The Real Deal New York

How Connecticut courts office tenants

Constitution State offers generous incentives and basks in big projects, though leasing market remains sluggish

August 01, 2012
By Melissa Dehncke McGill

Connecticut’s commercial real estate market has long struggled to compete with its massive neighbor to the south, New York City. And the 2008 financial crisis dealt the state a massive blow from which it has yet to totally recover.

In this month’s Q&A, The Real Deal checked in with brokers in Connecticut to find out how commercial real estate is holding up in Fairfield County, the area of the Constitution State closest to Manhattan.

Generally, brokers say that activity has slowed down this year for both leasing and investment sales, but note that opportunistic buyers are finally starting to purchase buildings as lenders stop the practice of extending loans and allow buildings to fall into distress.

Brokers say Greenwich — known for its hedge funds and tony retail strip — as well as Stamford and other cities closer to Manhattan are performing best, while northern Fairfield County is struggling most.

Stamford, the site of UBS’s U. S. headquarters, has seen a burst of development activity lately. The developer Building and Land Technology is erecting a $3.5 billion mixed-use project called Harbor Point. The project has already drawn in businesses like Starwood Hotels, which moved its global headquarters there early this year, as well as high-end furniture store Design Within Reach and Fairway, the popular supermarket. Also in Stamford, a 400,000-square-foot Chelsea Piers Connecticut outpost opened last month.

In addition, Connecticut Governor Dannel Malloy has not taken the soft market conditions lying down. He’s aggressively courted major companies with generous tax benefits and financial reimbursements for relocating to the state — a move that has brought in the likes of NBC Sports, ESPN and Cigna.

For more on how office rents are holding up in Fairfield County, on what type of concessions landlords are offering and on whether Manhattan companies are sniffing around for cheaper space, we turn to our panel of experts.

 

Christian Bangert

Christian Bangert
principal, RHYS Commercial

How is the office market in Fairfield County holding up for both leasing and investment sales?

Overall, last year was probably a little stronger and more active than I’ve seen in the first half of this year. The main thing is that deals in general — and office leasing especially — are taking twice as long as they did in the pre-2008 days, when some lease deals were done in three to six months. It now takes six to 12 months to do the same deals.

Who’s in control of the office leasing market in the area right now — landlords or tenants?

Tenants definitely have the upper hand, especially in the sense of the concessions — such as free rent and improvement allowances. It’s easier to retain a tenant than to get a new one, so if a tenant is looking to move, you see more aggressive offers from the building across the street than from their current landlord. Moving costs are part of the negotiation. Purely on rent, there has been very little change in the past one to three years. It dropped significantly from ’08 to ’09 and has stayed level since. It varies from building to building, but 20 to 30 percent was the rent adjustment across the board in most markets, and they still seem to be at those lower rates.

How is Stamford doing compared to other Fairfield County areas for investment sales?

Stamford is one of the most active — if not the most active — of the larger cities. Stamford pulls more Class A tenants because it’s closer to Manhattan and has the major train lines. Danbury is still very sluggish and Norwalk is also fairly stagnant. Greenwich seems to still be doing very well. We still see a lot of action in the higher-end boutique markets like Westport, New Canaan and Darien.

Last year, UBS contemplated moving back to Manhattan from Stamford. It decided to stay, but how much of a challenge is it to pitch Connecticut as an office location?

UBS only agreed to stay for the next three to five years. The general belief is that the reason it had to get back into the city is that for picking true financial talent, you have to be in the city. Not everyone lives in Stamford or wants to do the reverse commute. So we feel pretty strongly that we will probably see UBS slowly migrate out of Stamford back to the city and that will put a big chunk of office space on the market.

We’ve written about the $3.5 billion, mixed-use Harbor Point project in Stamford and the new Chelsea Piers outpost there. What impact do you think those projects will have on the area’s commercial market?

Harbor Point is everything from residential to large retail, [like] the Fairway market. With the marina they are doing, it’s one of the major projects on the East Coast and is creating a lot of buzz. A lot of those properties around the perimeter are being snatched up by other developers at lesser numbers than what was paid for them a couple years ago, with the hopes that it’s the up-and-coming place.

 

Paul Jacobs

Paul Jacobs
executive vice president, CBRE Stamford

How is the office market in Fairfield County holding up?

All in all, the market is stagnant. There have been a number of tenants that have come out to look for large blocks of space, but there are a number of large blocks that continue to remain vacant, as evidenced by the second quarter of 2012 ending with negative net absorption of 322,000 square feet for Fairfield County.

