As the recession devastates the banking, brokerage, retail and automobile industries, landlords and commercial real estate brokers in lower Fairfield County ponder when and if the office market will be the next victim.
The region could be vulnerable because financial service companies rent much of the office space in Greenwich and Stamford. Greenwich has been called the nation’s unofficial hedge fund capital.
“We are still in a very good market. However, a lot of our clients are financial services companies,” said Jim Fagan, senior managing director of the Westchester County, N.Y., and Connecticut operations of New York City-based Cushman & Wakefield Inc. commercial real estate. “They include everything from hedge funds to reinsurance companies to investment banks, not to mention advertising agencies and other professional services companies.”
Those former mainstays in the office market will be shrinking, he said.
“As tenants try to lower their fixed costs, they are slimming down their commercial real estate exposure, where it is practical and pragmatic,” Fagan said. “The market is going through an adjustment. While it was white hot in July of 2007. It certainly is less than that now.”
John Hannigan, principal of Choyce Peterson commercial real estate in Stamford, said, “The quantity of tenants looking to grow has decreased precipitously.”
Reported office vacancies are not really bad - yet.
In the third quarter, 17 percent of the 14.5 million square feet of office space in Stamford was available for lease or sublease, up slightly from 16.4 percent at the same time last year, according to an average taken from five real estate firms. Available space are locations that are empty or slated to become vacant soon.
The numbers do not include large, single-occupant buildings such as the main UBS AG investment bank and trading floor in downtown Stamford.
But vacancy reports might not tell the whole story, said Jeff Gage, executive managing director at the Stamford office of Chicago-based Jones Lang LaSalle commercial real estate. Some companies have space they are not using but will not admit it unless a broker approached them about subleasing, Gage said.
Sublease space, that which is leased but currently unused, is rising in Fairfield County, he said.
“We are going to see vacancy rates going up to 25 percent or higher (countywide),” Gage said. “My guess is that 40 percent of that will be sublease space.”
The big subleases include 112,000 square feet that UBS put on the market at 201 Tresser Blvd. in Stamford at Purdue Pharma’s headquarters. Others in the city are 50,000 square feet from Legg Mason at First Stamford Place and 120,000 square feet at 290 Harbor Drive.
Greenwich has smaller office vacancies, but its 4.8 million square feet of office space depends largely on financial services, hedge funds and private equity firms. About 9.3 percent of the town’s office space was available in the third quarter, which was unchanged from the same time last year.
“Greenwich and Stamford are not immune from the downsizing and reorganization from a new model of doing business,” said John Goodkind, managing principal at the Greenwich office of New York City-based Newmark Knight Frank commercial real estate. “The days of abundance are gone.”
“Large users are unlikely to make decisions on space unless they have to,” he said, referring to lease expirations.
On the positive side, Goodkind said many people who had worked for hedge funds, financial institutions and banks will be looking for office space in which to start their own companies.
“We have already seen significant numbers of new companies looking for smaller spaces,” he said. “That will be the mode for the next 12 to 18 months.”
But Gerald Celente, a trends forecaster known for gloomy predictions, said the downturn in the retail sector will affect office space because fewer customers will exist for service firms such as ad agencies.
“In 2009, the focus will broaden to include a range of calamities that will leave no sector unscathed,” Celente said in a report issued by his Rhinebeck, N.Y.-based Trends Research Institute. “Next in line is retail, which accounts for some 70 percent of consumer spending, 26 percent of which is holiday sales.”
“Add to the (retail) empties the commercial space vacated by defunct financial firms and an array of troubled businesses from restaurants to architectural firms, to high-tech operations, to offset printers, etc.,” the report said. “The inescapable result (that we predicted over a year ago and is only now being discussed in the business media) is a commercial real estate bust that will be costlier, wreak greater havoc and prove more intractable than the residential market decline.”
Local landords, by contrast, are more optimistic.
“We have been here before (in a recession), and we will get through it,” said Jo Ann McGrath, director of leasing for the Merritt 7 Corporate Park in Norwalk. “We just have to stay positive.”
She said the 1.4 million square feet of office space in Merritt 7’s six buildings is 95 percent occupied.
A 51,000 square feet sublease might occur in the complex’s 301 Merritt 7 building. Applied Biosystems is moving out of 301 Merritt 7 in July because it merged with Invitrogen Corp.
Applied Biosystems’s lease expires in 2011, and it has an option to sublet the space, McGrath said.
Margaret Carlson, director of leasing for New York City-based RFR Realty’s seven office buildings in downtown Stamford, said the market is slowing, but not to a crisis stage.
“We are still continuing to sign deals, and we are starting to see concessions for tenants creep in,” Carlson said. “Velocity is slowing down, but we remain optimistic. There are a lot of deals out in the marketplace, and we do not have a lot of sublease space in our portfolio.”
RFR’s Stamford buildings are 90 percent leased, she said.
Another landlord representative, Jeff Newman of W&M Properties, said the recession offers a chance to recruit new tenants. W&M manages First Stamford Place and Metro Center office complexes in Stamford and the MerrittView office building in Norwalk.
“We are well-positioned to ride out a down market,” Newman said. “We always have more than enough cash flow to cover debt service and operating needs.”
Gage of Jones Lang LaSalle predicted rents will drop 20 percent to 30 percent during the recession, which offers local companies a chance to move into better buildings.
In March, Stamford-based Choyce Peterson began telling its clients to pursue renovation subsidies and lower rent from landlords.
The average asking rent for Class A office space in downtown Stamford is $48 per square foot per year, according to Cushman & Wakefield.
“We have been out there ahead of this (recession) news and have been meeting with many area companies to help them navigate these tough economic times, with regard to their office space,” said Hannigan of Choyce Peterson.
“The smart landlord are the ones who will lead the market in (lower) pricing,” Gage said. “If you follow the market, you are already too late.”
- Staff Writer Peter Healy can be reached at peter.healy@scni.com or at 964-227
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