Report: sales strong, but office weak in Fairfield County.

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 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.

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 downsizing 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 was in stark contrast with 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, for $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, in Wilton, 535 Connecticut Ave., in Norwalk, 1266 East Main St., in Stamford, 45 Glover Ave., in Norwalk, and 707 Summer St., in 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 sub market, did little to entice further financial commitment. In fact, countywide velocity fen almost 18% from last year to 2.6 million SF in 385 transactions. Interestingly, however, this volume of deals 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 16% of deals to 12%. Notably underrepresented, in particular, were deals completed exceeding 100,000 SF. Lacking an unexpected influx of interest like that caused in 2001 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 337,7 10 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. in Stamford, CRT Capital Group's 29,650 SF at 262 Harbor Drive in Stamford and General Electric's 29,530 SF at 3 Corporate Park Drive in 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 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.