Two Connecticut markets have some of the highest shares of distressed commercial loans in the nation according to a new report.
According to loan data firm CRED iQ, Stamford is the second-most distressed market in the nation with 32.2 percent of commercial loans there being delinquent or in special servicing. Hartford comes in fourth with 25.9 percent of loans in the same position.
CRED iQ’s analysis is built upon the current balances of all loans which it tracks within each market.
According to CRED iQ’s analysis, the office sector is driving distress in these markets. In Stamford, 92.8 percent of distressed loans are from the office segment. While far less than Stamford, distress in the Hartford market is dominated by offices, with over 50 percent of troubled loans coming from the office sector.
“The office [segment] is just certainly a no-go at this point,” said Shaun Dwyer, senior vice president of commercial banking at PeoplesBank.
The 30.4 million-square-foot Greater Hartford office market had a 23.1 percent vacancy rate at the end of the third quarter, according to commercial brokerage CBRE, and an average annual per-square-foot rent of $20.79.
The 37.8 million-square-foot Fairfield County office market had a 27.6 percent vacancy rate at the end of the quarter according to commercial brokerage Cushman & Wakefield, and a $34.40 average per-square-foot asking rent.
The Hartford area had seen only 103,492 square feet of positive absorption in the quarter, while Fairfield County saw 236,285 square feet.
High vacancy rates in the Hartford office market pre-pandemic likely contributed to the level of distress, he said.
“We already had a fairly high vacancy rate,” Dwyer said. “So, there was obviously a supply issue in office, in my opinion within Hartford proper, as well as Greater Hartford. Then we had the pandemic, with the issues there, a lot of firms going to hybrid or fully remote. Obviously, it gave a lot more stress to the market, and you’re seeing vacancies tick up even higher than where it was. You’re seeing a lot of properties in the 30 [percent] to 40 percent vacancy range, and some even higher than that. It’s just going to take a lot longer for that to absorb even if the market does bottom and tick up.”
Chris Arnold, head of commercial real estate lending at Liberty Bank, said the market picture appears brighter to his bank, outside the office market.
“I don’t see distress in multifamily. I don’t really see stress in industrial. I don’t see much stress in retail,” he said. “It’s a fairly finite amount of office, and the thing that’s worked against office is that increasing property taxes, increasing insurance, increasing operating costs in general have stressed NOI.”
While some companies are beginning their return to office plans or mandates such as Amazon, Dwyer said he believes that companies in Connecticut eliminating remote or hybrid work won’t have a major impact on the office market.
“I think it’s either greater employment within Hartford County, or a huge wave of the return to office,” Dwyer said. “I think it’s going to help, I just don’t think you’re going to see a monumental shift of the vacancy going from where it is today to a healthy range. Overall vacancy within Hartford, it’s still very, very high.”
While the office sector looms large over the CRE market, Arnold said that Liberty remains bullish on the market with multi-family being a reason for positivity.
“I think there’s still good demand drivers and pent-up demand for good spots,” he said. “The other thing about multifamily is that we have created a fair amount of new inventory, but for the most part, there was so little multi-amily being built. A lot of the product in Connecticut is pretty dated. What I see in demand is well-designed, well-located, amenitized new product. It really commands a premium in the market, because people downsizing out of the house, the fallback from that is very dated kind of multifamily. So, in my mind, there’s still some really good demand drivers in that.”
