Hartford Business Journal

HARTFORDBUSINESS.COM | JULY 10, 2023 19 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." Lender beware 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. "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 negotia- tions 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 foreclo- sure on three mixed-use buildings on Pratt Street, which the company has targeted for conversion to apart- ments. 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 enor- mous 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 Fran- cisco 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." The Stilts office building at 20 Church St., in downtown Hartford, is currently going through the foreclosure process. PHOTO | COSTAR Chris Ostop Eric S. Goldstein Private equity could play larger role in office lending market By Michael Puffer mpuffer@hartfordbusiness.com I n a healthy office market, vacancies are around 8% to 12%, said Michael J. Riccio, senior managing director and co-head of national production for CBRE's debt and financing arm. At the end of the first quarter, Greater Hartford's office space availability rate reached an all-time high of 29.9%, according to CBRE data. Riccio said many traditional banks will be eager to unload office assets, even if they are still performing. And landlords who need to refinance in the near term need to put up equity to cover at least some of their property's lost value. That is giving rise to a cottage industry of investors who are raising funds to service that market. It's riskier, but the yields will be much higher, he said. "Most of the lenders who will do that have the ability to own that property if they need to," Riccio said. "Private equity funds have raised a lot of money for this because they see that issue, and they see the opportunity coming." Riccio said it's possible many office buildings will become mothballed, and then it will fall to local and state governments to deal with the problem. "There will be office buildings torn down," he said. He also cautioned that doom isn't hanging over all office properties. Modern buildings offering highly sought amenities, and in premium locations, will continue to function well, he said.

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