NORTHEAST SNAPSHOT, DECEMBER 2010
FAIRFIELD COUNTY, CONNECTICUT, OFFICE MARKET
The commercial real estate market in Fairfield County reflects the issues affecting the greater national economy. Due to the fundamentals of commercial real estate and how the marketplace functions, the region will be in a state of malaise for the foreseeable future. The marketplace has bottomed, however, and will improve over time.
From 2005 through mid 2008, employment was increasing, companies were expanding; there was competition to put money to work through loans and investments. Capital formation grew at a torrid pace as the national capitalistic system sought higher and higher returns in a market where the risk seemed to diminish each month. As that feel-good locomotive hit the wall in 2008, there were tremendous lay-offs and all capital sources that had been pushing money at the real estate asset class evaporated. In the first three quarters of 2009, tenants stopped conducting real estate business almost altogether. Even tenants driven by lease expirations often opted for short-term renewals due to the cataclysmic uncertainties that decision makers were facing. Additionally, tenant renewals were driven by give-backs of space as companies needed less space due to fewer employees. Companies took space proactively in 2007 because they anticipated hiring more employees, but they reversed that strategy in 2009.
Vacancy Rate: The office vacancy rate in Fairfield County rose from its low point of approximately 12 percent in fourth quarter 2007 to a high of 19.3 percent in the third quarter of 2010. The dramatic increase in vacancy is in large part due to the decimation of jobs in the financial industries that are the predominant employers in Fairfield County.
Leasing Velocity: Excluding lease renewals, there was almost 3.5 million square feet of leasing velocity in 2007, which slowed by 35 percent to a little more than 2 million square feet in 2008. Velocity decreased again in 2009 to approximately 1.8 million square feet. This year, leasing activity picked up in the first two quarters, registering more than 1.5 million square feet and slowed to 425,000 square feet this quarter, beating last year’s total activity for the same period. Leasing activity should pick up slightly in the fourth quarter, bringing us to about 2.5 million square feet of leasing activity for the year.
Absorption: In 2009, the Fairfield County office market returned almost 1.1 million square feet of space. (Almost 1.1 million square feet of space that was previously occupied became unoccupied in 2009). This trend has continued this year with a little more than 775,000 square feet of previously occupied space going vacant — 350,000 square feet in the third quarter alone.
Rental Rates: While asking rental rates have remained somewhat constant, despite the deterioration of market conditions, certain submarkets have fared better than others. Better buildings in the Stamford CBD have generally kept their rents above the $35-per-square-foot watermark. Furthermore, the highest quality buildings near the train station can attain rents in excess of $50 per square foot. The $35-per-square-foot rent number can also be attained in some of the very best buildings outside of the Stamford CBD. Generally, most buildings have had to lower their taking rents by as much as 30 percent to attract tenants. A-minus grade buildings, outside of the CBD find themselves competing for tenants predominantly on price and are forced to start rents in the mid to high $20s on a rent-per-square-foot basis.
The Future: As the premier Manhattan suburb (or submarket) housing employees for the financial services industry, the future of Fairfield County’s office market is somewhat brighter than its immediate neighbors. As the financial services industry recovers, jobs will be replaced faster in Fairfield County than in other markets — causing demand for office space occupancy in the county to revive. For the next 12 to 18 months, however, landlords will have to endure the lethargy of not enough tenant demand to increase pricing, while tenants will likely enjoy rental rates similar to what they were 20 years ago. As the unemployment rate begins to decrease and as jobs are added to the marketplace, office vacancy will decline. Positive momentum for landlords in Fairfield County should start to take shape 9 months from now.
Capital Markets and Investment Sales: There is a distinct gap between the buyers and sellers of commercial property in Fairfield County. At the peak of the market, there were 27 sales of institutional properties totaling almost 6 million square feet. Year-to-date, there have been only three sales and not for the lack of capital, as was the case for most of 2009. Currently, the market has sufficient capital chasing product, however, most potential buyers are looking for distressed opportunities whereby they can purchase long-term assets at historically low pricing, and then profit handsomely when the market normalizes. The current owners and lenders are trying to hang on to their distressed properties in order to see how quickly the market returns.
To sum it up, the commercial real estate market is driven by events that lag market cycles. Typically, employment growth does not begin until 12 months after a recession ends. Commercial real estate doesn’t benefit from the increased employment for a year beyond. If you look at the truly remarkable recovery in the economy since the very uncertain times in early 2009, you’ll understand why we have strong confidence in the local real estate markets for the foreseeable future, although we might have to wait a while.
— Jim Fagan is senior managing director with Cushman & Wakefield.
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