Class B vacancy rates are down in downtown New Haven, but not for the reasons one might imagine.

“The obvious explanation for the recent popularity of the more affordable Class B office space would be that tenants, suffering the effects of a prolonged economic slump, have tightened their belts and migrated into less expensive quarters,” reports John Keogh of Colliers International, in his first-quarter 2013 market report, which tracks 59 office properties. “It makes sense, but it isn’t true.”

The reality is Class A space has grown with the departure and/or contraction of companies like AT&T and the United Illuminating Co. as well as the conversion of many downtown Class B buildings to residential use, a trend continuing with the recent purchase of 205 Church Street by a New York developer with plans for at least 100 apartments.

As a result of these changes, the overall downtown New Haven office market vacancy rate at the end of the first quarter of 2013 (14.6 percent) nearly matches the 2007 rate (14.7 percent).

The difference between Class A and Class B space, however, is reversed. Six years ago, the Class A vacancy rate was 9.5 percent and Class B was 17.9 percent. In the first quarter of 2013, the Class A vacancy was 20.8 percent and Class B was 10.6 percent. 

Yale University and Yale-New Haven Hospital, along with city and state government entities and non-profits are filling Class B space, according to Keogh, who sees several possible scenarios unfolding.

“You have so much A space available that Class A building owners lower prices in order to compete,” he says. “Presumably the market will firm up for B space.

“If ever there is any surge in demand, which there could be — there have been a lot of entrepreneurial startups in New Haven so it wouldn’t take much –– then Class B prices might get up to a point of pushing Class B tenants into Class A space. It certainly hasn’t happened yet.”

Chris Nicotra of Olympia Properties describes the rental market as “really hot.”

SeeClickFix recently expanded from 1,000 square feet at 746 Chapel Street to occupying the entire 5,500-square-foot third floor, says Nicotra, the building’s landlord. At 760 Chapel Street, another Olympia Properties building, business incubator the Grove, which was born in a storefront at 71 Orange Street, has signed a five-year lease for 7,500 square feet.

“I barely have a vacancy anywhere,” Nicotra adds. “People are calling. Banks are starting to open up. Deals are starting to get done.”