Drop in demand from schools hits the office market

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One of the largest categories of tenants in the New Haven office market is schools. Yale University leases hundreds of thousands of square feet in investor-owned buildings for administrative departments and academic programs. Charter schools – publicly funded but privately operated – have been big occupiers of office space in the city, most of it used for classrooms and other instructional purposes.

Another notable space user in this genre, one that might be a bit surprising to some people, is the New Haven Board of Education. Over the last 20 years or so the city has been engaged in a massive program of school construction and renovation. Forty-one schools have been built or refurbished over that time at a cost of $1.5 billion, most of it furnished by the State of Connecticut. While the city owns all of these buildings, it does not own enough surplus real estate to supply temporary space during the two years or so that it takes to complete each school project. For that the Board of Ed leases privately owned properties, some of which are included in the inventory that serves as the basis for this report.

As is the case with most tenant classes, there is an ebb and flow in the volume of demand generated by schools. The charter school industry has carved out a solid niche in the city over the last two decades and its operators have purchased and renovated several buildings to house programs that were once located in rented space. In an effort to minimize cost, the Board of Ed tries to lease space only when it is needed to accommodate students from schools that are being rebuilt.

Over the last year and a half, a slackening in demand from schools has resulted in a significant increase in the vacancy rate for Class B buildings outside the Central Business District. Since the 1st quarter of 2016, vacant space in that category has climbed from 7.1 to 11.9 percent with negative net absorption of more than 80,000 square feet. Much of the vacancy is concentrated in two properties, 495 Blake Street and 540 Ella Grasso Boulevard. The Blake Street building, just under 60,000 square feet, has been home to both charter schools and Board of Ed programs in recent years. It is now close to vacant and reported to be the object of a purchase agreement by a non-school space user. The property on Ella Grasso Boulevard is part of a 175,000-square-foot complex that has seen many tenancies by public and charter schools. A recent vacancy of 30,000 square feet represents the first available space there since the 1st quarter of 2013.

The new vacant space on Ella Grasso Boulevard was the major factor in pushing the citywide vacancy rate from 13.6 to 14.1 percent this past quarter. This reverses two quarters of gains for the market but keeps the vacancy rate within the fairly narrow range of 11 to 15 percent that it has stayed in for the last three years.

Significant transactions for the 2nd quarter include a 10-year, 13,000-square-foot deal for the penthouse floor of 900 Chapel Street, leased by The Connection Fund, a social services agency. Murtha Cullina, a Hartford-based law firm, leased 5,000 square feet at 265 Church Street, a.k.a. 1 Century Tower.

Q2 2017 New Haven Office Market Report

Drop in demand from schools hits the office market

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