Where are asking rents for Class A office space these days, and how does that compare to the recent past?

Asking rents continue to creep up slowly, even with the large blocks of availability. That’s due, in large part, to a couple of properties: 695 East Main Street in downtown Stamford, as well as 600 Steamboat Road, which have asking rents of $56 and $100 per square foot, respectively. So that brings the asking rental rates up because it is a weighted average. Class A rental rates have increased over the last year from $36.20 to $41.10.

What are the most surprising trends you’re seeing in the Fairfield County office market?

We’re seeing a lot of smaller space requirements. In the first half of 2012, our statistics show about 57 percent of the overall leasing activity were transactions under 10,000 feet. Only two were over 50,000. There were no transactions over 100,000 feet. There’s also a continued consolidation and emphasis on cost cutting — all of our tenant rep assignments are 20 to 30 percent smaller space than the tenants currently occupy.

What is the most telling statistic about the Fairfield County office market?

Out of 14 blocks of available space over 100,000 feet, seven of them are in Stamford.

Who are the office tenants looking to take space in Fairfield County?

Most of the activity is in the financial sector. What is also important to note is that the entertainment/media sector is expanding, with NBC Sports, WWE and Blue Sky Studios expanding by 43,000 feet in Greenwich. Another sector continuing to grow is health care.

What kinds of tax and other incentives are being offered to get companies to relocate or stay in Connecticut?

Governor Malloy just finished what is known as the First Five incentive program. He had legislative approval for $200 million to give in incentives to the first five companies that guaranteed an increase of 200 new jobs. The program included low interest and forgivable loans, tax credits, reduced electricity rates and training grants. And with the success of the First Five, he’s continuing to the next five. Three of the first five companies that were recipients were NBC Sports, ESPN and Cigna.

 

Tim Rorick

Tim Rorick
senior managing director, Colliers International Connecticut Stamford

How is the Fairfield County office market holding up for leasing and investment sales?

In the leasing market, there is very little activity from new tenants. For the existing tenancy, the preference these days is for shorter-term renewals. Nobody feels like they want to lock into anything long term. With investment sales, there is not a lot happening because there is not a lot of product. For the product that is on the market, we are actually seeing some pretty good numbers. It seems there was a lot of pent-up demand, and there is a lot of money out there.

Which commercial markets in Fairfield County are performing the best, and which are struggling?

I would say Greenwich is, by far, holding up the best, but there are pockets within Greenwich such as the submarket of West Greenwich which are soft. Lower Fairfield County, Greenwich and Stamford have held up well relative to Norwalk and northern Fairfield County. The biggest struggle that I have seen is in leasing Class B product. I think tenants are using this [down] market to trade up in quality of building. So a lot of the Class B buildings from an activity standpoint are completely dead.

A recent study found that Fairfield County was one of the most expensive places to locate a corporate headquarters. Are high prices deterring companies from moving there?

Yes, but you have always got a critical mass of financial services companies, law firms, those types of companies that need to be in a market like Fairfield County. And it’s all relative. Fairfield County is expensive, but we are less expensive than New York, San Francisco and some of the other high-end markets in the country.

What impact do you think the Harbor Point project is having on the area’s commercial market, and what other projects are you watching?

I think that’s had a tremendously positive effect for the South End. What you had before was a Pitney Bowes warehouse and an old utility site. What you’ve got now is very high-end residential, a supermarket and Class A–plus trophy office space. The other development I’m watching is the 95/7 in Norwalk, which seems to have stalled somewhat, but I know that they are getting good activity there, as well as the Fairfield Metro Center, which was stalled [but] seems to be getting a lot of activity as well.

Are most of the firms that are in the market for office space looking to relocate from Manhattan, or are they already located outside of the city?

They are already located outside the city. That’s not to say that we won’t experience a very large corporate relocation. As the cost of doing business in New York goes up, we look more and more as a likely alternative. I predict we will see some sizable corporate relocations from New York in the near future.

 

Peter Gray

Peter Gray
broker, Pyramid Real Estate Group

How is the office leasing market in Fairfield County?

Overall, for leasing, Stamford, New Canaan and Darien remain strong. Greenwich has been difficult, and Norwalk even more so.

What kind of activity and prices are you seeing on the investment sales front?
Product below $1.5 million seems to move fast, often purchased by first-time investors at low cap rates. I am also seeing the largest office buildings move anywhere from $200 per square foot for Class C to more than $400 for Class A.

