Cushman & Wakefield recently released its fourth quarter 2012 report for the Fairfield County commercial real estate market. Although overall absorption improved from last year, year-to-date market fundamentals, particularly leasing activity and overall vacancy, are down from 4Q-11.
Fairfield County’s Class-A overall vacancy rates continued to creep upwards, albeit at a slower rate, ending the year at 20.8%, up from the 20.6% recorded last quarter and year-end 2011’s 20.4%. This is the highest reported vacancy rate, however, since 2002 and 8.3 percentage points higher than the healthy overall vacancy rate of 12.5% in 2007.
There was a significant decrease in new leasing activity in 2012 (Class A and B combined), with a total of 2.1 million square feet (msf) executed. This figure lagged behind yearly totals of 2.4 msf in 2011 and 2.9 msf in 2010.
For Class A, the total square feet leased in 2012 was 1.7 msf, 20.6% lower than the 2.1 msf leased in 2011 and 34.4% lower than the 2.6 msf leased in 2010. On a quarterly basis, a total of 524,158 square feet (sf) were leased, representing 31% of the yearly leasing, but a decrease of 3.6% from the 543,968 sf leased in 4Q-11.
Major new office leases signed this year include Marsh USA’s 49,068-sf lease at 501 Merritt 7, Norwalk (a downsize from the 91,435 sf previously leased at 601 Merritt 7); American Institute for Foreign Study’s (AIFS) 39,778-sf lease at 1 High Ridge Park, Stamford; Ipsos ASI’s 33,305-sf lease at 301 Merritt 7, Norwalk; General Atlantic Partners’ 29,412-sf lease at 600 Steamboat Road, Greenwich; and AXA Investment Mangers’ 16,319-sf lease at 100 West Putnam Avenue, Greenwich.
In contrast to new leasing activity, renewal activity during 2012 was very active, registering 1.4 msf, up 37.8% from last year’s total of 1 msf. Three major Fairfield County employers, GE Capital, Encompass Digital Media and Sikorsky Aircraft, signed renewals this year, which accounted for more than 500,000 sf.
Class A overall absorption for office space in 4Q-12 was negative 172,289 sf, a decrease from the positive 175,665 sf 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 CBD, with HealthNet and Pitney Bowes adding a combined 340,000 sf in Shelton, while UBS shed a total of 258,202 sf in downtown Stamford.
Out of this combined amount, only 12.3% was absorbed when Charter Communications subleased a portion of the former UBS space during 3Q-12. Class-A direct absorption, however, finished with positive 146,163 sf, 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,” said Jim Fagan, senior managing director and market leader of Cushman & Wakefield’s Fairfield and Westchester County regions. “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% 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 CBD and Non-CBD, 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 Avenue, were leased and taken off the market.
At 115,628 sf, Class-A leasing activity in Greenwich was robust this quarter, more than double the 48,618 sf leased in the third quarter and tremendously improved from the 11,530 sf leased in 4Q-11. Although Class-A overall absorption in the Greenwich submarket improved slightly from 4Q-11’s negative 31,340 sf to the current negative 20,962 sf, it actually decreased from last quarter’s positive 32,928 sf. This was due primarily to the addition of 40,698 sf at 51 Weaver Street when United Rental relocated to Stamford. This addition of space also caused the Class-A overall vacancy rates to increase in Greenwich over the last year from 19.5% to the current 20.7%.
In the Stamford CBD, Class-A overall vacancy rates remained steady throughout 2012, increasing only slightly from 4Q-11’s 26.2% to the current 26.3%, and increasing from the 23.7% recorded last quarter. At 91,605 sf, Class-A leasing activity dropped dramatically in the submarket this quarter, decreasing 61.4% from last quarter’s 237,489 sf, but increasing from 4Q-11’s 55,74f5 sf. Class-A overall absorption was also grim at negative 186,993, a deterioration from last quarter’s positive 126,349 sf and from 4Q-11’s negative 21,159 sf. There was a small rise in Class-A direct average asking rents in the CBD from last quarter, increasing to $51.89 psf from $51.80 psf.
There was a significant rise in Class-A leasing activity in the Stamford Non-CBD from last quarter, almost tripling from 3Q-12’s 24,309 sf leased to the fourth quarter’s 78,906, but a 48% decrease from 4Q-11’s 164,413 sf. Class-A overall vacancy rates remained fairly steady throughout 2012 registering 26.6% in 4Q-11, 26.2% last quarter and the current 26.0%. Class-A overall absorption in the Stamford Non-CBD registered at negative 23,347 sf, a decrease from last quarter’s positive 17,622 sf, but a small increase from 4Q-11’s negative 32,530 sf.
The most positive results this quarter were recorded in the South Central submarket where Class-A leasing activity increased to 154,063 sf from last quarter’s 107,134 sf and last year’s 119,285 sf. Correspondingly, the submarket’s Class-A overall vacancy rates decreased from 3Q-12’s 17.7% and from last year’s 19.9% to the current 16.5%. Class-A overall absorption recorded at positive 58,125 sf, also improved this quarter from 3Q-12’s negative 8,059 sf and 4Q-11’s positive 44,122 sf.
Uncertainty about the U.S. national elections and the “fiscal cliff” negotiations coupled with the effects of Hurricane Sandy appear to have had a significant impact on the Fairfield County economy. Total payroll employment declined by 3,700 jobs or 0.9% 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%. The U.S., as a whole, has recovered almost 55% of the jobs lost and New York City has recovered 139%. As a result of this sluggish performance, the unemployment rate in Fairfield County also lags the nation. At 8.1% in November, the county’s unemployment rate is above the 7.8% 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, with three significant transactions executed this quarter, bringing the total transactions for 2012 to 10. Fourth quarter sales included the 33,791-sf 450 Post Road East in Westport, sold by Baywater Properties for $12.6 million or $383.92 psf to Earle W. Kazis Associates Inc.; the 18,754-sf 1500 Boston Post Road in Darien, sold by SHR1 LLC for $7.2 million or $383.92 psf to Clarion Partners; as well as the transfer of the 246,785-sf Canal Street portfolio (785, 850 and 880 Canal Street in Stamford) to ClearRock Properties, which acquired control through the acquisition of the debt on the property.
“The investment market remains skewed, with interest from both ends of the risk spectrum,” said Mr. 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.”
Cushman & Wakefield publishes its market information and studies online at www.cushmanwakefield.com/knowledge.