The Real Deal New York

Meh office market in Fairfield

Overall leasing activity is up, but the county is still hurting from the departure of several multinationals over the last year
By Bryan Virasami | August 02, 2017 11:00AM

The downtown Darien project will include 112,000 square feet of new office space.

Stamford is struggling to deal with an abundance of office space due to the loss of a handful of multinational companies last year. But the big picture isn’t as dire for the rest of Fairfield County, brokers say.

There is good news: Gross leasing activity in the first half of the year totaled 1.8 million square feet in the county, a 20 percent jump over last year’s 1.5 million square feet, according to Newmark Knight Frank’s second-quarter report. In the same period, renewals reached 950,000 square feet, which is nearly double the 2016 figure, and accounted for much of the leasing activity. The asking rent in Fairfield County was $38.09 in the second quarter, a jump from $35.52 in the same quarter of 2016.

The situation wasn’t so rosy, however, with new leases, which fell 23.5 percent over the same period, to 733,425 square feet this year, according to NKF. And availability in Fairfield rose 5.7 percentage points in the second quarter this year compared to the year-ago quarter, to reach 27.1 percent, a figure NKF called the “market’s highest rate on record.”

In Stamford, asking rent was $43.56, and the availability rate was 31.4 percent, NKF reported.

“It’s still definitely a tenants’ market. Landlords are certainly needling to compete against each other within the marketplace to win the deals,” said Christian Bangert, executive vice president and principal at the Stamford-based commercial real estate firm RHYS. As a result, he said, more landlords are offering concessions, including free rent. Several executives at large brokerage firms also said Connecticut’s budget problems remain an issue in the real estate office market.

However, Thomas Madden, the director of Stamford’s Office of Economic Development, quickly dismissed the question about whether all the availability keeps him up at night.

“No, because it’s artificially inflated,” Madden said, referring to the huge vacancies created by UBS and other large corporations that left or downsized last year. He said that his office is helping some new companies that are looking to lease space in Stamford in the coming months, including some tech companies, but claimed he couldn’t share the details.

Brokers at several large firms say they are encouraged by strong interest from potential tenants. “We hit an iceberg, but I don’t think we’re going to sink,” said Ed Tonnessen, executive managing director of JLL’s Stamford office.

He said that despite the blow from major companies leaving the area last year — among them UBS, which abandoned its 712,000-square-foot trading floor, and GE, which decamped for Boston — a series of smaller firms taking leases is slowly picking up the slack.

Some of the notable recent deals include Henkel’s 135,000-square-foot lease, signed late last year and followed by a 20,000-square-foot expansion earlier this year. The company said it will move its North American consumer-goods headquarters to Elm Street in Stamford this summer. “That is the headline deal, but there aren’t four of them,” said Tonnessen.

Meanwhile, Charter Communications — whose headquarters is in Stamford — has been growing since it swallowed up Time Warner Cable last year. The company is reportedly looking for a larger property in Stamford to accommodate its growth but has also explored space in other cities. “What does Charter do?” Tonnessen wondered aloud. “The good news is that it appears Charter is going to stay in Stamford. That would be a devastating loss if that was not the case.”

Other new Fairfield County leases that stood out for brokers include Epsilon, which leased 64,850 square feet at 10 Westport Road in Wilton, and Partner Reinsurance Company, which signed a 56,690-square-foot lease at 200 Stamford Place.

The largest reported lease renewal this year was Prudential Annuities Life Insurance for 197,610 square feet at One Corporate Drive in Shelton, followed by Blue Sky Studios, a Greenwich-based computer-animation film studio, which renewed 146,761 square feet in the second quarter.

While new office product is not on the radar with developers, a glut of multifamily and mixed-use projects will have a net positive impact on the commercial market, Tonnessen said. In recent years, 3,000 apartment units were built in Fairfield, which he expects to attract young professionals and, consequently, new office tenants.

A recent JLL report concluded that despite the high availability and absence of new office construction, there seems to be light at the end of the tunnel. For example, tenants are embracing transit-oriented development and renovated properties that give off a “light and bright” character, the report said, adding that “young people have gravitated towards Stamford,” which could eventually drive increase office demand.

“What’s genuine is that product around the train station and downtown Stamford is the most desirable, so the prices reflect that,” Tonnessen said. “If you own a building or if you’re looking for value, if you get outside of the Central Business District, it’s a very soft market.”

JLL’s second-quarter report showed that outside Stamford, vacancy rates varied significantly across towns and cities. Ridgefield had a 5.5 percent vacancy rate, the Norwalk/I-95 area appears to be really struggling, posting a whopping 42.5 percent vacancy rate in the second quarter, and New Canaan/Darien showed a 14.4 percent vacancy rate.

One of the most talked about pending developments in Fairfield County is the mixed-use downtown Darien project. Baywater Properties, the developer, is trying to get the necessary approvals from local officials to move forward by the end of the year. In a recent report, NKF described the plans for downtown Darien as a $100 million-plus project that includes 112,000 square feet of office space that will “bring a modern urban flair while maintaining the town’s historical character.”

Tonnessen said the project will not compete for tenants with Stamford, noting that Darien is a unique “boutique” market.

He added that the majority of current projects in Fairfield are mixed-use retail and residential. “There will be no new office construction without being pre-leased, in my opinion,” he said.

One way brokers expect to stay busy is by capitalizing on the trend among landlords to reinvest in their properties.

One example is Merritt 7 in Norwalk, a group of six buildings with 1.4 million square feet of Class A office space and a 97 percent occupancy rate, according to CBRE. Before it was renovated, the vacancy was around 20 percent, said Tom Pajolek, executive vice president in CBRE’s Stamford office.

Pajolek said that new landscaping, fitness facilities, new entryways and shared conference facilities are among the amenities that raised the property’s profile.

Tenants at Merritt 7, which is adjacent to a Metro North station, include Millward Brown, Aon, Xerox, Siemens and Hearst, which signed a 30,251-square-foot lease late last year.

In its first-quarter report, NKF said that in the last three years, some 20 properties totaling about 3 million square feet were either completed or currently undergoing renovations in Fairfield County. In addition, the report said landlords are adding “on-site services and entertainment that attract millennials and Gen Zs.”

This means good value for tenants, said Bangert of RHYS.

“What the market has to offer now is greater than anything I have seen in the past 15 years I have been doing this,” he said.