FactSet Research Systems, currently located in Stamford and Greenwich, leased 129,095 square feet in this yet-to-be-completed building at 601 Merritt 7, Norwalk, in the first quarter of the year.

The economy may be rebounding, but it’s taking awhile for the commercial real estate market to catch up, at least in Fairfield County. After a stellar first quarter, commercial leasing was down in the second quarter of 2004, according to area brokers. But success in the first quarter will likely carry the first half and help assure slightly positive space absorption rates overall at the midway point of the year.

“Our second quarter was really slow,” said Steve Greenbush, a first vice president at CB Richard Ellis in Stamford.

The firm leased about 600,000 square feet of space in April, May and June – 47 percent below what they leased in the first quarter, Greenbush said.

George Walker, senior vice president of Albert B. Ashforth Inc. in Stamford, also noticed some falloff in transaction volume, but is optimistic that the market will bounce back. The commercial real estate market usually lags behind the economy, he said.

“While most companies are feeling a little better about the long-term progress of the market, very little of that has come into [the commercial real estate market],” he said.

He characterized the commercial market’s rebound as “two steps forward and one step back.” CB Richard Ellis brokered more than 1.1 million square feet of leases in Fairfield County, but the second quarter saw the firm broker less than 600,000 square feet in lease deals.

The largest lease of the quarter was a warehouse deal in Shelton, Greenbush said.

“It was just an extremely slow quarter and I don’t know why,” he said.

There haven’t been significant commitments in the second quarter and absorption rates are improving very slowly, Walker said.

“We’re not going to see a significant absorption in the first half,” he said.

But the market will begin to improve, Walker said. Success in the rest of the economy takes time to translate into success in the commercial real estate market, he said. The corporate real estate market typically lags 10 to 12 months behind the stock market, Walker said. When the commercial real estate market begins to see those changes, Walker expects an exponential recovery, he said. Some of the recovery has already started, he said.

“I think we are starting to catch up,” he said.

The market is seeing positive absorption, but the recover is still “kind of anemic” at this point, Walker said. Also, the market is not overbuilt, so vacancy rates aren’t drastically high.

Walker compared today’s corporate real estate market to the market in the early 1990s, when there was a 30 percent vacancy rate. The vacancies were eventually filled in because of job growth. The vacancy rate now is less than it was in the early 1990s at 15 percent overall for commercial space in Fairfield County, but the lack of job growth in could mean that filling that 15 percent could take as long as it did to fill in the 30 percent vacancy rate 10 or 15 years ago, Walker said. But that has started to happen, he said.

“I think we’ve turned the corner,” Walker said.

Fairfield County has started to see positive absorption, he said.

“I suspect that, as the economy continues to heat up Â… the need for adding more space will come,” Walker said.

But the real shift in the market toward the positive side probably won’t become readily apparent until the fourth quarter of 2004 and into 2005, he said.

‘A Good Thing’

Greenbush agreed that the commercial real estate market is due for some more activity and that some of it, at least, could come later in 2004.

“First quarter was great. I’m not pessimistic about the rest of the year,” he said.

Greenbush said he expects to see some big transactions in the third and fourth quarters and is not concerned about the rest of the year. He pointed to slight overall improvements as encouraging signs. The first half of 2004 was slightly better than the last half of 2003, with Fairfield County availability rates going down a percentage point from 18 percent to 17 percent, he said.

One trend that will help landlords get back up to a competitive balance with tenants is the steady decrease in available subleasing space, which fell to 16 percent in the county, Greenbush said.

“I think that’s a good thing,” he said.

Another trend that characterized the first half of 2004 was the migration of companies from Stamford to other cities farther east, like Norwalk.

“I think what we saw this year was the trend of companies leaving Stamford,” Greenbush said.

Businesses like Diageo PLC, the alcoholic drink distiller, left Stamford for new digs in Norwalk. Stamford’s traffic problems are part of the reason companies are leaving that city, Walker said.

“I think Stamford’s greatest challenge is the congestion and the traffic,” he said.

People are starting to realize what a difference that is making to employees, Walker said. Many of these companies’ employees live in the more affordable communities to the east and have to commute to Stamford, so a move to Norwalk or another city farther east cuts down on car time.

“At the end of the day, it’s a quality-of-life issue for employees,” Walker said.

But Stamford is not doomed, Walker said. Many of the city’s challenges are short-term, he said, and will improve when the commercial market catches up with the economy.

“I think we are looking at positive absorption rates [in the near future] for Stamford,” Walker said. “The fundamentals for Stamford are quite good.”

There is also a lot of available space in downtown Greenwich, Greenbush said. But because Greenwich is home to many financial services companies, the city is still doing very well, Walker said.

“Greenwich is a market unto itself,”

The city is smaller than Stamford and more specialized, with hedge funds making up a large part of leases.

“It is a very resilient market,” Walker said.

And it’s getting more expensive.

“I don’t think I’ve ever seen a greater disparity in cost per foot between Stamford and Greenwich,” Walker said.

At the same time, Walker said he has never seen less of a disparity in cost per square foot between Greenwich and Midtown Manhattan, he said.