Financial services sector provides boost to Fairfield County.

The diversity of Fairfield County's business community once again proved an asset in the third quarter of 2003, as strength in the financial services industry stimulated a market that otherwise exemplified the sluggishness characteristic of this economic recovery, according to CBRE.

Specifically, the on-going expansion of hedge funds and other financial service companies boosted leasing, produced positive absorption and reduced availability countywide compared to the same period of last year.

The locus of this financial services activity was the western submarket, primarily Greenwich and Norwalk, where the actions of GE Commercial Finance, the Amaranth Group, Graham Capital, Ziff Brothers and AQR Capital Management, among others, elevated the segment's leasing 34% from the first nine months of last year to almost 1.3 million square feet, or more than half of all the velocity in the county thus far this year.

The removal of several large blocks of available space from the West's supply as a result of these transactions combined with minimal new space returns to produce positive absorption of nearly 397,960 square feet. Availability in the segment, consequently, fell 16% from last September to 2.0 million square feet and the availability rate dropped almost three percentage points to 16.3%.

Because the west's strength came from such a specific sector of the financial services industry, however, the benefits associated with the spike in its demand generally remained within the boundaries of the western submarket.

Stamford, the east and the north saw less exciting results in the first nine months of this year--results perhaps more in line with the realities encountered in a jobless recovery. On the other hand, the slight uptick in the economy has translated into a stabilization of space returns throughout Fairfield County--allowing for some progression into the supply of available space given the demand in the West.

Altogether, absorption in Fairfield reached positive 682,580 square feet, availability decreased 7% over the past year to 7.7 million square feet and the availability rate fell just over a point to 16.9%. Leasing rose 13% from last September to 2.5 million square feet. Because much of the space leased by the hedge funds and financial service firms so active this year was among the most expensive in the county, average asking rent countywide plummeted $2.35 per square foot from a year ago to $25.99 per square foot.

Internal Activity Drives Leasing

Unlike neighboring Westchester, where relocations from New York City have had a tremendous impact on leasing over the past few years, Fairfield's velocity continues to derive from the expansion and movement of companies already in the county. In fact, relocations into Fairfield dropped 7% from last year to 244,140 square feet while expansions grew 19% and intra-county moves jumped 14%. And, in an interesting contradiction to the general perception that the supply of venture capital dried up with the technology bust, the amount of space leased by start-up companies climbed 13% from the first nine months of last year.

While this internal growth is a positive sign given the lack of vitality in the general economy, new blood has always been a contributing factor in the growth of Fairfield's office market and without it, the market lacks an important stimulus. Already, with the exception of a few new commitments following the September 11 terrorist attacks, the county has not seen a significant relocation from an outside firm since 1999. Part of this may stem from the new trend Of overseas outsourcing--in an effort to cut costs, companies are now setting up back-office operations in places like India where a highly educated population is available at much lower prices than in the U.S. Initially, this outsourcing has focused on call centers, but may eventually grow into billing, benefits, and other accounting-type functions.

After a long dry spell where expansions practically disappeared, however, and companies made do with what they had, internal growth is a welcome sign, especially as a notable portion of the growth came in large transactions which eliminated large blocks of available space from the supply. In total, space leased in deals greater than 50,000 square feet jumped 155% from last year to 681,850 square feet, causing the size of the average transaction to increase 5% to 7,396 square feet. Much of that came from deals in the West submarket, where GE Commercial Finance's 221,000 square foot commitment at 201 Merritt 7 in Norwalk, Amaranth Group's 123,070 lease at Greenwich American Center in Greenwich and Graham Capital's purchase for occupancy of 40 Highland Avenue in Rowayton were just three of the seven transactions completed in that segment that made it into the county's top deals of the year for 2003.

Large Transactions, Minimal Space Returns Whittle Away at Availability

For the past two years, Fairfield County's market identity revolved around the constant growth of sublease space. Panicked companies seeking to ease pressure on their balance sheets dumped space onto the market at incredible rates, leaving the county struggling with a huge burden of surplus space at a time when demand had reached an all time low.

In the first nine months of 2003, that burden eased slightly, due somewhat to improved leasing velocity, but mostly to a more moderate level of new space returns. As of the end of September, sublease space remained unchanged at 2.5 million square feet. However, because the total amount of available space dropped 7% from last year, subleases increased to 32% of the county's total availability from 30% in 2002.

The overall drop in availability this year came as a result of positive absorption across the board. Altogether, 682,580 square feet more space became occupied in the first nine months of this year. This number is somewhat deceiving, though, as Stamford's 188,130 square feet of positive outcome, for example, can be traced to a single event--Xerox's decision to stop marketing 255,000 square feet of space for lease at its Long Ridge Road headquarters--and not to any great increase in occupancy. On the other hand, several transactions that could have boosted absorption even higher did not. Approximately half of GE Commercial Finance's 221,000 square foot lease at Merritt 7, for one, counted towards absorption--the landlord relocated six tenants from the 201 Merritt 7 building to other buildings within the park to make way for the mega-tenant.

While the decrease in overall available space in Fairfield is certainly encouraging, the fact that large leasing transactions broke up several major blocks of available space sets the stage for even more progress in the future. As of the end of September, tenants with requirements exceeding 50,000 square feet had 32 opportunities countywide totaling almost 3.0 million square feet of space. At the same time a year ago, they had 37 in 3.9 million square feet--and very few users of that size existed. The future could also take another turn, however, given the dependence of the real estate market on the growth of the labor market. In addition, rumors of the possible return of several large blocks of space to the county's supply are rampant, potentially dampening the remarkable recovery evident in the Western submarket.

Investment Sales Continue to Surge

One aspect of the real estate market in Fairfield that never saw a slowdown, even through the worst of the downturn, is investment sales. In the first nine months of 2003, investors continued to express their confidence in the county--and their need to place capital in stable assets at low interest rates--by competing heavily for the few trophy properties that have not already changed hands.

TIAA-CREF's Westport portfolio, for example, received significant interest, eventually selling to a joint venture of Normandy Realty Partners and Lexham Private Investors. High Ridge Park in Stamford, a property never traded before, also saw vigorous bidding and was acquired by George Comfort & Sons for $171 per square foot.

Average Asking Rent Dives as Competition Leads to Lower Pricing, Concessions

Despite a somewhat brighter economic picture, tenants looking for space continued to hold sway in Fairfield County in the first nine months of 2003. Even the competition to acquire real estate could not measure up to that seen in the leasing market as owners fought to entice tenants away from sublease opportunities. Average asking rent, as a result, dropped 8% or $2.35 per square foot to $25.99 per square foot countywide--its lowest average since first quarter 2000.

Taking rents, however, rarely reached that point, as virtually everything became negotiable, and many sublandlords resorted to rates in the mid-teens to relieve themselves of surplus space.

Only a few select properties in Greenwich remained above the fray, as address cache and interest from the financial industry encouraged more confidence.