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Steady As It Slows

Turmoil On Wall Street Trickles Into State Markets

By KENNETH R. GOSSELIN, Courant Staff Writer

February 24, 2008

For three years, sales of office buildings in and around Hartford set records for volume and price, fueled by no-fuss underwriting and easy money from Wall Street. n And 2007 appeared to be set on the same course, especially after the sale early in the year of a prime office property at Corporate Ridge in Rocky Hill that set a new per-square-foot record for the market south of Hartford. n But a slowdown soon hit — one that is likely to continue in the next year — as money from Wall Street all but dried up for real estate deals amid the subprime lending crisis that is still roiling the financial markets.

Although the subprime crisis is focused on the residential market, it has also taken a toll on the commercial real estate market, which, for the most part, had not suffered a downturn at the same time. Wall Street firms, hit hard by the crisis, abruptly tightened the spigot, severely restricting the flow of cash fueling both the home loan and commercial markets.

The slowdown is likely to affect not only office sales in the next year, but other commercial transactions involving industrial and retail properties. New development could also feel the pinch as financing becomes more difficult to obtain, commercial real estate experts said.

Concerns are also growing about whether the national economy is slipping into recession. Connecticut might be in a better position because the state's housing downturn was not as severe as elsewhere in the country. Still, some economic forecasts say that the state's job growth will slow this year and that by the end of 2009, there could be job losses.

Coming into 2008, the office leasing market in Greater Hartford remained healthy with relatively low vacancies. In markets east, west and south of Hartford, there was a shortage of prime, Class A space, so much so that landlords were able to get the upper hand in lease negotiations.

Downtown Hartford and the suburban market north of the city did not fare as well. Although downtown has had aggressive leasing by Travelers as it expands in the city, the central business district faces the loss of MetLife, which is moving to Bloomfield.

Overall leasing trends in Greater Hartford, however, remain favorable, said Patrick J. Mulready, a broker at commercial real estate firm CB Richard Ellis.

Healthy leasing and buildings filled with tenants are attractive to investors. Investors who buy properties hope that rents will rise as demand — born out of job growth — increases. The sales of recent years were a sign of confidence in the local economy and, some said, the redevelopment in downtown Hartford.

In 2007, office sales included the purchase of State House Square, a marquee office complex next to the Old State House in downtown Hartford, a transaction that demonstrates the rise in prices in recent years. The 845,000-square-foot complex sold for $115 a square foot, up from $87 a square foot three years earlier.

Although office sales started out strong in 2007, the total value of the transactions fell by 17 percent, to $188 million, compared with 2006.

Experts say that potential buyers have become more hesitant because financing terms, including borrowing rates, are no longer as favorable. Lenders aren't willing to finance as big a portion of deals, forcing investors to put in more of their own equity or seek secondary financing, making deals more complex.

Just a year ago, Wall Street investment banks were more than willing to finance as much as 85 percent of a deal. Today, the most active commercial real estate lenders — life insurers and banks — are only willing finance between 65 percent and 75 percent, said Michael J. Riccio, senior director at CBRE/Melody in Hartford, the financing arm of CB Richard Ellis.

Riccio said that making up the difference isn't easy and can hurt the chances of a deal's going through quickly — or at all.

As Wall Street firms have stepped back from financing commercial real estate deals by raising borrowing rates, more inquiries have flooded into commercial banks. When Wall Street was a prime player, banks largely couldn't compete with the loose terms offered by Wall Street.

Now, commercial banks are fielding a growing number of inquiries about financing commercial projects.

That's been the case at Waterbury-based Webster Financial Corp.

"We're getting many more calls now," said Bill Wrang, senior vice president of commercial lending at Webster Financial, the parent of Webster Bank. "We've had many more requests for financing than we've had for several years."

Although the increase in business is obviously good, Wrang said that banks can't hope to entirely fill the void.

And, at least in New England, where a severe economic downturn in the early 1990s was caused partly by a collapse in commercial real estate, banks are likely to be far more cautious in their underwriting, Wrang said.

"There is a potential for the shortage of capital," Wrang said.