Hartford Business Journal

HARTFORDBUSINESS.COM | October 10, 2022 9 DEAL WATCH RECENT SHOCKS TO GREATER HARTFORD OFFICE MARKET • Travelers Cos. notified landlords in 2021 it would give up about 150,000 square feet of leased space in downtown Hartford. • Prudential Financial plans to vacate space at 280 Trumbull St. in Hartford, shrinking its downtown presence from 250,000 to 25,000 square feet. • In August, Voya Financial put its 470,000-square-foot Windsor head- quarters up for sale. • In June, The Hartford announced plans to sell or lease its 457,396-square-foot office building in Windsor. • Robinson+Cole agreed to lease 75,000 square feet at One State St. in Hartford, vacating 120,000 square feet at 280 Trumbull St., its longtime home. • UnitedHealthcare is shrinking its footprint in downtown Hartford's City Place I office tower from 350,000 square feet to 50,000 square feet. 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 down- town 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 work- force? 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 apart- ment conversions are a key response to Hart- ford's office vacancies. "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 Devel- opment 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 tradi- tional 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 opportu- nity 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. 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 oper- ating 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 elec- trical 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. "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 occu- pancy 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 Trav- elers over the next three, four years is going to move out of one of our build- ings. We know CareCentrix is going to move out or downsize substantially." A collective punch In Farmington, Economic Develop- ment 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 mani- festing 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. Mike Freimuth John Larson David Lehman

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