Overview
The commercial office market in Connecticut is facing significant challenges and uncertainties in 2024. The COVID-19 pandemic has led to shifts in how office space is utilized, resulting in increased vacancies and a “flight to quality” as companies seek smaller, high-end spaces. While some areas may see a rebound, the overall market is bracing for continued pain and transformation. Recent legislative changes aim to facilitate the conversion of commercial spaces into residential units, adding a new dimension to the market dynamics.
Key Statistics
- Greater Hartford Office Vacancy Rate: 28.2%
- Office Space Availability in Greater Hartford: 29.8% of 73.2 million square feet
- Vacancy in Hartford’s Central Business District: Nearly 30% of 7.97 million square feet
- Outdated Office Space: 30% of the state’s office space is outdated
- Greater Hartford Industrial Sector Spec Under Construction: 0.0 million square feet
- New Industrial Space: 2.7 million square feet came online in Q1 2024
Major Trends and Challenges
- Financing Woes
- High Interest Rates: “High interest rates are significantly affecting commercial real estate, making refinancing difficult,” said Steve Schappert. “This has led to increased foreclosures and abandonment of properties.”
- Refinancing Challenges: Owners are struggling to refinance, as evidenced by the ongoing foreclosure case of the Stilts Building in Hartford. “In the current financial climate, lenders will have to extend loans and modify terms to help owners keep properties functioning until interest rates go down,” Schappert added.
- Lender Behavior: Many commercial mortgage-backed security lenders are foreclosing on properties or forcing owners to abandon them, exacerbating the crisis. “The foreclosure process is a self-fulfilling prophecy of certain doom,” Schappert said.
- Municipal Assessments
- Unrealistic Assessments: Many municipalities face potential loss of tax revenue as property values decrease and vacancies rise. “Hartford could see significant financial strain with nearly 30% vacancy in the central business district,” Schappert noted.
- Impact on Hartford: Lawsuits, such as those filed by Shelbourne against Hartford, seek relief from high property assessments. “Alarming vacancy rates will continue, making it difficult for many properties to remain operational,” Schappert said.
- Flight to Quality
- Smaller, High-Quality Spaces: Companies are reducing their footprint per employee from 190 square feet pre-pandemic to 165 square feet, opting for higher-end spaces with better amenities. “A smaller footprint allows companies to invest in higher-end space,” Schappert said.
- Investment in Properties: Landlords must invest in or reposition properties for alternative uses. “Office buildings that don’t see investment and attempt to compete on price alone are likely to languish,” Schappert explained.
- Rising Rents: The trend towards high-quality spaces is leading to increased rental rates, particularly in premier locations like West Hartford and parts of Glastonbury. “High-quality buildings in the best locations with easy access to amenities will be best-positioned for a rebound,” Schappert said.
- Conversions and Adaptations
- Class B to Residential: Conversion of smaller Class B office buildings into apartments is helping address housing shortages. “However, converting larger Class A office towers into housing remains challenging without substantial support,” Schappert pointed out.
- New Housing Projects: Investments in new housing projects, such as the conversion of the Fuller Brush factory into apartments, continue despite office market issues.
- Construction Costs
- Increased Costs: Rising construction costs are driving up fit-out costs for landlords and tenants, further pressuring rental rates. “The dramatic increase in construction costs means higher upfront fit-out costs for landlords and new tenants,” Schappert said.
- Market Shifts and Future Outlook
- Pain in the Office Market: “We’re going to see some pain down the road for sure,” Schappert stated. “But I don’t think office space is dead by any means.”
- Hybrid Work Models: “Companies want to retain young talent, but you still have to train that talent somewhere, so offices are not going to disappear,” Schappert added.
- Industrial Real Estate: The industrial real estate market, specifically warehousing, is thriving. “The market for new warehouse space is on fire,” Schappert noted.
- Outdated Office Space
- Disadvantage of Old Buildings: “Downtown office buildings that are not up to snuff are at a real disadvantage,” Schappert said. “It’s difficult for the owners of outdated office buildings to attract new tenants when competing against Class A office space.”
- Legislative Changes for Conversions
- Senate Bill 416: The Connecticut Senate approved a bill making it easier for developers to convert commercial buildings into residential units. “This proposal aims to help Connecticut communities convert vacant commercial properties into vibrant residential developments by cutting through some of the red tape,” Schappert said.
- Local Control Concerns: Critics argue the bill removes essential local controls over land use. “Taking away key fundamental municipal land use planning will create unintended, unforeseeable harm,” Schappert noted.
- Public Health Codes: Concerns were raised about the bill not requiring developers to meet public health codes during conversions.
- Warehouse Construction Slowdown Side Note
- Construction Halt: “The days of massive new warehouses popping up in Connecticut towns on a regular basis are over for now,” Schappert observed. Despite 2.7 million square feet of new industrial space coming online in early 2024, no new properties are under construction.
- Market Equilibrium: “The market has found a new equilibrium with vacancy rates in the low single digits, but with not lots of demand that would encourage any speculative building,” Schappert said.
- Amazon’s Pause: Amazon, a major driver of the warehouse market, has paused its expansion plans, including a major new logistics center in Waterbury. “Connecticut is faring better than Boston in terms of Amazon’s pullback,” Schappert added.
- Resident Pushback: Opposition from local residents has also slowed new warehouse projects. “There’s some discouragement on that front, where the court system is used to stop projects,” Schappert explained.
Projections and Recommendations
- Continued Vacancy: High vacancy rates and the downsizing of office spaces by major corporations are expected to continue.
- Property Values: Property values may continue to decline, leading to more foreclosures and abandoned buildings.
- Rebound in Premier Locations: High-quality buildings with good amenities and locations are best positioned for a rebound, with increasing rental rates expected in these areas.
- Municipal Strategies: Municipalities need to adjust property assessments to reflect current market realities and explore alternative uses for vacant office spaces.
- Industrial Stability: Despite a slowdown in new warehouse construction, the industrial real estate market remains stable with low vacancies and steady rents. Strategic development and addressing resident concerns will be key.
- Leveraging Legislative Changes: Developers and municipalities should leverage the new legislative framework to facilitate conversions, ensuring compliance with local zoning rules and public health codes.
Conclusion
The Connecticut commercial office market is navigating a complex landscape of high vacancies, financing challenges, and shifting space requirements. Strategic investments in quality spaces and adaptive reuse of office buildings will be crucial for weathering the current headwinds and positioning for future growth. The industrial real estate sector, particularly warehousing, remains a bright spot amidst these challenges, though new construction has slowed. Addressing local opposition and finding innovative solutions will be essential for sustainable development. The recent legislative changes provide an opportunity to revitalize vacant commercial spaces, but careful implementation and oversight are necessary to ensure balanced growth and community benefits.
