Instability in Financial Markets Results in Tenants Taking
“Wait-and-See” Approach Toward Lease Commitments
Cushman & Wakefield has released its third quarter Fairfield County office market report, indicating year-to-date leasing activity remained stable however; there was a significant slowdown in year-over-year leasing and investment sales. There is little new construction taking place and vacancy rates remain relatively low.
Overall Class-A vacancy rates countywide in the third quarter registered 13.9%, slightly higher than the 13.3% reported at the close of the second quarter, and up from 12.8% in the third quarter of 2007. Overall asking rents for Class-A space at the close of this quarter averaged $35.88 per square foot (psf) countywide, up from the $35 psf average at the close of the third quarter 2007. Although rents have not increased dramatically, concessions, such as free rent and tenant-improvement allowances, have become more generous, resulting in lower rent costs, overall, for tenants.
Historically over the past two decades, the Fairfield County office market has been supply constrained with only a few small pockets of new office construction. However, things appear to be shifting. In a counterintuitive move, Building and Land Technology (BLT) is moving ahead with the construction of two office buildings in its Stamford Harbor Pointe Development, totaling 400,000 square feet (sf) that will be ready for occupancy in 2009. The move is intended to provide new office space to tenants seeking close access to the train station in a waterfront environment. Because the space has not yet hit the market statistically, and as the amount of sublease space that is both actively as well “quietly” available has increased over past levels, the market is likely softer than the vacancy numbers reflect. This will provide savvy tenants with the ability to obtain space in buildings at somewhat reduced occupancy costs and with more flexibility.
This trend is somewhat exacerbated by tepid tenant demand for space in the 5,000 to 25,000 square-foot (sf) range. Notwithstanding the lethargic demand for smaller space, large tenant demand remains strong — with nearly a dozen tenants looking for upwards of 100,000 sf of space in the Fairfield/Westchester County markets.
As a whole, Fairfield County experienced 580,980 sf in Class-A leasing during the third quarter, compared to 507,923 sf leased during the third quarter of 2007. There was a decline in leasing from 2007 to 2008. Year-to-date, 1,510,896 million square feet (msf) were leased, compared with 2,162,467 msf during the first three quarters of 2007.
“Most people would agree that 2005, 2006 and 2007 were very busy in terms of leasing activity, which makes the fall off seem all the more dramatic,” said Jim Fagan, senior managing director and head of Cushman & Wakefield’s Fairfield and Westchester County region. “While uncertainty in the financial markets will have a negative effect on the commercial real estate markets, the region’s fundamentals will remain relatively sound due to the long-term contractual nature of leases, combined with the fact that very little new product has been constructed in our marketplaces over the past two decades.”
Significant leases signed in the third quarter included General Reinsurance Corp’s lease of 310,000 sf at 120 Long Ridge Road in Stamford; Sun Products Corporation’s lease of 56,603 sf at 60 Danbury Road in Wilton; Digitas’ lease for 36,000 sf at Four Stamford Plaza in Stamford; Dymon Associates lease for 15,500 sf at 700 Fairfield Avenue in Stamford; and Tygns Financial Products lease for 15,000 sf at 40 Danbury Road in Wilton.
There was a slight increase in Class-A rents in the Stamford CBD at the close of the third quarter with an average $47.51 psf compared to $46.06 psf at the close of the second quarter. Rents were up significantly from $41.33 psf reported in the third quarter of 2007. Concession packages offered by landlords to tenants in the form of free rent and/or tenant improvements, however, have largely negated those gains. Stamford CBD rents were second only to Greenwich, whose rents in the CBD market can easily exceed $100 psf, but averaged $66.72 psf. Hedge funds continued to drive leasing activity in Greenwich.
Overall absorption for Class-A space in Fairfield County during the third quarter totaled negative 81,839 sf compared to the second quarter total of negative 199,378 sf. Absorption in the third quarter of 2007 registered positive 250,111 sf.
Investment sales remained sluggish during the third quarter, with market indicators pointing toward a decrease in asking prices. The sales market is projected to continue at a slower pace due to the constraints of the debt markets and expensive financing. Investor demand remains strongest for residential rental buildings, retail and select high-quality office buildings. New construction will become less of a possibility, as difficulties in obtaining non-recourse construction financing will keep proposed construction projects on hold — a positive for the near-term.
Only two significant sales occurred during the third quarter: 1290 East Main Street, a 54,000-sf building in Stamford, which GHP sold for $11.5 million to Chilton Investment Co; and 88 Hamilton Avenue in Stamford, a 154,533-sf mixed use/flex building, which Poplar Point Partners LTD. sold for $20 million to Seaboard Properties.
“In the imminent future, investment sales will be driven by long-term acquisitions with short-term debt, said Mr. Fagan. “In addition, it’s going to be far more difficult for developers to construct build-to-suits in this market. In a good economy, business projections can be made three years out; but in a choppy economic environment, it takes a visionary to see where we’ll be."
