Anaylsts Cautiously Optimistic about Office Space

There's good news and bad news for the commercial real estate market to start 2010.

Bad news first: Overall vacancy in the Fairfield County real estate market is still high—county-wide, the vacancy rates for commercial space remain steady at 19.7 percent for prime buildings.  

"Fairfield's market is soft. We haven't completely stabilized yet," said Jonathan Mazur, an assistant director at Cushman & Wakefield in Stamford. "We lag behind New York city, and they're already showing signs of strong recovery. We're not there yet, but maybe not that far off."

Stamford and Greenwich, where most of the office space is situated, are the barometers for trends in the area. In Stamford's central business, 22.8 percent of the office space remained empty in the first three months of 2010, with 16.1 percent empty in Greenwich.

In the Darien/New Canaan submarket, vacancy rose slightly, from 16.8 percent in the final quarter of last year to 17.7 percent in early 2010. But Cushman doesn't read much into this slight bump since Darien/New Canaan represents such a small slice of the county—just 2 percent.

The increase in vacancies in Stamford from the last quarter of 2009 was 17,818 square feet. By comparison, the increase in Darien/New Canaan equalled just 6,200 square feet.

In the county, Fairfield had the lowest first quarter vacancy rate of 4.6 percent.

Now, the good news: While not in Darien/New Canaan, leasing activity in the county generally jumped in the first quarter of 2010 and was nearly double that of the previous quarter. And the vacancy rates are actually lower than the Cushman & Wakefield analysts predicted. Both the first quarter of 2010 and the fourth quarter of 2009 posted better-than-expected numbers, leading to some optimism.

Mazur believes the market will continue to be soft for another year, maybe dipping even a bit lower. In all likelihood, we'll see New York city's resurgence spread to Fairfield county by next year.

"There are positive signs that things are picking up," he said.

Employment was flat in Fairfield county in the first quarter and jobs correlate directly to office space.

"The overall economy is getting better," said Mazur, "but certain sectors lag, and real estate is one of them. We're stabilizing and growth is going to happen."

Since vacancy rates are still high, rents per square foot have dropped.

"Typically in a down market, the landlord will do more to secure a tenant, like offering free rent or tenant improvement dollars [to subsidize their build out.] It's not unheard of in a larger deal for a tenant to get five to ten months free."

Rents in Greenwich, since they climbed the highest in the market bubble, have fallen the most. Prices per square foot there are currently at $55.93 compared to a high in 2008 of $77.81.

"It's a tenant's market right now. We have a trend of early renewals of leases," said Mazur. "Tenants want to lock in new lower rates, and landlords are happy to lock them in for a longer period of time."

In the New Canaan/Darien submarket, rents are currently averaging $33.35, down from $35.68 two quarters ago.

Jim Fagan, senior managing director at Cushman & Wakefield spoke to New Canaan Patch in October '09 and accurately predicted that the vacancy rates would remain high for the next six to twelve months before recovering. Seven months later, he's sounding rather positive.

"I think we'll look back," he said, "and determine that the market bottomed out in late '09/early '10."