Hartford’s rock bottom commercial real estate market is attracting investors looking for a sweet deal on office buildings.
Among the interested shoppers is the state of Connecticut.
While many state and local governments have considered selling property in recent years to generate short-term revenue, Connecticut is seeking to purchase a large office building as part of a new long-term strategy to consolidate its leased space holdings into state-owned property, sources say.
Last year, the state quietly put out multiple requests for proposals asking Greater Hartford and other Connecticut landlords for offers on buildings with more than 100,000 square feet of space.
Sources say the state has looked at several significant downtown Hartford properties including the 556,000-square-foot Connecticut River Plaza, which is currently undergoing an $8.5 million renovation.
The RFPs closed recently, real estate sources said, but it’s not clear how many bids the state has received.
Donald J. DeFronzo, the commissioner of the Department of the Administrative Services, which houses the state’s real estate division, said the state has received offers and will begin to match them with the state’s geographic space needs.
He said the review will look at potential facilities throughout the state.
“We are interested in moving from leased space to owned space,” DeFronzo said. “It is something we are looking to do on a statewide basis.”
The state is looking to take advantage of a bearish real estate market that has caused vacancy rates — particularly in Hartford — to increase dramatically, pushing down the value of commercial office buildings.
That’s giving real estate investors — including the state — the opportunity to seek out discounted office space.
But the search for an office building represents more than just a good buying opportunity, DeFronzo said.
It’s part of a long-term strategy by the Malloy Administration to try to reduce the state’s real estate costs by consolidating more expensive leased space into facilities owned by Connecticut taxpayers.
According to Connecticut’s master facility plan for 2011 to 2016, which was published in July, the state is looking to decrease the amount of square feet leased by all government sectors by 2.3 percent over the next five years from 3,122,602 square feet to 3,049,398 square feet.
“Due to the current economic conditions, it would be financially prudent for the state to begin the process of planning for the purchase of state office space to better facilitate the long-term collocation of appropriate state agencies in strategic locations throughout the state,” the report said.
Although real estate is not considered a core competency of state government, Connecticut is a major landlord.
The state owns 254,308 acres or 8 percent of all land in Connecticut. That includes more than 3,700 structures, which accounts for 59.6 million gross square feet of building space spread across 92 percent of Connecticut’s cities and towns.
Connecticut uses state owned space to meet nearly 96 percent of its total office needs, but pays $62.1 million a year to lease an additional 3.1 million square feet of office space.
That equates to about $20.34 per square foot.
Almost 38 percent of those leasehold costs are attributable to the judicial and corrections departments, which includes court space.
DeFronzo said the state has 233 leases in force but about 40 percent of them are on a month-to-month basis, which means the state can exit those commitments on short notice.
But it will still likely take some time before Connecticut strikes a deal to buy a large office building.
In the meantime, DeFronzo said the state is taking inventory of property it already owns to assess how much empty space exists.
The loss of several thousand state employees in recent years to retirement, as well as a number of government agency consolidations that occurred in 2011, has opened up “thousands” of square feet of space that will allow the state to exit some of its smaller leases and move employees into state-owned property immediately, DeFronzo said.
It was recently determined, for example, that the state office building at 165 Capitol Ave., which houses DAS, has about 5,000 to 6,000 square feet of available space.
“We believe there is some significant savings that can be achieved,” DeFronzo said.
Connecticut is not alone in reviewing its real estate strategy as a way to potentially cut costs. State’s around the country, which have experienced more than $425 billion in budget shortfalls since the start of the recession, are looking at different ways to trim spending on their real estate assets, experts say.
“Every state and city is looking at this in a major way because they can’t print cash like the feds can,” said Kevin Wayer, who is co-president of realty brokerage firm Jones Lang LaSalle’s public institutions practice. “State and municipal governments are looking hard at their portfolios; in particular their approach to owned-versus-leased space.”
Wayer said as property markets have gone down in recent years, some government entities have been looking to purchase buildings in order to take advantage of pricing that is at or below replacement costs. But there are many other strategies and considerations also being taken into account.
Other states, like California for example, have considered selling billions of dollars in state-owned property to generate short-term revenues.
President Obama has called for selling off unneeded federal property to achieve $3 billion in cost savings.
In Connecticut, officials have identified seven vacant facilities comprising of 307,214 square feet of space, but there has been no decision on how to utilize the buildings or if selling them makes economic sense. The state also has RFPs out to sell several small properties. One of the major considerations when determining whether to lease or own property is long-term occupancy needs, Wayer said.
Organizations pay a premium for leasing space because it provides them the flexibility to move on a shorter-term basis. That’s why corporations typically only tend to own their headquarters, which is more of a permanent fixture, while leasing out other ancillary space.
State governments tend to be a long-term tenant, but real estate needs must be based on the needs of individual agencies.
If there is an agency that is expected to shrink in the coming years, it might make better economic sense to house it in leased space or consolidate it into another state-owned building, Wayer said.
States are also working to drive down occupancy costs by trying to reduce operating, maintenance, and energy expenses, consolidating agencies, and allowing more workers to telecommute, Wayer said.
If the state does pull the trigger on a deal to buy a downtown Hartford office it could be a significant boost for the city, which has seen vacancy rates hover around the 30 percent mark in the central business district.
There are several downtown Hartford properties currently on the market, so it would make sense for the state to look in the Capital City. The Metro Center and Bank of America buildings are on the sales block, and the two-building Connecticut River Plaza property remains completely vacant.
