Tremors continue to ripple through Fairfield County.

With economic tremors being felt across the nation and with lower earning expectations and layoffs in many sectors of the economy, could a decline in real estate values be in our future? To answer this question, we must first look to how this specific market has evolved.

In recent years, the real estate market in Fairfield County, as in much of the country, has enjoyed steady appreciation in values. We saw the inventory shrink as expanding companies devoured available office space. It seemed, to our amazement that companies were in a competition to hire as many employees as possible and that markets were only limited by the size of its available labor pools. We felt the frenzy with multiple bids for stabilized office buildings and value-added (partially vacant) plays alike.

From the ownership perspective, "smart money" from institutional investors and REITs flowed into Class A office buildings, often strategized with exit plans that would be implemented in the first five years. Other owners bought to hold for the long-term by financing out with attractive non-recourse loans. Then prices began to spike, and secondary markets began to see investors and developers looking for bargains. New construction was held to a minimum because developers and lenders remained cautious in the wake of the late '80's oversupply debacle.

Tenants experienced the boom market from a different perspective. Companies discovered that sustained economic growth had completely transformed the leasing environment. Space was limited, lease rates spiked, free rent evaporated and tenant improvement dollars declined sharply. Tenants shown space with "two or three interested parties looking at it" found the space leased before they could deliver their 15-page RFP, this was truly a "Landlord's Market".

Real estate brokerage agencies had to change also. Educating their clients to the realities of the market and being first to know about any pending vacancy became the drill. Lowball offers or complicated proposals were death. The Fairfield County office market vacancy was an anorexic 6.0 percent in the third quarter of 2000, the lowest recorded in CB Richard Ellis' history of tracking this market. Dot-coms helped perpetuate the demand frenzy for a while, but did limited damage to the fourth quarter 2000 market, since old economy companies were ready to step in and take dot-com sublet space with improvements such as cyber cafes, fiber and furniture in place.

Today the whole market is changing yet again. Demand for office building sales has slowed, as the "smart money" institutional investors are now looking at the multi-family residential markets and industrial markets. Available sublease space has totally to overwhelm demand in the Lower Fairfield County market, while supply -- only begins to exceed demand in Eastern Fairfield County, which only has a 5.9 percent vacancy rate, the lowest in the county. The strength in Eastern Fairfield County is perpetuated by a continued migration to value by Lower Fairfield County tenants like BPA, 30,000 square feet and Perkin Elmer Corporation, 350,000 square feet and by the continued internal growth of companies like Transwitch 75,000 square feet and Health Net, 93,000 square feet.

The overall Fairfield County vacancy rate for office space during the second quarter of 2001 is 9.1 percent, a 30 percent increase from the first quarter 2001.

The avalanche of sublease space continues to hamper the net absorption in Fairfield County at a negative 516,703 square feet. As compared to last year, the second quarter of 2000's net absorption was a positive 134,909 square feet.

Class A vacancy rates are 7.5 percent for Fairfield County, while class B vacancy rates stand at 12.6. percent. Asking average lease rates have begun to plateau and decline from the first quarter to the second quarter of 2001 at $31.65 and $31.38 per square foot, respectively. The decline is the first since 196 when rates were $19.85 per square foot and should be taken in context.

We are experiencing a substantial dip in demand this quarter. Large and mid-size corporations are postponing decisions for large blocks of space. Lack of the supply or new construction over that past few years should protect the market from dipping below its long term average vacancy over the past 10 years.

If this general economic downturn (not recession) continues, considering the fact that the lenders have kept speculative construction to a minimum, rents will plateau and gradually decline from their highs but not below their long-term average. Vacancies then will continue to be absorbed, and local markets will oscillate due to local forces, when large spaces go on and off the market. Now there is more room for negotiations of rental abatement and tenant improvement dollars which will be based on a specific building's or submarket's situation. Tenants and buyers of real property find that opportunities always follow a market transformation. We see this decline as a short term (2-3 quarter) cycle and foresee the market leveling off in the future, unless there is a catastrophic drop in the economy. The bottom line is that it has been my experience that the market will always seek equilibrium and that extremes in a market, be it labor or real estate, will almost always swing that pendulum back to the center and often for a while past center. This phenomenon is what they call on Wall Street "a much needed corretion."