STATE HOUSE SQUARE
The Property
State House Square is an 844,813 square foot office complex in Hartford, Connecticut located in the Central Business District across from the Old State House and next to the Travelers Indemnity Corporation’s world headquarters. The property is a trophy-quality asset in a secondary market and consists of two, fourteen-story towers situated on either side of a renovated, historical office building. Harbor Group International (“HGI”) purchased the complex in September 2003 for $66.0 Million.
The Play
HGI purchased the property from Aetna Life Insurance Company who had acquired the property via a deed-in-lieu of foreclosure. HGI purchased the asset with the knowledge that a significant number of leases at the property were set to expire.
When HGI purchased the property, Travelers Indemnity Corporation was occupying over 300,000 square feet. However, 163,739 square feet of office space was scheduled to expire by August 2004, less than a year from the acquisition date. This exodus would decrease Travelers leased space from 36.2% to 16.8% of the building and decrease the occupancy of the building from 92% to 73%. In addition, Hartford had been experiencing an increase in vacancy rates from 9.4% in 1999 to 17.5% in 2003.
Knowing the leasing risk going into the deal, HGI budgeted for a three-year recovery plan from the purchase of the asset or approximately two years from the expiration of the Traveler’s leases. This plan included a means of funding tenant improvement and lease concession costs to encourage tenants to lease the available space. In addition to the leasing plan, HGI was confident that the market would play out in their favor for several reasons since two large leases were about to come to market and take the other large competitive blocks of space out of the market. Shipman & Goodwin’s 90,000 square foot lease at the Phoenix Building was set to expire and they were set to move one of the limited large blocks of Class A spaces available. Also, the State of Connecticut was scheduled to lease 250,000 square feet of office space in One Corporate Center, lowering the potentially available large-block office space in the Hartford CBD considerably. These two leases were expected to tighten up the vacancy rate to a forecasted 11%. In addition, sixty-five percent of the leases in the Hartford CBD were scheduled to expire in 2005 and 2006, offering plenty of potential new tenants to occupy the vacant space in State House Square.
The City of Hartford was also seeing change as a demographic shift was being introduced to the Hartford CBD. A $1.0 billion convention, cultural and entertainment development called Adriaen’s Landing was expected to shift the perceived downtown eastward towards State House Square, generating increased visibility and increasing the desirability of the location. Finally, a limited amount of new construction recently completed and no new construction planned increased the chances of vacancy rates tightening further.
The Conclusion
In 2005, Travelers decided to return to the building. Travelers approached HGI with a request to expand and extend their remaining leases by approximately 38,000 additional square feet. The following year, in the middle of 2006, Travelers contracted with HGI to lease an additional 210,000 square feet of space with terms of up to 10 years in length. Including the new Travelers leases, HGI signed up 445,000 square feet of leases for a total of $58 million in new net lease value. Average occupancy was increased to 98% with 25% leased until 2015 and beyond.
State House Square was sold at the height of the real estate frenzy in February 2007. A competitive bidding process drove the price for the asset. The quality of the tenancy, compounded with the overall investment market drew interest from investors who would otherwise only been interested in assets located in primary markets. The property was sold for $97.8 million. The sale yielded a 22.73% IRR and allowed HGI to return 175.6% of the equity invested in the deal.