With office foreclosures looming, CT landlords struggle to regain footings

The workers have simply not returned.

And downtown Hartford’s largest commercial landlord — beset by two major office tower foreclosures, including Metro Center — says the state needs to take a stronger role in attracting new office tenants to the city to underpin leasing efforts in the aftermath of the pandemic.

David Schick, senior strategist at Shelbourne Global Solutions LLC , said the Brooklyn, N.Y.-based commercial real estate investor and developer, plans — in partnership with other major downtown office building owners — to hire a consultant to determine what incentives might best shore up office building occupancies.

“We’re working with the other owners on that,” Schick said. “We all need to figure out a solution because if we come up with a solution, it’s good for the city and it’s good for us. And then, you can go to the state and say, ‘This is what is needed.’ ”

In addition to Metro Center, at 350 Church St., Shelbourne faces foreclosure at 20 Church St., the “Stilts Building” and smaller historic buildings on the south side of Pratt Street.

As the foreclosures unfold, Shelbourne already has lost day-to-day control of the 23-story Stilts Building to a court-appointed receiver. And Friday, Stamford-based Webster Bank filed a proposed order in Superior Court in Hartford that outlined a plan for naming a receiver for the 12-story Metro Center. Shelbourne declined to comment Friday.

Downtown office leasing in Hartford and in cities across the country took a tremendous hit after COVID-19. Many office workers, sent home abruptly at the start of the pandemic, have remained there, either full- or part-time. That means tenants are downsizing their leased space, causing headaches for landlords such as Shelbourne that are now seeing a growing amount of empty space in their buildings.

The leasing of office space has long been considered a key indicator of economic health, a sign of job growth and contributor to the well-being of other area businesses. Foreclosures  push down the value of buildings and, in turn, generate less property tax revenue for a city.

In the last decade, the heavy concentration of office buildings in downtown Hartford — former Mayor Luke Bronin often referred to it as essentially “an urban office park” — has been lessened, with the conversion of older office structures to more than 3,000 apartments.

The population of downtown residents is growing and those apartments are leasing quickly. But the pandemic showed how dependent downtown still remains on office workers.

Shelbourne’s Schick estimates that up to another 1 million square feet of downtown office space could be converted to apartments. Shelbourne is examining its portfolio of office buildings in the city for possibilities, Schick said.

Taking a page out of ‘Hart Lift’?

One strategy that has been discussed in recent months is focusing office-to-apartment conversions on older office buildings, encouraging tenants in those buildings to move to better quality office space, known as “Class A” space that is now more affordable.

“We’re lucky in that we still have a high demand for residential,” David Griggs, president and chief executive of the MetroHartford Alliance, the region’s chamber of commerce, said. “It’s not the savior for every building but for the ones that it is, maybe we could move some tenants out of those buildings into the higher, Class A building. That just has to be our focus and what we do.”

One potential incentive to boost office leasing that could come out of a consultant study could be patterned after Hartford’s successful Hart Lift storefront revitalization program, Schick said. In Hart Lift, city grants helped fund improvements to spaces with landlords and tenants all contributing to the overall cost.

The program has made significant strides, particularly along downtown’s Pratt Street, helping boost foot traffic and vibrancy.

Schick said that the model might be used in paying for tenant improvements in office buildings, with the state picking up part of the cost. Landlords offer tenant improvements in lease deals to make space more attractive for potential tenants.

The cost of tenant improvements has more than doubled since before the pandemic, rising to about $70 a square foot from $30 a square foot, Schick said. Higher construction costs are partly to blame, but tenants are now seeking more in their office space in an effort to bring employees to the workplace more frequently during the week.

Office leases being inked

Commercial real estate brokers say office leases are being inked, but they are primarily for smaller spaces.

“The leasing market is very active for tenants under 10,000 square feet,” said Patrick Mulready, senior vice president in the Hartford office of commercial real estate services firm CBRE. “It’s business as usual for tenants that size. Really where there is a lack of activity is in the large tenant market.”

According to CBRE, overall office vacancies in Hartford’s central business district were 22.1% as of June 30, the latest statistics available. That is down slightly from 22.6% the previous quarter, the firm said.

Mulready said that remains elevated from the “high teens” where vacancies typically hover in downtown.

But the same report notes that vacancies in “Class A” space and the dominant portion of the downtown market, were nearly 27%, unchanged from the previous quarter.

The results for the second quarter of this year in the central business district was not directly comparable to the same quarter in 2023. CBRE changed what it included in its statistics as of Jan. 1, now adding owner-occupied commercial space. That space includes insurance giants The Hartford Financial Services Group and Travelers.

Without owner-occupied space, vacancies certainly would be higher.

Shelbourne isn’t the only landlord dealing with foreclosure in the city.

The owners of a majority of Constitution Plaza also are under pressure from its creditors.

Like Shelbourne, Constitution Plaza’s owners have been unable to refinance their existing loan on the property, a problem being experienced nationally, according to ratings agency Moody’s.

Kenneth R. Gosselin can be reached at kgosselin@courant.com .