourne is currently in negotiations with Wells Fargo Bank to settle a foreclosure action filed in Hartford Superior Court last June, alleging the landlord failed to make payments since February 2022 on a $31 million mortgage for the 420,000-square-foot office tower at 20 Church St., also known as the Stilts Building.
Schlossberg said he’s hopeful of reaching a compromise this year.
Shelbourne is also facing foreclosure on three mixed-use buildings on Pratt Street, which the company has targeted for conversion to apartments. Schlossberg said Shelbourne is asking the lender for more time to get needed city and state approvals to launch the conversion.
Despite its office issues, Schlossberg said Shelbourne still views Hartford as fertile ground for investment, given recent successes of office-to-apartment conversions, new street-level retail, improvements to rail transit and more.
In fact, Shelbourne announced late last month it paid $4.75 million for 242 Trumbull St., a 304,413-square-foot, mid-rise office/retail complex in downtown Hartford that it plans to convert into 286 apartments.
“Shelbourne has invested an enormous amount of time, money and the heart of our company to improve the city of Hartford, to make life better for its citizens,” Schlossberg said. “We are going to keep on going with more investment.”
Meantime, lenders and investors who funneled money into the office market face losses. Even if they foreclose, they’ll be left with assets worth much less than when loans were initially made.
“Banks may be in for a rough ride in the coming months as urban commercial real estate markets continue to soften for a variety of reasons,” said John Carusone, president of the Hartford-based Bank Analysis Center. “Higher interest rates, combined with increasing vacancy rates and remote or hybrid work practices are conspiring to create worries for bankers regarding the health of their commercial real estate loans.”
These concerns are most acute in large cities like New York, San Francisco and Chicago, but Connecticut is not immune, Carusone said. Downtown office vacancy rates are approaching 20% nationally, and employee in-office attendance is about half of pre-pandemic levels, he said.
In Connecticut, Waterbury-based Webster Financial has sold off some of its office loans to decrease its exposure, while M&T Bank reported in January that 20% of its $5 billion office loan portfolio was at risk of default.
“Some economists estimate that downtown office buildings have lost about 38% of their value, which translates into roughly $500 billion,” Carusone said. “Connecticut bankers, like their counterparts elsewhere, are girding for potential credit-quality erosion, and are beginning to beef up their allowance for potential loan losses on commercial real estate.”
This special edition informs and connects businesses with nonprofit organizations that are aligned with what they care about. Each nonprofit profile provides a crisp snapshot of the organization’s mission, goals, area of service, giving and volunteer opportunities and board leadership.
Learn moreHartford Business Journal provides the top coverage of news, trends, data, politics and personalities of the area’s business community. Get the news and information you need from the award-winning writers at HBJ. Don’t miss out - subscribe today.
SubscribeDelivering Vital Marketplace Content and Context to Senior Decision Makers Throughout Greater Hartford and the State ... All Year Long!
Read HereThis special edition informs and connects businesses with nonprofit organizations that are aligned with what they care about. Each nonprofit profile provides a crisp snapshot of the organization’s mission, goals, area of service, giving and volunteer opportunities and board leadership.
Hartford Business Journal provides the top coverage of news, trends, data, politics and personalities of the area’s business community. Get the news and information you need from the award-winning writers at HBJ. Don’t miss out - subscribe today.
Delivering Vital Marketplace Content and Context to Senior Decision Makers Throughout Greater Hartford and the State ... All Year Long!
In order to use this feature, we need some information from you. You can also login or register for a free account.
By clicking submit you are agreeing to our cookie usage and Privacy Policy
Already have an account? Login
Already have an account? Login
Want to create an account? Register
In order to use this feature, we need some information from you. You can also login or register for a free account.
By clicking submit you are agreeing to our cookie usage and Privacy Policy
Already have an account? Login
Already have an account? Login
Want to create an account? Register
This website uses cookies to ensure you get the best experience on our website. Our privacy policy
To ensure the best experience on our website, articles cannot be read without allowing cookies. Please allow cookies to continue reading. Our privacy policy
0 Comments