What are the most surprising trends you’re seeing in the Fairfield County office market?

The number of gyms just keeps climbing, with no end in sight. I’ve put in six in the last five months alone. Hardly a day goes by that I don’t get at least one phone call from one type of fitness use or another.

 

Jim Fagan

Jim Fagan
senior managing director, Cushman & Wakefield

What are you seeing in the Greenwich and Stamford office markets?

The Greenwich [central business district] is a very small market with high rents. In that area, 600 Steamboat Road, which is owned by Gen Re, a Warren Buffett company, is being renovated and will be leasing. It used to be occupied by Royal Bank of Scotland. … When RBS built its headquarters in Stamford it vacated that building. So it’s been vacant for a while now. … Those rents probably start in the high $80s and can go up to $100 a square foot. … Meanwhile, in the Stamford CBD, people are paying for the highest-quality spaces. That’s somewhere in the $40s to $50s.

Which commercial markets in Fairfield County are the strongest, and which are struggling?

I think they are all in a kind of state of malaise, actually. The ones that are most robust are the Stamford, Greenwich and probably the Westport markets, but in none of those markets do the owners have an upper hand.

What are the most surprising trends you’re seeing in the office market?

Normally if the vacancy remains high, prices come down, but there is a fairly select group of buildings where the prices are going up. There’s been very little building since 1988; that’s 25 years. Those landlords that go the extra step and make their buildings that much nicer are going to capture significantly higher rents.

What is the most telling statistic about the Fairfield County office market?

The number of employed people. In Manhattan, employment has dramatically increased since 2009, [but] ours increased in the first half of 2010 and since then has dropped off.

 

James Ritman

James Ritman
managing director, Newmark Grubb Knight Frank

How is the office market in Fairfield County holding up?

Overall, Connecticut is doing very well on the leasing side. Investment sales have been very active. Over the last few years the banks and lenders have extended [loans] as opposed to taking possession of underwater properties. So some of the properties were readjusted and some now have gone onto the market either in debt sales or foreclosure sales. There have been pieces of mezz debt bought, positions have been taken by REITs or investment groups to foreclose and take possession of properties at a discount. A portfolio was recently bought for $24 million. The previous buyer bought it in ’08 or ’09 for about $55 to $60 million.

Where are asking rents for Class A office space, and how does that compare to the past few years?

In downtown Greenwich, asking rates for the top buildings are still over $100 a square foot. The range is generally $80 and $100. It almost rivals some of the rents in Manhattan. In Stamford on the higher end, it’s $50 to $60 a square foot for the top buildings. Norwalk has suffered more than some of the other towns. Class A rents there are in the low to mid-$30s. For the last two years, the rents have been pretty much the same in all these markets for Class A buildings. They are off from where they were in 2008. In Greenwich, the top Class A building was getting $150 a square foot in ’08. That building is getting $85 to $90 per square foot today.

Are high prices deterring companies from moving there?

We are not seeing that. Starwood Hotels looked at [moving to] Florida, Texas, Georgia, New Jersey and New York, but Connecticut won the bid. I think people want to be around New York. People question Greenwich rents, which are a little higher. But the state incentives bring the overall deal down to a level playing field. Rents in Westchester County are significantly lower than they are in Fairfield County, [but] New York State is not doing as good a job at providing tax incentives. So Starwood pays a much higher rent per square foot in Stamford than if they had stayed in Westchester, but the state of Connecticut gave them a very large incentive package.

What are your thoughts on UBS publicly considering moving back to Manhattan last year?

UBS was looking at incredible incentives to move back to downtown Manhattan, and a lot of their workforce comes from New York City. It’s still cheaper to pay the rents here with state incentives than to stay in Manhattan, which is not giving any incentives unless you go Downtown. We are getting a lot of looks from bigger users in Manhattan. A number of years ago you didn’t see that. Once in awhile there was a UBS or an RBS, a monster deal. Now, groups in New York City that are looking for large blocks of space are thinking about Connecticut and Stamford.

Are there any new types of office tenants looking to take space in Fairfield County?

The big one is film. That is a whole new industry that has flooded the market and created jobs and tax revenue in the state and county.

Who has the upper hand right now —building owners or tenants?

While the landlords don’t have the upper hand, it’s not a for sale sign. … With that said, a landlord is going to provide an incredible work allowance to a [big] tenant in order to lure them here. But they are going to keep the rents pretty strong compared to Westchester County or even New Jersey.

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