🔒Market Uncertainty: Opportunities, challenges face New Haven’s post-pandemic office market

Scott Phillips is looking forward to the move.

On June 1, Phillips, the CFO of Halda Therapeutics, an emerging biotech company, and his colleagues will officially begin working in their new 9,800-square-foot lab and office space in New Haven, at the former Winchester Arms Factory, 115 Munson St.

The newly-renovated, state-of-the-art lab is part of the larger Winchester Center development, a multiyear, multi-phased, mixed-use project that will include apartments, retail and research facilities to support New Haven’s growing biotech ecosystem.

Phillips says Halda Therapeutics, which was founded by Yale researchers, is moving from its current Branford location to be closer to the university. But finding the right commercial space proved challenging, he says, because many of the locations available in the Elm City were not ready for lab space.

That’s slowly changing as private developers are both renovating existing buildings and developing new large-scale projects to meet growing demand.

In addition to the Winchester Center plan, another major development — a new 10-story, 500,000-square-foot bioscience lab and office space — started construction this June at 101 College Street and will feature specialized labs, research and incubator space.

Such developments reflect the opportunities for New Haven, but also the challenges faced by current commercial property owners — especially in the office market — who are confronting potential tenant downsizing as companies consider hybrid or complete remote work models in a post-COVID world that’s still in flux.

In the immediate-term, that seems to be having an impact in New Haven. For the first quarter of 2021 commercial vacancy rates overall in the city rose from 17 percent to 18.7 percent, according to a market report by brokerage firm Colliers.

The report noted that Square Nine Softworks, a business document management software company, is reducing its 30,000-square-foot lease at 123-127 Church St., by two-thirds.

It’s a trend that Chris Ostop, a managing director of brokerage firm JLL’s Connecticut operations, says will have a short-term impact, estimating that companies with expiring leases could cut their office footprint by 10 to 15 percent, on average. But he’s confident the in-person office environment will survive.

“If you need to have knowledge transfer and collaboration, it’s harder to do that [from] home,” Ostop said.

He says the hybrid model may be driven less by industry or company than by an employee base.

“If you have a seasoned group of employees and know they’re capable of doing their job, then working from home [may work].” Ostop said. “But if you have a number of [younger and new employees] in need of onboarding that can be super hard to do remotely.”

Workplace flexibility

The return to work picture — both in New Haven and nationally — is starting to come more into focus as companies begin to announce transition plans, according to new survey research from the Society of Human Resource Management (SHRM), a national HR membership association.

Nearly four in 10 companies will implement a phased return strategy, with critical teams first, and 19 percent will employ an alternating strategy.

But the longer-term plans reflect a growing openness to work-from-home flexibility. Sixty-eight percent of all organizations and 73 percent of large companies (with 500-plus employees) will likely or definitely adopt more remote work opportunities, according to SHRM data.

Additionally, more than a quarter of organizations (26 percent) that did not previously offer remote work will probably or definitely allow workers to do so permanently.

That’s likely to increase pressure on property owners and developers to upgrade amenities, says Will Lorenz, the director of leasing for FUSCO Management LLC, a New Haven-based property management and development firm.

Lorenz says Class A properties — the top-tier category of commercial real estate with the highest per-square-footage price tag — often feature perks like on-site parking, cafes, gyms and daycare centers. He anticipates some property owners may offer new upgrades that will play well to safety-conscious tenants and employees.

“I think we’ll see higher quality air filters [in buildings] just to make everyone feel [safer],” he said.

Cost concerns

As the demand for investment in upgraded ventilation and touchless amenities emerge, it’s creating a financial challenge for property owners and managers, says JLL’s Ostop, because they are confronting stagnant lease rates and short-term shrinking demand — both revenue concerns — while seeing the costs of adding perks and doing business increasing.

Ostop says the cost of commercial lease rates in Connecticut and New Haven have been largely stagnant for more than two decades.

“In New York, rents can go from $40 to $80 to $120 in 24 months,” Ostop said. “We don’t have that level of volatility.”

In 2020, for instance, average office space in New Haven ranged from $18.29 per square foot for Class C buildings to $33.43 for Class A, according to MarketEdge, a market research group that tracks New Haven property rates.

Ostop says that while he understands the trends toward more biotech space, he notes that existing New Haven property owners may find challenges in financing the conversion of existing space to serve biotech demand.

That’s because many of the biotech firms seeking lab and office space are early-stage companies with less available funding for the higher lease rates property owners would have to charge to renovate space and secure bank loans.

“Where are those landlords going to get the money to build out lab space that might cost three or four times the cost of traditional office space?” Ostop asked.

Garrett Sheehan, the president and CEO of the Greater New Haven Chamber of Commerce, understands the concern, but is bullish on both the city’s biotech future and the resilience of its office space.

He points to the lease deal that life sciences company Arvinas recently signed to take 160,000 square feet at 101 College Street starting in 2024. Yale also announced it will occupy an additional 125,000 square feet in the building, which will include coworking space for life science startups run by Cambridge-based BioLabs.

He also sees signs of life in the city as restaurants, retailers and offices reopen and see more activity.

Sheehan knows challenges remain but he’s bullish about the future.