🔒New Haven’s office market faces uncertainty in 2021

When will south central Connecticut’s office real estate market, anchored by the dynamic eds-and-meds-fueled engine of New Haven, return to pre-COVID levels of activity?

Tomorrow? Next month? Next year?

Ever? Or maybe never.

By any useful metric, 2020 was a disastrous year for the office market — in Connecticut and the nation. When the pandemic exploded in mid-March, the vacancy rate in New Haven’s central business district stood at just under 8 percent.

By the end of the third quarter, according to Colliers International, the overall New Haven office vacancy rate had risen to 17 percent — still “muted” compared to many other mid-sized markets in the Northeast. (In “normal” business conditions, 5 percent is considered the point of equipoise between supply and demand.)

Outside the central business district, the office vacancy rate swelled to nearly 28 percent.

The actual daily occupancy rate in New Haven office buildings plunged to between 20 and 30 percent, Colliers estimates.

Revenues in many industries, especially service sectors, fell sharply or evaporated. Not conceiving that the emergency could last beyond 30 or 60 days, many landlords forgave rent payments from beleaguered tenants for a month or two. But then those landlords, under pressure from lenders, were forced to clamp down the screws on tenants — many of whom were laying off workers to keep their heads above water.

“With the realization of COVID hitting in March we entered into a recession and the office market froze,” said Stephen Press, co-principal of Press/Cuozzo Realtors in Hamden. “Tenants that were about to sign leases or extend leases hit the pause button and requested time to wait and see what their worlds would look like and what their future office requirements would be.”

There were signs of life, including strong leasing activity at the Class A building at 195 Church Street (the New Haven Savings Bank building). But for most properties, including in the central business district, leasing activity froze.

At downtown’s largest Class A building, the 467,500-square-foot Connecticut Financial Center at 157 Church Street, leasing queries all but stopped, according to Sean O’Neil, senior vice president of Jones Lang LaSalle, leasing agent for owner Chase Enterprises in Hartford.

Still, occupancy remains stable at the 28-story facility — for now. O’Neil says no lessees have jumped ship; Bank of America in the spring extended its lease of 30,000 square feet. Available office inventory at the Financial Center today is about 30,000 square feet — less than 10 percent of the 433,000 square feet of total rentable space, well below the central business district Class A average vacancy.

“We haven’t had anybody close their doors or downsize,” O’Neil says.

And there were some deals to be done. Carter Winstanley added to his growing empire of life-sciences properties with his $21 million ($70 per square foot) acquisition of the Temple Medical Center, a two-building, 300,000-square-foot complex in close proximity to the Massachusetts developer’s other office and lab buildings on George and College streets.

Outside of the central business district, a group of three Class B office buildings, totaling some 150,000 square feet, at 540-580 Ella Grasso Blvd., was sold to local investors Mendel Paris and Sim Levenhartz for $6.85 million, or $45 per square foot.

But aside from a couple of opportunistic deals, most activity in the office market ground to a standstill. Frank Hird, vice president of OR&L Commercial, says diminishing demand for office space in the Elm City isn’t linked solely to COVID.

“There’s a long-term New Haven trend of office buildings being converted to residential use, largely because they weren’t profitable [for office use],” he explains. “This has been a trend that started 10 years ago. The need for office space is diminishing, and the need for residential space and other uses [e.g., bioscience applications] is increasing.”

New Year, new normal?

What will 2021 look like for the office market? No one really knows, of course. The brightest sign of hope locally and nationally is the continued roll out of COVID-19 vaccines.

But the fix won’t be instantaneous, most experts say.

“I believe the first half of 2021 will look a lot like 2020,” says Stephen Press. “Landlords will need to continue to work with their tenants as they reevaluate their space needs and determine which employees may work remotely permanently.”

Will office occupancy ever return to pre-COVID levels? No one knows.

“My best guess is that this will not permanently change the demand for office space in the future,” said Garrett Sheehan, president of the Greater New Haven Chamber of Commerce, which itself rents office space in its 900 Chapel St. headquarters. “The way people work has definitely been changed, and I expect employers will be more flexible going forward as to whether someone works from home or at the office on any given day.

“But there is still a very compelling argument for having an office,” Sheehan adds. “In many ways it’s easier to coordinate efforts, collaborate on ideas, and build a team when your employees are centrally located.”

“Regular office space [use] will continue to diminish — regardless of COVID,” says OR&L’s Hird. But New Haven’s ace in the hole, as always, remains the presence of the city’s two largest employers — the Yale New Haven Health system and Yale University — and unlike, say, General Electric in Fairfield, they’re not going anywhere.

The future belongs to bioscience and biotech uses, Hird adds.

“The way Yale cranks out these biotechs you’ve never heard of — and then all of a sudden they get a $250 million investment. It’s a really good thing for New Haven.”

A forecast released in late September by Cushman & Wakefield predicts that the office market is unlikely to return to pre-COVID levels before 2025.

Nevertheless, the study concludes, “The coronavirus remote work experiment will become a permanent trend, but at some point, employees will return to the office in numbers that match the past.”