COMMERCIAL GROUP

F A I R F I E L D C O U N T Y | F O U R T H Q U A R T E R � � � 8

Commercial Market Report

Dear Clients and Colleagues,

Fairfield County economic and employment data mirrored positive national trends in the second half of 2018, and the County is sharing the momentum being experienced by its adjoining Westchester, NY neighbor.

The ongoing upward trends bode well for Fairfield County commercial real estate owners. Concurrently, commercial property owners continue to face the challenges of changing tenant preferences and physical obsolescence.

Fairfield Office occupancy improved considerably during the second half of the year. Vacancy rates declined as property owners became proactive in attracting tenants by lowering pricing objectives. Reported office lease rates were 6 percent lower, year over year, comparing the fourth quarter of 2017 to the fourth quarter of 2018.

• Greenwich offices in particular experienced strong headwinds in 2017, suffering sharp occupancy losses. Property owners reacted constructively to this setback and accepted deep cuts in leasing rates, in addition to providing term flexibility and leasing incentives to tenants. According to CoStar data, Greenwich leasing rates dropped 22 percent during 2018, which helped this segment of the market recover 4 percent of occupancy during the second half of the year.

• Stamford office leasing continues to benefit from ever-increasing consumer demand for access to public transportation, and the many conveniences found in urban hubs. This trend is having a positive impact on high-profile buildings including the former UBS space at 677 Washington Avenue. According to ownership, the building is experiencing leasing success and will soon show significant occupancy gains. Among the new tenancy is, reportedly, media production companies taking advantage of the existing technical infrastructure. Another well-located property, the 500,000-square-foot, 15-story facility at Gateway Harbor Point near to the Stamford train station, is slated to become the new headquarters of Charter Communications.

Fairfield Retail properties exhibited strength and resilience, performing better than the reported national trends for occupancy. The year unfolded with the most recent wave of national big brand retail distress eroding County fundamentals. The supply-demand balance then reversed in the second half of 2018 as rental rates declined 5 percent, attracting new retail business tenants. Retail square footage under construction, particularly GGP’s large SoNo mall (now owned by Brookfield), will result in a 3 percent increase in available retail rental stock when delivered. Additional high end, new inventory will certainly negatively impact older shops in less attractive locations.

• Greenwich retail properties have been under pressure since the middle of 2017. Retail space owners have been particularly responsive, according to CoStar data, as overall rents have declined by 11 percent. Attractive pricing and tenant improvements have lowered the cost of occupancy bringing in new business. Year over year, occupancy increased by one percent in the fourth quarter of 2018.

In summary, market shifts are accelerating. The design and type of retail offerings must reflect the needs of a consumer who is highly selective, aware of competitive offers, and seeking unique products and experiences. In the office sector, convenience, connectivity, and proximity to public transportation are dictating success.

F O U R T H Q U A R T E R � � � 8

Executive Summary

F O U R T H Q U A R T E R � � � 8

Executive Summary

In such a fast-changing environment, the pace of investment sales transactions has weakened. Recent higher interest rates are a challenge to those requiring financing for acquisitions. Facing uncertainty, investors and financing partners are underwriting current and future real estate investment cash flows carefully and cautiously.

Houlihan Lawrence Commercial Group looks forward to sharing our expert understanding of the market, and to providing professional advice as clients evaluate potential investments and dispositions. We are pleased to have an expanded presence in Connecticut, and we strongly encourage owners and tenants to contact us for a complimentary assessment of their real estate.

T H I S R E P O R T I S P R E P A R E D B Y

Teresa MarzianoReal Estate Salesperson

Karen HellerAssociate Real Estate Broker

Steven CidAssociate Real Estate Broker

Houlihan Lawrence Commercial Group 800 Westchester Ave., Suite 517NRye Brook, NY 10573

Writer

Editor

Editor

H LC OM M E RC I A LGROU P.C OM 4

F A I R F I E L D C O U N T Y E M P L O Y M E N T A N D I N C O M E S T A T I S T I C S – S E A S O N A L L Y A D J U S T E D

Fairfield Unemployment at Low Levels

Similarly to Westchester, Connecticut’s unemployment declined further in 2018. Fairfield is following a similar trend. A positive employment background bodes well for real estate occupancy and values.

PE

RC

EN

T

Y E A R

2004 2006 2008 2010 2012 2014 2016 20183

4

5

6

7

8

9

10

Y E A R

PE

RC

EN

T

2004 2006 2008 2010 2012 2014 2016 20182

4

6

8

10

Sources: COSTAR, US. Bureau of Labor Statistics, Unemployment Rate and Fairfield’s Median Household Income, CT. All data retrieved from FRED, Federal Reserve Bank of St. Louis; January 2019.

