Activity in the Fairfield County commercial real estate market declined in Q4 compared with the same time in 2011, according to a new report from brokerage Cushman & Wakefield. While absorption improved from last year, year-to-date market fundamentals, particularly leasing activity and overall vacancy, are down, the report said.
Fairfield County’s Class-A overall vacancy rates continued to creep upwards, albeit at a slower rate, ending the year at 20.8 percent, up from the 20.6 percent recorded last quarter and year-end 2011’s 20.4 percent . This is the highest reported vacancy rate, since 2002 and 8.3 percentage points higher than the healthy overall vacancy rate of 12.5 percent in 2007.
There was a significant decrease in new leasing activity in 2012 (Class A and B combined), with a total of only 2.1 million square feet executed. This figure lagged behind yearly totals of 2.4 million square feet in 2011 and 2.9 million square feet in 2010. For Class A, the total square feet leased in 2012 was 1.7 million square feet, 20.6 percent lower than the 2.1 million square feet leased in 2011 and 34.4 percent lower than the 2.6 million square feet leased in 2010. On a quarterly basis, a total of 524,158 square feet were leased, representing 31 percent of the yearly leasing, but a decrease of 3.6 percent from the 543,968 square foot leased in 4Q-11.
Major new office leases signed this year include Marsh USA’s 49,068- square-foot lease at 501 Merritt 7, Norwalk (a downsize from the 91,435 square feet previously leased at 601 Merritt 7); American Institute for Foreign Study’s (AIFS) 39,778- square-foot lease at 1 High Ridge Park, Stamford; Ipsos ASI’s 33,305- square-foot lease at 301 Merritt 7, Norwalk; General Atlantic Partners’ 29,412- square-foot lease at 600 Steamboat Road, Greenwich; and AXA Investment Mangers’ 16,319- square-foot lease at 100 West Putnam Ave., Greenwich.
In contrast to new leasing activity, renewal activity during 2012 was very active, registering 1.4 million square feet, up 37.8 percent from last year’s total of 1 million square feet. Three major Fairfield County employers, GE Capital, Encompass Digital Media, and Sikorsky Aircraft, signed renewals this year, which accounted for more than 500,000 square feet.
Class A overall absorption for office space in Q4 2012 declined, dropping by 172,289 square feet, a huge decrease from the positive 175,665 square feet recorded last quarter, an indication that more space was added in the 4th quarter than what was absorbed.
Markets hit with the greatest amount of space returns included the Eastern and Stamford central business districts, with HealthNet and Pitney Bowes adding a combined 340,000 square feet in Shelton, while UBS shed a total of 258,202 square feet in downtown Stamford. Out of this combined amount, only 12.3 percent was absorbed when Charter Communications subleased a portion of the former UBS space during Q3 2012. Class-A direct absorption, however, finished with positive 146,163 square feet, indicating that much of what was added was sublease space.
"Although this has been a year of uncertainty and despite the negative economic impact of the U.S. national elections and fiscal-cliff negotiations, demand is expected to increase, particularly by larger out-of-state corporations attracted by appealing government economic incentive packages," Jim Fagan, senior managing director and market leader of Cushman & Wakefield’s Fairfield and Westchester County regions, said in a statement. "With well over one million square feet of tenant requirements within the county, 2013 could prove to become resilient to lackluster economic growth."
Despite the increase in Fairfield County vacancy rates, direct Class-A rental rates rose, averaging $39.17 per square foot (psf), an increase of 9.3 percent over 2011’s rates of $35.84 psf. This escalation in rental rates is primarily due to higher rents at premier, Class-A transit-hub locations combined with the higher than average quoted rents on a few large empty blocks of space throughout the county. In the Greenwich CBD, the Class-A rate averaged $96.73 psf, only $4.73 psf lower than Manhattan’s priciest Madison/Fifth submarket. The Class-A direct average rental rates for combined Greenwich central business district and non-central business district, however, dropped $7.09 psf from last quarter’s $68.19 psf to the current $64.10 psf, as large blocks of high-priced space, including 600 Steamboat Road and 100 West Putnam Ave., were leased and taken off the market.
Uncertainty about the U.S. national elections and the "fiscal cliff" negotiations coupled with the effects of Hurricane Sandy appears to have had a significant impact on the Fairfield County economy. Total payroll employment declined by 3,700 jobs or 0.9 percent between July and November. Overall, Fairfield County continues to lag behind the national economy. Of the 30,000 jobs lost during the 2007-09 recession, the county has only recovered 8,300 or 27.7 percent. The U.S., as a whole, has recovered almost 55 percent of the jobs lost and New York City has recovered 139 percent. As a result of this sluggish performance, the unemployment rate in Fairfield County also lags the nation. At 8.1 percent in November, the county’s unemployment rate is above the 7.8 percent national average. Some of the recent softness is likely to be recovered as the effects of Sandy diminish, but overall, the county is expected to continue to lag behind the rest of the nation in the near term.
Fairfield County office investment sales activity improved in the fourth quarter, with three significant transactions executed, bringing the total transactions for 2012 to 10.
"The investment market remains skewed, with interest from both ends of the risk spectrum," said Fagan. "Opportunity investors are looking to pursue under-leased or over-leveraged assets in hopes that infusing these properties with fresh capital and expertise will generate above-market returns. At the other end of the spectrum are the ‘safe-harbor’ investors looking to purchase well-leased assets that will provide a higher yield than other asset classes, such as treasury/corporate bonds and even gold. Investors are willing to pay more for these assets, due to their perceived safety compared with the risks in a difficult and unpredictable economy."
