🔒In 2023, employers will seek out amenity-laden office space

It’s no secret that the office market struggled in 2022.

Many major Greater Hartford employers — UnitedHealthcare, Prudential Financial and Voya Financial — announced plans to significantly shrink their office footprints as they continue to embrace remote or hybrid work coming out of the pandemic.

The issue prompted the MetroHartford Alliance to form an office space working group with real estate and other professionals to develop a response to increasing vacancy rates.

Downtown Hartford’s office vacancy rate at the end of the third quarter of 2022 was 21%, according to CBRE. Downtown’s 15 Class A office towers had a vacancy rate of 24.3% at the end of the third quarter, but that number is expected to rise as more leases expire.

Vacancy rates are highest in the northern section of Greater Hartford — Bloomfield, East Granby, East Windsor, Enfield, Windsor and Windsor Locks — at a staggering 35.1%.

Hartford Business Journal recently asked two top Greater Hartford office brokers — Chris Ostop, managing director of JLL Connecticut; and Joel Grieco, office brokerage executive director of Cushman & Wakefield’s Hartford office — for their views on where the region’s office market is headed in 2023.

Here are some trends to keep an eye on.

Flight to quality

Ostop said that in addition to prioritizing locations with walkable amenities, tenants are interested in upgrading their offices with premium amenities and hospitality services to position their office as a magnet for their employees.

“With that there are a greater number of relocations over renewals as companies elect to move to higher-quality buildings that can offer an ‘experience,’” he said. “With this flight to quality, there will likely be an increase in vacancy, but landlords that are willing to invest in their asset will remain well.”

Grieco said because companies are able to reduce their footprint by 20% to 40% as a result of a mobile and flexible workforce, they are able to pay a higher per-square-foot cost while still reducing their total occupancy costs. This allows them to seek out the higher-quality buildings with the most robust mix of amenities.

“To compete with work-from-home, an employer must make the workplace feel more like home,” Grieco said.

Grieco said Hartford County has long been a battleground for landlords to “steal” each other’s tenants with free or lower rent and big tenant improvement allowances.

Amenities were always part of the sell, but now they are a major factor in a tenant’s decision, he said.

“As such, savvy landlords are adding real fitness centers (not just an old treadmill and a unisex shower), coffee bars, outdoor gathering areas with fire pits and yard games, interior game rooms, golf simulators, quiet rooms, car-detailing services, common conference rooms, eco-friendly features (secure bike storage, EV charging, green spaces, solar), outdoor terraces, and even child care and dog care,” Grieco said. “Landlords that rely solely on offering cheap space, without enhancing their amenities, are likely to suffer.”

New construction and conversions

Another trend to watch is the growing number of functionally obsolete office buildings being converted to other uses wherever feasible, Ostop said.

The most likely conversions will be to multifamily, specifically in the urban core.

“This is key for smaller cities that need an increase in population and talent base in order to attract new companies,” Ostop said.

Gateway vs. growth markets

Companies are also adapting to a more distributed workforce by targeting non-major metros — or gateway markets — to recruit and retain employees seeking greater housing affordability and higher quality of life, Ostop said.

This can be advantageous for markets like Hartford/New Haven that are easily accessible to several gateway markets, like New York City and Boston, but are cheaper from an office cost standpoint and provide employees a lower cost-of-living.

Subleases galore

Many tenants are looking to downsize office space, but not all of them have leases expiring in the next 12 months.

“This has resulted in a flood of sublease spaces being offered to the market,” said Grieco, “to allow companies to right size into new space, while trying to sublease their old space.”

Sublease spaces inevitably compete with the direct space being offered by a building, resulting in further downward pressure on rents, Grieco said. This creates opportunities for bargain-seeking tenants looking for low rent and short-term commitments.

“But ultimately, it’s a bad dynamic for the market,” Grieco said. “Furthermore, given the lack of demand in the Hartford County office market, the reality is that most subleases will sit fallow until the lease expires.”