Market Extra: How Purdue Pharma’s bankruptcy could mark a fresh blow to Stamford, Conn.

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Purdue Pharma threatens to be the next major company to go dark in Stamford, Conn., a city still working to attract a new era of tenants after the 2008 financial crisis left its prized Class A office market awash in vacancies.

The OxyContin drugmaker earlier this month filed for bankruptcy protection to contain a mountain of lawsuits over its role in the U.S. opioid crisis. Now, the fear is that Purdue could be the next shoe to drop in Stamford.

The Sackler family, which controls Purdue, bought its 13-story headquarters in 1999 for $77 million, according to financing documents. The family struck the deal as the seaside commuter town, about 40 miles northeast of New York City, was beginning to entice large financial institutions and Fortune 500 companies away from its metropolitan rivals with tax breaks.

Connecticut as a whole has endured a cycle of budget deficits, corporate downsizings and departures, including the surprise decampment in 2016 of General Electric GE, +2.35%  from its Fairfield County home to Boston. Stamford lost GE Capital, the financial-services arm, two years later and only recently has been able to re-purpose hulking office buildings in its main business district that once housed entire investment banks.

Purdue currently leases more than 32% of its headquarters, but in about 14 months would be on the hook for the property’s full 504,471 square-foot allotment, according to Kroll Bond Rating Agency.

If vacated, the property would leave another 14% of Stamford’s small 4 million square-foot central business district for Class A office space without tenants, which already has a high 20.6% vacancy rate as of the second-quarter, according to Moody’s Investors Service. High vacancies can hurt building owners, city budgets, real-estate values and investors who finance properties.

“If you are driving down I-95, you can see all of the vacant floors in these buildings,” said Ronald Czebiniak, founder of real-estate firm Aegis Realty Group in Stamford, in an interview with MarketWatch. “Smaller office space is growing, but the big office space is not getting filled.”

Underscoring the city’s longstanding challenges, Moody’s charted Stamford Class A office property vacancies for the central business district at 19.5% to 31.5% since 2014, or well above the national average of about 15% for that period.

Moody’s Investors Service

Empty offices in Stamford

As a counterpoint, Stamford’s head of economic development Thomas Madden, estimated that Stamford has been able to attract 15,000 to 18,000 new jobs in the past two years in industries that range from consumer goods to law firms, in part by offering employers office space at roughly a third of the cost of Manhattan.

“Stamford is not a one-horse or a one-mill type of town,” he told MarketWatch. “I think the vacancy rate is going to keep going down.”

A long shadow

Purdue’s headquarters sits in Stamford’s main business corridor at 201 Tresser Boulevard, about a 10-minute walk from Metro-North and Amtrak commuter rail lines, which can shuttle passengers in and out of the heart of New York City in roughly an hour.

The glass-encased Purdue property was last appraised at $227 million in 2016, when the Sackler family, through several entities and trusts, took out a 10-year $110 million mortgage on the property through Bank of America, which was then packaged up with other property loans and sold to investors as mortgage bonds.

“It’s a real large building and it’s a lot of square footage if it were to go on the market in Stamford,” said Matthew Halpern, a senior credit officer at Moody’s, in an interview.

While the next steps at the Purdue property will likely be decided by the bankruptcy judge, investors are considering worst-case scenarios.

“It can be very difficult to sell a big building in a suburban location,” said Jen Ripper, an investment specialist at Penn Mutual Asset Management who invests in mortgage bonds. “Loss severities can be in excess of 50%.”

Notably, the nearby former UBS Group AG UBS, -0.93%  Stamford office at 677 Washington Blvd., once touted as the world’s largest trading floor, sat nearly vacant for years following the 2008 financial crisis. Two years ago $145.6 million of property debt on the complex was sold at a more than $100 million loss for bondholders, according to Trepp data.

However, more recent signs point to a potential turnaround for Stamford, particularly after the professional wrestling network WWE WWE, +3.56%  said this spring it would relocate its headquarters to the former UBS complex, putting vacancy at the property under 30%.

Three years ago, Bank of America documents related to the sale of debt pegged to Purdue’s Stamford headquarters, highlighted the Sackler family’s “conservatively” estimated net-worth of about $14 billion, underscoring what had been a roughly $34.9 billion global market for opioids, like Purdue’s signature OxyContin drug, as of 2014.

However, the family’s fortunes have taken a plunge since as opioid overdose became a major national health problem, leading to charges of aggressive marketing by Purdue, Insys Therapeutics and other firms, and eventually a bankruptcy filing in the case of Perdue.

As part of its bankruptcy filing, Purdue and the Sackler family proposed a global settlement of up to $12 billion to cover thousands of claims brought by cities, states and Native American tribes swept up in the drug epidemic.

Several states rejected the settlement as inadequate, including New York State’s Attorney General Letitia James, who vowed to pursue separate claims against the drugmaker and the Sackler family in court.

Beacon Company and Rosebay Medical Company, two Sackler-controlled entities that borrowed against the Purdue headquarters in Stamford, per loan financing documents, are being investigating by Attorney General James as part of a civil lawsuit against the family, which claims the Sacklers have been moving funds into trusts and offshore accounts to keep them out of the reach of any potential recovery effort.

Purdue declined to comment for this article. Members of the Sackler family that control the borrowing entities at Purdue headquarters either didn’t respond or declined to comment. The New York State AG’s office declined to comment.

Rialto Capital Advisors, which oversees the property loan on behalf of bondholders, didn’t return several calls for comment.

Still, others see a bright outlook for Stamford, even if Purdue pulls the plug. Jeffrey Williams, a real-estate broker at Colliers International in Stamford, noted that the city has finally started to see former bank headquarters being populated, but this time with a greater mix of tenants and from a variety of industries, including finance.

“I am very optimistic about the future of Stamford,” Williams said in an interview.