Writer: Teresa Marziano, Real Estate Salesperson
Executive Summary
FIRST HALF 2024
The national economy has defied recession due to a resilient consumer and the Federal Government’s transfer payments to households. In addition, the US Government’s strategic investments in several infrastructure initiatives have added economic activity and employment to an economy that is already at full employment capacity. Consumers amassed savings and accumulated wealth during the upheavals of the Pandemic and have enjoyed an abundance of jobs. Generous Federal and State programs helped lowerend consumers while those invested in the stock market or enjoying home ownership saw meaningful asset appreciation. As a result, consumers face a cooler economy from a position of strength. Even in a slower economy, Fairfield County employment and disposable income trends suggest that its population will continue to confidently drive spending in services, giving resilience to the local economy.
During 2023 Connecticut’s economic growth enjoyed significant tailwinds. In contrast, headwinds appeared in 2024 and economic challenges are emerging for the State of Connecticut and Fairfield County. Connecticut’s first quarter GDP was the second lowest among New England states as the manufacturing sector has become a meaningful drag to growth during this year. The manufacturing slowdown appears to have been more severe in Connecticut than in other states, mainly driven by the lack of qualified labor residing in the state. However, several service industries, such as finance, insurance, arts, entertainment, and hospitality, continued to help the economy move forward, mitigating the slowdown. Fairfield County’s economic growth is likely to continue to fare better than Connecticut’s, due to its concentration in those service-related industries that are still enjoying encouraging trends. Nevertheless, the cooling of the economy is evident across the property segments that we analyze.
Nationwide, challenges to the office sector have not abated. Employer concessions and hybrid work arrangements are still evolving. Similar to national trends, Class A offices in Fairfield are capturing a disproportional share of new leasing, retaining pricing power. B and C offices, on the other hand, are facing a very challenging environment. Assets that are unable to retain tenants are likely to be sold at below-replacement value as this is the only way deal economics will work for an investor repositioning these problem assets. Retail spaces have fared better than offices after the Pandemic and it is likely to continue on a strong footing, as long as the local economy holds. Demand saw a renaissance after re-opening, and this initial burst of tenant activity is now settling down to a more normal level.
Commercial real estate investment sales across property types are weak and a strong rebound is unlikely until forced by debt maturities, and further sustained by the return of willing lenders to the commercial real estate space.
Greenwich Retail Demand Slows
Retail properties in Greenwich had a challenging first half of the year. Supply of space exceeded demand as retailers gave back shops to landlords. Modest gains in occupancy, achieved in the first quarter, were more than lost in the second quarter as leasing deals declined. Both direct and sublet space saw weaker demand.
In contrast, inflation trends helped Landlords retain pricing power and lease prices ended the first half of 2024 approximately 15% higher than year-end 2023, according to Costar. These numbers, however, are always impacted by asset mix, therefore a higher percentage of deals in prime area assets would skew the average price upwards.
Greenwich Offices Experience Headwinds
Nationally, office tenants continue making efforts to right-size their office footprints and select office space with uniqueness and relevance that attracts employee attendance and productivity. These efforts are most acute in the finance industry, the largest employer in Greenwich. Up to the end of 2023. this office market fared better than others in the Country. However, Greenwich offices now appear to be experiencing departures, stemming from corporate space optimization a result of new work location protocols.
Executive Summary
FIRST HALF 2024
During the first half of 2024, and, in particular, during the second quarter, Greenwich experienced large office tenant departures which elevated vacancy rate by 2%. As a result, lease prices weakened significantly, according to Costar. The negativity implied by the statistics suggests that there could be a data integrity issue. Data points for next quarter will give us information to better understand if poor data reporting for Q2 2024, a one-off event, or a worsening trend, reflect the true fundamental picture for office space in Greenwich.
Fairfield Retail Owners Experience Healthy Demand
Fairfield Retail experienced strong demand in the first half of the year. Demand exceeded supply and occupancy rates tightened. Demand was strong in both direct and sublet space and price increased approximately 4% from year-end. Leasing activity was healthy. Retailers are seeking spaces that offer value, visibly and convenience. Greater Fairfield had offerings that met these requirements.
Service providers found areas of opportunity in Fairfield. Examples include restaurants, a brand dedicated toy store, and a cannabis business. Frank Pepe’s Neapolitan pizza opened a new establishment in Stanford at 64 High Ridge Road. Bricks and Minifigs, a dedicated Lego store just opened its doors at 1929 Black Rock Turnpike. Stamford Planning and zoning approved a new cannabis dispensary late June 2024 in proximity to the border with Darien. Lastly, Danbury is receiving funds for an electric vehicle charger build out push which will start in the second half of 2024.
Greater Fairfield Office Owners Experience Stronger Headwinds
The greater Fairfield office market showed accelerating occupancy loss and lease price weakness. In prior quarters, the Greenwich sub-market had offset some of the negative trends observed in other Fairfield areas. However, during the first half of this year, Greenwich fundamentals turned negative, and weakness for the entire Fairfield office segment of the real estate market accelerated. Vacancies are now approximately 16% and rents have declined over the last twelve months.
Similar to other Geographies, Fairfield Investment Transactions Remain at Depressed
Levels
Fairfield investment sales transactions remained at low levels due to the challenging interest rate and valuation environment. Debt financing availability has not improved, and bid-ask transaction spreads remain sizable. Lack of confidence in valuations continues and has suppressed investments sales. Financing sources are scarce and regional banks are seeking to reduce their CRE exposure. Median transaction prices remained stable probably signifying that assets transacting are in relatively good condition and not needing meaningful investment.
HOULIHAN LAWRENCE COMMERCIAL TEAM
Interesting commercial real estate investment opportunities will likely become available soon given the number of properties that will need to be refinanced in a vastly different interest rate environment. Liquidity continues to be restrictive and poorly capitalized owners will seek to sell. However, there are numerous market and economic risks that will add to the complexities of acquiring commercial real estate. Understanding the market forces that are shaping the fundamentals for each property requires a deep knowledge of the property, local and regional insights, and close contacts with the right financial partners. Our Team is highly skilled in all these areas. Reach out to HOULIHAN LAWRENCE COMMERCIAL for a complimentary assessment of your real estate, an evaluation of a purchase target, and to receive an in-depth perspective on the dynamic Fairfield commercial real estate market.
Fairfield Unemployment at low levels consistent with National trends
Fairfield’s unemployment rate has stabilized at levels similar to the pre-pandemic period. Services industries are the largest creator of employment in Fairfield County.
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; June 2024
Unemployment Rate in Fairfield County, CT
Office Space – Greenwich and Fairfield Weaken
Further
Greenwich Office Market had a difficult First Half of 2024 suffering set-backs in occupancy and pricing. Fairfield office markets experienced accelerating declines in occupancy and price during the quarter.
Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets – June 2024
Retail lease pricing and occupancy improves in Fairfield but Greenwich loses occupancy
Greenwich retail real estate had shown remarkable resilience but suffered a set back in occupancy during the first half The larger Fairfield retail markets are experiencing a rebound in activity with better occupancy and achieving pricing gains
Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets – June 2024
Investment Activity Remains Depressed Similarly to other Markets
Investment activity in the Fairfield County remains depressed due to the difficult financing environment, higher interest rates and uncertain valuations.
FAIRFIELD TRANSACTIONS REMAIN DEPRESSED
Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets – June 2024