Unemployment Rate in Connecticut

Unemployment Rate in Fairfield County, CT

H LC OM M E RC I A LGROU P.C OM 5

Office Space – Trend Established in 2018 Continues: Landlords Prioritize Occupancy Over Rental Rates

Greenwich continues to be a successful financial hub, however, it is not immune to national trends. Landlords are redesigning and streamlining office space. As a result, square foot usage per employee has declined pressuring landlords to adjust rental rates in order to attract tenants. Rental rates are now stabilizing.

Fairfield, as a whole, continues to experience the effect of corporate turmoil in the region. Despite challenges, some of the most interesting assets in Fairfield, such as the former UBS building in Stamford, are now being successfully repositioned by new ownership.

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

0

5

10

15

20

VA

CA

NC

Y P

ER

CE

NT

AG

E

OF

FIC

E G

RO

SS

RE

NT

OV

ER

AL

L

$34.0

$34.5

$35.0

$35.5

$36.0

$36.5

$37.0

$37.5

$38.0

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

0

2

4

6

8

10

12

14

16

VA

CA

NC

Y P

ER

CE

NT

AG

E

OF

FIC

E G

RO

SS

RE

NT

OV

ER

AL

L

0

$10

$20

$30

$40

$50

$60

$70

$80

Office Gross Rent Overall

Office Gross Rent Overall

Vacancy Percentage

Vacancy Percentage

F A I R F I E L D O F F I C E S - L O W E R R E N T A L R A T E S H E L P A C H I E V E S T A B L E O C C U P A N C Y

G R E E N W I C H O F F I C E R E N T S S T A B I L I Z E

Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets – January 2019

H LC OM M E RC I A LGROU P.C OM 6

Retail Landlords Demonstrate Flexibility and Seek to Maintain OccupancySeismic changes in the way consumers purchase goods are altering Fairfield’s retail real estate landscape. Historically, Greenwich has been a bastion of stability for retail owners. However, the landscape is rapidly changing and many merchandise stores are being replaced by unique service providers leading to an increase in vacancies and corrected lease rates.

Overall, Fairfield retail seemed to be spared from the broader retail malaise earlier in the year. While data from Costar suggests that landlords have had to adjust rents in order to retain and attract tenants as the turnover of retail shops increases, retail rates in Fairfield County rebounded in Q4-2018.

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

0

1

2

3

4

5

6

VA

CA

NC

Y P

ER

CE

NT

AG

E

AL

L S

ER

VIC

E T

YP

E R

EN

T O

VE

RA

LL

$30

$31

$32

$33

$34

$35

$36

$37

$38

AL

L S

ER

VIC

E T

YP

E R

EN

T O

VE

RA

LL

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

0

1

2

3

4

5

VA

CA

NC

Y P

ER

CE

NT

AG

E

$66.0

$68.8

$71.6

$74.4

$77.2

$80.0

Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich Retail properties. January 2019.

All Service Type Rent Overall

All Service Type Rent Overall

Vacancy Percentage

Vacancy Percentage

F A I R F I E L D R E T A I L - P O S I T I V E O C C U P A N C Y T R E N D C O N T I N U E S

G R E E N W I C H R E T A I L R E N T S T R Y I N G T O S T A B I L I Z E

H LC OM M E RC I A LGROU P.C OM 7

W E A K T R A N S A C T I O N V O L U M E S D U R I N G Q 3 - � � � 8

Investment Activity for Fairfield County Weakened at the End of 2018

After a healthier first half of 2018, investment sales activity in Fairfield County weakened in the second half of the year. However, median price per square foot transacted appeared to rebound.

Interest rate increases and structural changes occurring in the retail and office markets, have given pause to investors. In this environment, rosy projections tend to be replaced by more realistic assessments of the future. Sellers, on the other hand, have grown accustomed to a strong investment sales market and are having difficulty re-setting their price expectation. This is not a unique situation from a historical standpoint. Investors should keep in mind that transactions are likely to take a little longer in this environment.

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Q42017

Q12018

Q22018

Q32018

Q42018

0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

DO

LL

AR

VO

LU

ME

(IN

TH

OU

SA

ND

S)

ME

DIA

N P

RIC

E P

ER

BL

DG

SF

$50

$100

$150

$200

$250

$300

$350

$400

Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects transaction activity in Fairfield CT. January 2019.

Median Price Per Building SFDollar Volume (in millions)