GE Commercial Financial’s 221,000-square-foot expansion via its relocation to 201 Merritt 7 in Norwalk was among Fairfield County’s largest commercial real estate deals during the first six months of this year.

Though the general economy remains sluggish and job cutting continued in an effort to reduce spending, Fairfield County’s commercial real estate market actually fared well in the first half of 2003, according to observers.

Leasing, buoyed by companies looking to either upgrade their space or renew expiring leases in the tenant-friendly market, rose compared to last year, and the decline of space returns allowed positive absorption. Availability, though, increased slightly from June 2002, due primarily to returns from downsizing and space turnovers in the second half of last year.

That increase, however, was minimal compared to the double-digit growth of available space in the previous two years. In total, availability rose 5 percent from last June to 8 million square feet and the availability rate increased less than a single percentage point to 17.5 percent.

Still, a significant part of what did come back on the market was sublease space – an indication that while things are looking up, some companies are still feeling a budget pinch. The number of those companies, however, was far smaller than in the past – sublease space grew 4 percent from last year to 2.6 million square feet. Leasing, meanwhile, which reached record lows during the height of the economic downturn, made a comeback in the first half of 2003.

Altogether, new commitments in Fairfield jumped 10 percent from the first six months of last year to 1.7 million square feet. Absorption, responding to the increase in demand for space, turned positive for the first time since the first quarter of last year at 475,730 square feet. Average asking rent, reflecting both the influence of low-priced sublease space and ownership’s flexibility in attracting the few tenants eyeing the market, fell 8 percent or $2.38 per square foot over the past year to $26.84 per square foot.

While those statistics certainly seem to suggest the initial stages of a recovery, weakness in several key sectors of the Fairfield market, including Stamford and Fairfield County’s eastern submarket, has led Dean Shapiro, executive director of CB Richard Ellis’ Westchester-Connecticut office, to make a more reserved assessment.

“Cautious optimism – that’s the key word in describing Fairfield County’s first-half outcome. While renewed leasing and positive absorption are key factors in a recovery, there’s still potential for further strains on the market in the future. [Beverage distributor] Diageo’s potential relocation to Norwalk from Stamford, for example, while excellent news for Norwalk’s business community, could hurt Stamford, which is still struggling with the effects of the last two years. As long as the stock market, and the economy in general, continues to improve, however, these potential problems should eventually be mitigated by the county’s natural impulse toward balance.”

Unlike neighboring Westchester County, where relocations from outside the county had a major impact on its office market in the first part of this year, Fairfield County’s strength came from internal sources. Expansions within the county, in fact, accounted for 26 percent of all space leased in 2003 and internal movement, 62 percent.

Four of the five largest deals done thus far involved the growth of an established operation. The chief beneficiary of those expansions was the country’s western submarket, and specifically the city of Norwalk, where the completion of three of the county’s most significant transactions doubled demand from the first six months of last year to almost 695,000 square feet. Among those transactions was GE Commercial Financial’s 221,000-square-foot expansion via its relocation to 201 Merritt 7 – a deal that also demonstrates the creativity necessary to land a prime tenant in a highly competitive market. To make the entire 201 building available for GE Commercial Financial, several existing tenants received incentives and then relocated to other buildings in the Merritt 7 complex. And while expansions played a large part in the county’s overall 2003 performance thus far, these expansions, and the vast majority of the deals done in general, were comparatively small – a sign of the caution and conservativeness that remains a part of most corporate decisions. The average lease transaction, as a result, fell 5 percent to 7,621 square feet.

Scales ‘Being Tipped’

Creativity like the GE Commercial Financial deal, paired with incentives, apparently has become a necessity for enticing users to direct space when clearly subleases offer the best deal, especially for the highest-quality-space product. In the first half of this year, it has also proven quite successful – in a time when subleases make up almost a third of all available space in Fairfield County, leasing in sublease space accounted for just 10 percent of the total demand. With little to stand in the way of owners lowering asking rents and furthering incentives except an unexpected uptick in the economy, that imbalance may continue for some time.

“In my opinion, landlords are basically more willing to discuss lease takeovers and more creative transactions to help stir activity in their own properties,” said Paul Jacobs, senior vice president at CBRE in Stamford. One reason for this attitude on the part of landlords is that velocity is very slow, he said.

“This type of concession was unheard of three years ago,” added Jacobs, who is currently working on a number of transactions that are creative in nature. The last such concessions were made was in during the 1980s, he said, adding, “The scales are being tipped clearly in the favor of the tenant, but once we see a market recovery, things will start to even out.”

The real question, Jacobs said, is when that recovery will occur.

There are positive signs in Fairfield County that point toward an upturn in the economy and, consequently, the market. Tenants and clients have been talking about expansion projections in the future rather than contraction projections in the short-term.

“That to me is a positive sign, and I think that we’re all kind of cautiously optimistic that we’re on a slight track upward,” said Jacobs. “I see generally positive signs, part of which is that the economic news is better than it has been.”

Much of the action in Fairfield County has been horizontal.

“Tenants are trading up or renewing where they are,” said Jacobs. “A lot of them are expanding, shedding space or going out longer-term with existing landlords. There has been a lot of moving around pieces of the pie, but not a lot of vertical movement.”

Typically there is more activity coming into the county, especially from New York City. The largest transaction to come out of the city was a 60,000-square-foot lease at 55 Railroad Ave in Greenwich by Ziff Bros., a money management firm.

“Aside from that, there hasn’t been a lot of movement. Sure, it might be summertime, but business goes on. If there’s a plan in place it’s not going to be held up because it’s summer,” said Jacobs.

Regardless of what kind of space in which it takes place, strong demand is a necessity for removing space from the available supply and, when combined with few new space returns, often brings about positive absorption. That has been the case thus far in 2003, as downsizing seemed to halt while new commitments grew, resulting in the aforementioned 475,730 square feet of positive absorption for the year, compared to 61,930 square feet of negative absorption in the same period of 2002.

Much of that outcome arose from events in the western submarket, where GE Commercial Financial’s lease at Merritt 7, Graham Capital’s purchase of 40 Highland Ave. in Norwalk, Gibbs College’s 64,550 square feet at 10 Norden Place in Norwalk and Ziff Bros.’ lease in Greenwich removed relatively large blocks of space from the submarket’s available supply.

In total, the western submarket saw 251,630 square feet of positive absorption for the year. Both Stamford and the North submarket also saw positive absorption in the first six months.

Most of Fairfield County’s overall availability resides in Stamford, which, despite posting positive absorption for the first half of 2003 and availability below June of 2002, still houses more than 35 percent of the county’s total availability and 43 percent of its total sublease supply.

To undercut the market and attract users to their space, most sublandlords have been willing to accept terms unheard of in direct leases, thereby pressuring several large portfolio owners, who have always had influence on the market due to the sheer size of their holdings, to cut asking rents across the board. As a result, average asking rent countywide fell $2.38 per square foot from last June to $26.84 per square foot.