🔒Expert’s Corner: Challenges and optimism — Assessing CT’s commercial real estate market

Commercial real estate is at the economic core of cities and towns throughout Connecticut.

While business owners and landlords face some of the highest property taxes in the nation, among other unique challenges that come with operating here, there are emerging opportunities and reasons for optimism. I recently moderated a panel focused on office, multifamily, hotel and retail properties at Hartford Business Journal’s third annual Cranes & Scaffolds Commercial Real Estate Conference held at the Aqua Turf. The esteemed panel included:

• Patrick Mulready, a managing director at commercial real estate services firm Cushman & Wakefield;
• Chris Reilly, president and CEO of development company Lexington Partners;
• Randy Salvatore, founder and CEO of real estate development firm RMS Cos.;
• Jim Litterer, real estate practice director at IMA Financial Group; and
• Chris Arnold, senior vice president and department head of commercial real estate lending at Liberty Bank.

Here are some takeaways from the session.

Return to office, or convert it?

Office space can be divided into three segments, and despite the spread of remote work, two are performing quite well. As more workers return to the office, the under-10,000-square-foot market is strong and the 10,000-to-20,000-square-foot range is strengthening. The outlier is the 20,000-plus-square-foot segment. While the market for large offices is active, we are seeing a flight to quality. This means that tenants that are leasing property are willing to pay a premium to significantly downsize to a building with more amenities in a sought-after location. With strategic planning, there is opportunity to repurpose some downtown office buildings in Connecticut, where occupancy rates have yet to recover since the pandemic. The main obstacle is tenant improvement costs, which are roughly double what they were a decade ago. Finding alternative uses for vacant space is critical to prevent downtowns from hollowing out. Converting offices to multifamily housing is a popular strategy, but high development costs and a persistent capital gap continue to complicate deals. Public-private partnerships will be essential to move such projects forward.

Experiential retail and amenitized housing

While you can find just about anything online, consumers still can’t have real-life retail experiences on their phone or computer. Providing an experience is where the opportunity lies in retail. In Hartford, for example, we’ve seen recent upgrades to the PeoplesBank Arena and Dunkin’ Park, as well as surrounding restaurants, bars, museums, art galleries and parks. Those spaces are becoming the central retail amenities in downtown areas. Hotels in the state have done surprisingly well during the rebound following the pandemic. Revenues have remained steady following back-to-back record-breaking years, and the success is mostly attributed to a rapid shift from serving business guests to welcoming leisure guests. What cities need to survive and thrive is a high volume of people, and this type of development and expansion helps immeasurably with downtown migration. We’re seeing the results of it in some Connecticut cities that boast successful restaurants, bars and other retail options for their rising population. It becomes a cycle of prosperity. In recent years, commercial real estate in general has become a buyer’s market, with everyone from single tenants to those with multimillion-dollar portfolios able to negotiate favorable terms. In Connecticut, construction for multifamily use has been much more prevalent than building office space. Top-tier residential properties in Connecticut are second to none, thoroughly amenitized and attractive to young people and empty-nesters alike; multifamily demand shows no signs of slowing down. But the drop-off to the next level of affordability is quite large. There’s a wide-open opportunity for developers there to close the gap. Laura Bellotti Cardillo is vice chair of the property tax and valuation practice at the law firm Pullman & Comley.