Norwalk has become one of the more active sectors of Fairfield County, as complexes with direct leases available, such as Merrit 7 (pictured above), offer quality facilities coupled with a nearby labor pool.

Fairfield County’s office market remains in a state of transition, with sublease space languishing on the market and inter-county moves the only transactions on the horizon.

While parts of the county could be doing better, the western section of the county is rapidly developing into the place to be in Fairfield in the new millennium – as Stamford was in the 1990s. Seven of the 10 largest lease transactions of 2003 took place in the West, as many of the county’s most significant companies chose to take advantage of aggressive, accommodating owners and the cachet of premier addresses with competitive rents. Most attractive of all these locations was Norwalk, which lured users not just to existing office space, but also mixed-use properties and planned developments. In total, leasing activity in the western segment accounted for 46 percent of Fairfield County’s total velocity, up from 43 percent in 2002.

And, while the western submarket saw most of the county’s major transactions of 2003, large deals made a comeback throughout Fairfield, resulting in total countywide leasing velocity 24 percent higher than the prior at almost 3.2 million square feet. This increased activity, though, came at a fortunate time, as the overall economic improvement in Fairfield did not extend to the amount of space being returned to the market, often as sublease offerings. Despite a seeming reversal in the trend around mid-year, the return of surplus space to the market continued to be a notable drag on the county’s progress and defied the notion that an improving economy would stave off further company downsizings.

“There are buildings that probably have had space available for the better part of a year or more,” said Michael Siegel, executive vice president at CB Richard Ellis’s Stamford office. “In some cases that’s not because they’re not good properties. There might be a challenging sublease, and it’s just simply not the right fit for tenants in the market.”

In an area like Norwalk, where there is direct space available for lease, the vacancy rate is somewhat lower. A property like Merrit 7 in Norwalk has been quite successfully leasing its direct space in recent months.

“Landlords with direct space are creative and aggressive because they want to get their buildings leased,” said Siegel, remarking that those landlords dealing with sublease space don’t necessarily have the same luxuries and flexibility.

“Clearly there is higher vacancy in the sublease sector,” he said. “I can’t honestly think of what direct space may not be getting activity.”

In total, a surplus of sublease space in Stamford increased another 6 percent over the past 12 months to more than 2.5 million square feet, or 32 percent of the county’s total available space. Overall vacancy in Stamford, however, decreased in 2003 compared to the previous year as the volume of leasing overwhelmed space returns to produce positive absorption of 376,190 square feet. Altogether, available space dropped 6 percent from December 2002 to just under 8 million square feet and the availability rate decreased slightly more than one percentage point to 17.5 percent. Giving an indication of just how far the county still has to go to return to health, however, average asking rents not only remained low in 2003, they continued to fall as a result of cost cutting in many major real estate portfolios. Asking office space rents dipped a total of 4 percent from the end of 2002 to the end of 2003 and now stand at about $26.49 per square foot.

“If we’re quoting 17.5 percent vacancy, we’re basically saying that it’s just a slight decrease from [2002]. [A vacancy rate of] 17.5 is still a healthy number and not unmanageable, reminding us that there are very strong sectors in the market,” said Siegel. Norwich and Greenwich were strong in 2003, while Stamford “clearly has a ways to go,” he said.

The reason Stamford lags behind the rest of the county is the recent trend of consolidations, with several firms moving out of the city and heading towards Norwalk.

The closest the county ever came to a zero percent availability rate was in 2000. Westport was under 4 percent, Stamford was at approximately 7 percent and the availability rate in Greenwich was roughly 2 percent.

At the time, developers, landlords and tenants were talking about which new buildings were going to be constructed to meet demand in the county. In the end, very few buildings were actually erected and projects in Stamford that were planned and sometimes even permitted never got under way.

“There’s always an event that happens, when the time just isn’t right,” said Siegel. “Rents supported a new building, but there was no lead tenant to kick it off, so it didn’t happen.”

The speculative development market remains a risky venture, and Siegel commented, “I don’t think too many developers will be thinking in that vein for a while.”

In many respects, Fairfield County and neighboring Westchester County have reversed places over the past few years. For the first time, Westchester has lower availability than Fairfield, while leasing has reached comparable levels. Most significantly, however, is the reversal of attitudes from companies looking to relocate operations out of pricey Manhattan. For years, Fairfield generally garnered most of the New York City relocation attention due to a combination of state and municipal tax incentives, quality office facilities and address cachet.

Go Westchester

Recently, Westchester has become the location of choice due to many of those same factors, along with a more appropriate space supply and fewer concerns over traffic. As a result, Fairfield’s leasing velocity over the past year has had to come primarily from internal sources – a major factor in the lethargy of the area’s recovery. In 2003, activity from existing businesses increased 23 percent compared with 2002, rising to more than 1.8 million square feet of space or 58 percent of the county’s annual total. On top of that, the growth of Fairfield business resulted in 55 percent more space leased in the form of expansions than in 2002. At 1 million square feet, these expansions made up 33 percent of the total. In contrast, relocations into Fairfield dropped 24 percent over the past year and fell to just 8 percent of the county’s total leasing activity.

The party line continues to be a zero-job-growth economy, as companies in Fairfield County shift from building to building without substantially expanding their workforces.

“A lot of companies are taking advantage of the market conditions,” said Siegel. “There are buildings being repositioned by strong landlords who recognize that if they want to get their building filled they have to be aggressive. Tenants looking at renewals often find it to be less expensive to move.”

The average leases in the area are for five years, and since many companies first took theirs in 1999 or 2000 during the dot-com boom, their leases are just about up.

“A lot of companies first signed at the height of the market and are currently paying high rents. Their landlord isn’t going to want to renew them at a major discount, so these tenants are almost forced to go out and test the market,” said Siegel.

An upturn in the economy usually means improved leasing, positive absorption and lower availability rates – all things that are evident in the burgeoning recovery Fairfield County saw toward the end of 2003. However, because this recovery has so far been a jobless one, and outsourcing of jobs is becoming more common, companies continued to return excess space to the market in large amounts – with significant impact. While leasing, aided by the return of large transactions, had enough strength to somewhat counteract these returns, the 376,190 square feet of positive absorption produced in 2003 was greatly aided by two non-leasing events – Xerox’s decision to suspend the marketing of 255,000 square feet of sublease space at its Long Ridge Road headquarters in Stamford and the conversion of 121,450 square feet of space at 77 Havemeyer Lane in Stamford to residential use.

Larger transactions moved up and east toward Norwalk, often shifting to higher quality facilities and taking advantage of proximity to a strong workforce. Where there were once large pools of labor available just east of New York City, companies now look farther east toward the New Haven County border.

“The best term I’ve heard is a market in transition,” said Siegel. “We’ve been in a period of adjustment since 2001 when the economy was certainly rocked. We’re starting to feel that things look better – and hopefully that’s a self-fulfilling prophecy. There is a sense of improvement and [leasing] decisions are being made by companies.”

Companies are no longer putting off their decisions in hopes that the market will decline further, said Siegel. While hesitant to say that the market has hit bottom, he did say that rents have stabilized at a low point and now may be in a position move up again.