Trio of CT office foreclosures show stress on sector
As lenders take over a trio of big office complexes in Connecticut, many more have loans coming due over the next few years that could force tough decisions by their owners — running the gamut from absorbing continuing losses for those that are able; unloading them at fire-sale prices; or walking away and handing the fobs to creditors, whether by choice or default.
Milford’s Great River Corporate Center is slated to be auctioned next week to the highest bidder, after a court proceeding that returned the building to lenders with less than a quarter of its available space leased out to tenants. And in a stunning decision by one of New York’s prominent landlords, Empire State Realty Trust is returning First Stamford Place to an investment syndicate of Wells Fargo rather than pay down a $173 million loan, despite occupancies above 80 percent for the complex a short distance from Stamford’s downtown Metro North station.
Meanwhile in New York bankruptcy court on Tuesday, opposing parties agreed to set up a $1 million “repair reserve” for the Constitution Plaza complex in downtown Hartford, which a lien holder is trying to seize. According to a court document filed Tuesday, a law firm has been pressing for the repair work, with the building owner contending the tenant’s rent payments are “an important critical aspect” of its efforts to emerge from bankruptcy.
One of every four loans secured by office buildings hits maturity this year, according to a February report by the Mortgage Bankers Association. In a
Great River Corporate Park on Wheelers Farms Road in Milford. The office is slated to be auctioned in April 2024, after lenders seized the building from its prior owner in a court action.
separate paper published last December by the National Bureau of Economic Research, analysts estimated that 44 percent of office building loans could be underwater with their outstanding balances greater than the value of the properties.
Adding to fuel to the fire is that more office workers have gotten comfortable working from home — a direct result from the COVID-19 pandemic — and luring them back into buildings hasn’t been easy for managers.
In a March study of pressures on landlords, Hearst Corp. subsidiary Fitch Ratings predicted the office market will be slower to recover compared to the period of the Great Recession, due both to remote work and high interest rates. It took about 20 months after the start of the 2009 financial collapse for the office market to begin a recovery, a process that extended
more than seven years. Four years after the start of the COVID-19 pandemic, office values have yet to begin any upward swing, as tracked by Fitch Ratings.
“We have work-fromhome and hybrid arrangements, so, generally speaking, the need for that amount of space has essentially been reduced,” said Melissa Che, senior director of commercial mortgage analysis for Fitch Ratings. “As they are hitting lease expiration or even before that, most tenants are not using all of the space, so they get rid of it or they might be downsizing — and in downsizing, they might be wanting to pay less rent than they were previously.”
In Fairfield County, office lease volumes in 2023 were more than 30 percent below the average over the prior decade, according to CBRE, but the real estate giant’s CEO told investment analysts in February
the foundation is there for a U.S. office market recovery, despite occupancies having yet to recover to the levels of 2019 and beforehand.
“We think it has bottomed out — it obviously is meaningfully below where it was,” said CBRE CEO Bob Sulentic, speaking on a February conference call. “Some stubbornness about people coming back to the office — that’s super clear. The other thing is there’s just a clear amount of pressure from companies to get their people back into the office, for all kinds of reasons.”
If history is any indication, rock bottom is when opportunistic buyers surface. The most prominent example in Connecticut was the onetime Union Carbide headquarters in Danbury, the largest single office building in Connecticut that had long struggled with vacancies after its conversion to multitenant use. Summit Development
bought the building in 2018 for $17 million, and is now adding apartments with the goal of diversifying the property’s revenue base; drawing more ancillary businesses like retailers; and by extension make its offices more inviting for new tenants.
Other examples abound in Connecticut and the wider region, to include the former Pitney Bowes headquarters on Stamford’s waterfront which Building & Land Technology is converting to apartments, and the American Lane corporate campus in Greenwich where Tishman Speyer wants to build a residential village on available land.
If residential conversion represents one path to profitability for former office properties, it takes time to win approvals and overhaul buildings for the purpose. That makes it far more likely that current owners holding distressed debt will extricate themselves and leave any redevelopment to new owners who have the cash to support loan payments until rental revenue ramps up. Che said that commercial real estate creditors are getting interest rates above 7 percent on new loans today, compared to less than 5 percent before the recent run of inflation.
That has contributed to foreclosures on commercial properties hitting their highest level since 2015 as tracked by Attom. The real estate data firm counted about 635 U.S. foreclosures under way as of February. That compared to about 350 prior to the onset of the COVID-19 pandemic, though well off the previous peak of nearly 900 foreclosures in late 2014 on the heels of the Great Recession.
In Fairfield County, office vacancies are above 25 percent with JLL projecting an increase in this year. But the firm is also predicting that real estate investors will be more opportunistic in purchasing buildings on the market. Two Westport offices changed hands last month, and of 40 buildings totaling at least 30,000 square feet of space statewide, half of them have been listed for sale in the past year.
“Even from the early days of the pandemic, I think we’ve been thinking of this as the lost decade for office” space, said Stephen Boyd, director of credit policy for Fitch Ratings. “Because they’ve got five-to-10-year lease terms, it takes a while for some of this stuff to filter through. Office isn’t dead or functionally obsolete as a property type, but we have too much of it and there needs to be some rationalization. The lowest quality of offices — that will need to come out of service and be repurposed.”