Hartford Business Journal

26 HARTFORDBUSINESS.COM | March 6, 2023 FOCUS: Banking & Finance By Michael Puffer mpuffer@hartfordbusiness.com S ome Connecticut banks are seeking to insulate themselves from the struggling office real estate market that's been battered by employers' post-pandemic embrace of hybrid or remote work. Stamford-based Webster Financial Corp. in late January reported significantly higher fourth-quarter profits, despite $20 million in loan charge-offs. About half of the charge-offs came from office loans, two of which were proactively sold, according to Webster Financial President and CEO John Ciulla. Ciulla told investors during a Jan. 26 earnings call that Webster, with $71 billion in assets, has been closely monitoring its office loan portfolio that is split evenly between higher-quality Class A properties and less luxurious Class B and C buildings. It's sold off some of those loans, while its overall office portfolio has shrunk from $1.7 billion to $1.5 billion, he said. "We haven't seen any material deterioration in the portfolio and what we've been doing is kind of selecting those Class B and Class C office loans … and looking at them and trying to think about whether or not there is particular vulnerability, and then seeing whether or not we can exit those credits … before maturity," Ciulla told analysts. He added: … "we've seen stabilization in the general credit characteristics of that portfolio, but we still are, like everyone else, concerned about the long-term nature of that asset class." Higher vacancies, more risk A move toward remote work has caused demand for office space to shrink dramatically in many U.S. markets with companies choosing to downsize their footprints as workers meet in person on a more infrequent basis. The U.S. office vacancy rate hit 19.1% at the end of the third quarter of 2022, according to the New York Times, while a new report from brokerage firm Cushman & Wakefield forecasted that 330 million square feet of U.S. office space could become vacant by the end of the decade. At most risk of vacancy are older, Class B and C properties that lack the amenities companies and their workers increasingly desire, the report said. In Greater Hartford, 21.5% of the region's 25.9 million square feet of office space was vacant at the end of the fourth quarter, while 27.3% was available for lease, according to brokerage firm CBRE. Downtown Hartford's overall office vacancy rate stood at 27.1% at the end of the fourth quarter, while center-city Class A buildings had a 27.1% vacancy with 34.6% of space available for lease, CBRE data shows. Banks that carry significant office assets are closely monitoring vacancies and leases, particularly with recent examples of major office landlords defaulting on loans. For example, global asset manager Brookfield Corp. recently defaulted on $755 million in loans on two, Credit Watch Banks keep closer eye on office property loans amid sector's slow recovery A Webster Bank branch in New Haven at 894 Whalley Ave. John Ciulla Greater Hartford office market snapshot (as of 4Q, 2022) Greater Hartford Downtown Hartford Downtown Hartford Class A # of buildings 401 39 15 Total sq. ft. 25.9M 7.9M 5.8M Available % 27.3% 29.7% 34.6% Vacant % 21.5% 23.5% 27.1% Sublease % 2.7% 4.3% 5.9% Avg. gross asking rent per sq. ft. $20.71 $22.39 $23.31 Source: CBRE 4Q Greater Hartford office market report PHOTO | COSTAR

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