NewHavenSkyline 2NEW HAVEN: According to the most recent research report for New Haven from Colliers International the New Haven office market is undergoing a change.

“The office market in New Haven is now a few months into its new reality of high vacancy and vague prospects, the result of the bombshell decision last September by Alexion Pharmaceuticals [NYSE: Alxn] to move its headquarters to Boston.”

The report added, “following the mega-jump in 3rd Quarter vacancy due to the Alexion move – from 14.1 to 19.3 percent – the market settled back into its usual groove in Q4, ending the year with modest improvement and a vacancy rate of 19.0 percent. Net absorption for the quarter was 20,898 square feet.”

"The market in New Haven may feel the effects of Alexion leaving for years. Five percent of the space in the city hit the market in a single day. But most of the impact should be confined to a small group of Class A buildings,” said John Keogh a senior broker in the New Haven office.

The largest transaction of the quarter was an expansion and lease renewal at 5 Science Park by the drug development firm Arvinas, which now occupies 27,000 square feet in the property. Along with several other smaller transactions, the deal increased occupancy in the building by 28,000 square feet.

According to Colliers, The lease with Arvinas was transacted at a rental rate unaffected by the imbalance in market dynamics that has resulted from the Alexion sublease offering. The Alexion building – 100 College Street – consists of 500,000 square feet of office and lab space on 13 floors, each of which measures close to 40,000 square feet. “It is a building best suited to large tenants willing to pay premium rents for a premium product.”

The report says, “there was already a glut of available space in this market class [A] before Alexion announced its offering, which added 295,000 square feet to available inventory. (The company will continue for the time being to occupy 205,000 square feet of lab space in the building.) Now the vacancy rate in Class A space is a daunting 31%.

Alexion has 13 years of remaining rent obligation and in addition it is likely seeing rents that are more than double its obligation for their new Boston space, with Boston Class A rates hovering around $65 to $75 per square foot.

Colliers says the of the Alexion overhang, “this will almost certainly apply downward pressure on Class A rental rates. But the number of tenants in New Haven that need large blocks of high-end space is limited and it’s a rare event when a large company moves into town.”

Advertised rents for sublease more than 68,000 square feet of space at 555 Long Wharf made available by Medtronics are being marketed at around $20 per square foot, well below the price of new Class A space.

Colliers says that the bargains are in Class A Space but that “the economics for Class B space – with a vacancy rate of 9.1 percent – should remain pretty much unchanged. Likewise with smaller Class A buildings. There could certainly be instances in which tenants trade up in quality, but for most tenants in the city – the not-for-profits, early-stage tech firms and professional practices – business should proceed in much the same way as it did before.”

“The looming question is whether the availability of so much good-quality office space will attract tenants from outside the immediate market, says the Colliers’ report.

It has happened before, in 2009 the medical device maker Covidien (now Medtronic) leased 130,000 square feet at 555 Long Wharf Drive, much of it currently available under sublease. The report says, “that lease effectively neutralized the first wave of downsizing by successors to the Southern New England Telephone Company, once the largest office tenant by far in the city.”

Not yet figured into Colliers’ data is the impact of the recently open District a high end tech innovation space on James Street where approximately 45,000 plus square feet of hard to classify space has come on the market, much of it available at prices similar to the 555 Long Wharf sublease.

Brokers are being invited to a March 6 preview of the tech innovation space.