Hartford Business Journal

18 HARTFORDBUSINESS.COM | JULY 10, 2023 Michael J. Riccio, senior managing director and co-head of national production for commerical real estate brokerage firm CBRE's debt and financing arm, in his Hartford office. HBJ PHOTO | STEVE LASCHEVER Due Date Wave of commercial loan maturities puts office landlords and lenders on edge By Michael Puffer mpuffer@hartfordbusiness.com H artford'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 nation- ally are facing a wave of commercial office loan maturities that will require them to pay up, refinance or rene- gotiate debts. Nearly $1.5 billion 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. 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 invest- ment firm is hoping to renegotiate terms, but acknowledges land- lords 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 strug- gling office properties have to decide whether it's best to foreclose and take on building ownership and main- tenance 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. Trouble on horizon During a commercial real estate conference last month in West Hartford, Capital Region Develop- ment Authority Executive Director Michael Freimuth described the looming office loan maturity wave as a "ticking time bomb." "If you are in the real estate busi- ness, 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 signifi- cant number of floundering Class B suburban office buildings will have to be demolished. Meanwhile, he said he's in discussions with some down- town 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 phys- ical layouts and issues related to plumbing and utilities. For example, deep floor plates within office build- ings make it difficult to create apart- ments 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. Gold- stein said he's hearing more talk of commercial loan workouts. Cycles of real estate value crashes Brion Kirsch

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