Fairfield County office market struggles through 2002.

While investors fleeing the volatility of the stock market triggered record values for investment grade properties in Fairfield County in 2002, the overall office market struggled to contain the ongoing effects of the economic downturn. Reluctance in making new financial commitments caused leasing to plummet, budget-conscious companies returning surplus space to the market forced negative absorption and higher availability, and rental rates declined as owners competed with sublets to attract the few tenants with requirements.

Fairfield County's performance over the past year, however, was not unique, according to Dean J. Shapiro, executive director of Insignia/ESG's Westchester-Connecticut office. "The repercussions of corporate cutbacks and down-sizings on commercial real estate have been seen all over the world, and Fairfield County is just a micro contributor to this global trend. Many other markets, in fact, have been hit a lot harder that Fairfield, which actually saw reasonably normal activity during the year in select areas."

The Town of Greenwich was the primary focus of this downturn-defying activity, as a combination of superior product and address cache continued to attract users to the area. Hedge funds, in particular, found Greenwich an attractive alternative to Manhattan as many of these companies' executives live in the town. Altogether, hedge fund activity accounted for almost 50% of Greenwich's total leasing velocity for the year.

And, though the town still boasts the highest average asking rent in the county at $39.51 per SF, a 12% decline in this rate from last year also drew bargain hunters looking for high end space at lower prices. In total, velocity in Greenwich rose 69% from 2001 to 515,850 SF, while Fairfield County's overall leasing fell almost 18% to 2.6 million SF. In addition, the general stability of Greenwich tenants served in stark contrast to otherwise significant corporate downsizing throughout the county.

Absorption ended positive in the city for the year and availability dropped 27% to 580,650 SF, as opposed to more than 894,430 SF of negative absorption and availability 13% higher countywide. Most dramatically, though sublease space declined 4% throughout Fairfield from the end of last year, Greenwich sublets plummeted 74% due primarily to Andor Capital Management's 144,340 SF commitment at Greenwich American Centre.

Greenwich's favorable rating, however, was not limited to space users. Investors also looked to the town as a desirable haven for their stock-weary capital in increasingly large numbers. Bidding wars for trophy properties were not uncommon, in fact, and often resulted in acquisitions at rates beyond any ever seen in the area.

Pickwick Plaza, for example, traded for $480 per SF, and 2 Soundview, $472 per SF. The rest of Fairfield County also benefited from the flight to quality, stable real estate investment, with Class A properties like 10 and 20 Westport Road, Wilton, 535 Connecticut Ave., Norwalk, 1266 East Main St., Stamford, 45 Glover Ave., Norwalk and 707 Summer St., Stamford achieving significant values.

While investors snatched up Fairfield County trophy properties in 2002, some did so with vacancies, both sublease and direct, within those buildings. This was clearly an expression of confidence in the county's future, as 2002's leasing levels, with the exception of the Western submarket, did little to entice further financial commitment. In fact, countywide velocity fell almost 18% from last year to 2.6 million SF in 385 transactions. Interestingly, however, this volume of deals done actually surpassed last year's total -- 382 transactions -- an indication that tenants signing new leases have more conservative performance expectations, and are therefore making smaller commitments to space obligations.

An examination of leasing by block reinforces this assessment: space leased in blocks under 25,000 SF increased to 63% of all transactions completed during the year from 55%, while those done in blocks greater than 50,000 SF plummeted from 36% of all deals to 12%. Notably under-represented, in particular, were deals completed exceeding 100,000 SF. Lacking an unexpected influx of interest like that caused in 200l by the attacks of Sept. 11, or notable expansions of a local powerhouse company, Fairfield saw only one transaction of that size range all year - Andor Capital Management's 144,340-SF deal at Greenwich American Centre. As a result, the average size transaction fell 18% from the end of 2001 to 6,687 SF.

Clearly, because corporate cost-consciousness favored smaller transactions in 2002, it also argued against any major changes to occupancies like expansions or relocations. In fact, leases considered either of these two qualifications fell dramatically in Fairfield in 2002: relocations dropped 43% to 337,710 SF and expansions declined 45% to 673,500 SF. Moves within the county, most likely the least expensive option for companies forced to sign new leases, grew 17% over the past year to 1.5 million SF, or 58% of all space leased.

Regardless of the type of lease signed, value-seeking companies discovered that leasing space in sublease offerings in 2002 presented not just immediate operational savings, but also allowed them to upgrade their space without incurring higher long-term costs. As a result, velocity in sublets increased 400% from last year to 511,160 SF. Among the larger sublease deals signed were Andor Capital Management's 144,340 SF at Greenwich American Centre, UDV's 47,600 SF at 9 West Broad St., Stamford, CRT Capital Group's 29,650 SF at 262 Harbor Drive, Stamford and General Electric's 29,530 SF at 3 Corporate Park Drive, Shelton. Many landlords supported the sublease process, as those tenants could eventually become direct tenants.

Tenants may have to hurry to take advantage of these types of deals in 2003, however, because even as leasing in sublease space became desirable in 2002, the number of new sublease offerings began to slow. By the end of the year, the flood of sublease offerings that began after Sept. 11 had ebbed enough that inroads could be made into the existing supply. Consequently, the total amount of available space in sublets dropped 4% from 2001 in Fairfield County to 2.4 million SF. They now account for 28% of the county's total available supply, down from 34% at the end of last year.

Unfortunately, despite this encouraging development, Fairfield County could not seem to get a break in 2002 -- as new sublease offerings began to fall off, the amount of newly available direct space began to increase as downsizing companies vacated more space than they leased. Combined with lackluster leasing, this imbalance resulted in negative absorption of 894,430 SF for the year, availability 13% higher than last year at 8.5 million SF, and an availability rate up more than two percentage points to 18.6%.

Putting all one's eggs in the same basket has always been something of a risk, especially when the stability of that basket is subject to forces beyond its control and comes into question in regular cycles. For the City of Stamford, dependence on the financial services industry basket has proven quite a rollercoaster ride over the past decade -- from the growing years of the mid 90's to the go-go expansion era of the turn of the century, the city's fortunes have been intertwined with these companies -- and their vulnerability to the fluctuations of the stock market. 2002, however, set a new precedent in terms of impact of the low end of the cycle, as financial services, more than any other industry, bore the brunt of the ongoing economic downturn -- and passed their reactions on to the Stamford real estate market.