HL Commercial Report First Half 2023 - Fairfield County

Commercial Market Report

FIRST HALF 2023

Writer: Teresa Marziano, Real Estate Salesperson

Executive Summary

The US economy is at a crossroads. Commercial Real Estate investors are cautious and expect a meaningful slowdown in the broad economy, driven by a sharp removal of monetary accommodation. In fact, commercial real estate investment sales reflect the sober outlook that commercial real estate investors appear to embrace.

Consumers, on the other hand, are confident, anchoring their outlook on a strong labor market that has shown resilience in the face of steep interest rate rises. Buoyed by consumers, the economy remains stronger than what most observers had predicted and Q2 GDP, “advance estimate”, reported at 2.4%, demonstrates the vibrance of the economy at large. Persistent consumer confidence has sustained the service sector of the economy and Fairfield County is benefiting immensely from this strength. Service industries are gaining an even greater importance in the economic make-up of Fairfield County.

The Pandemic has altered supply-demand dynamics across many aspects of the economy. Labor force participation rates dropped during the Pandemic, and these have not recovered enough to alleviate labor shortages. Consumers migrated work and play activities to their homes, boosting demand for residences and creating surpluses of office space that now lies vacant. Consumers changed their purchasing behaviors creating huge demand for goods that would be delivered in short order to their homes. This has increased demand for warehouses located in proximity to residential areas and other consumption clusters. In sum, consumer driven behavioral changes are re-defining patterns of work, consumption, and the dynamics of commercial real estate supply and demand, in cities and in suburban areas such as Fairfield. Overall, migration of households from NYC and other urban centers into Fairfield has created a positive demographic wave that continues to yield benefits for the County.

Greenwich Retail Vacancy Drops Helped by Lower Rents

Vacancy rates have declined sharply over the past year – by approximately 2%- and now stand at a low of 3%. Demand for retail space has been encouraged by lower pricing and the continued strength of the high-end consumer. Lease asking prices weakened approximately 10% in the span of the last four quarters creating an attractive entry point for retailers and service providers that had been considering exposure to the Greenwich market.

Both direct and sub-let space were active as leasing activity has rebounded and stayed at healthy levels. New eateries, service providers and retail brands have found attractive space and started new leases over the last six months, Examples are Freebird, a fast-food establishment focusing on chicken dishes and Abercrombie and Fitch- a well-know retailer of jeans and casual clothing.

Greenwich Offices Sustain Premium Pricing and Occupancy

The office sector, nationally, is experiencing strong headwinds stemming from the Pandemic. However, Greenwich office sector is in a particularly advantageous situation. Surrounded by wealthy suburbs and always a sought-after niche market for the financial services industry, its position has not lost luster. Healthy supply-demand fundamentals, pricing stability and declining vacancy all demonstrate the uniqueness of this market.

During the second quarter of 2023, leasing activity was very strong, reversing a weaker first quarter. Supply-demand balance was favorable, and occupancy increased close to 1%, a remarkable performance in the context of the national market. Going forward, we expect this market to remain strong as long as the inflows of households and corporates into Fairfield continue.

Executive Summary

FIRST HALF 2023

Fairfield Retail Owners Make Price Concessions

After three relatively strong quarters, Fairfield retail suffered a set-back in the second quarter of 2023. Landlords have been proactive in adjusting pricing to maintain the affordability of their offerings and leasing rates declined 5% during the second quarter as price declines accelerated, and 6% for the first half of the year. Leasing weakened but still managed to maintain a fairly good level of activity.

New eateries, such as DIG, a vegetable and protein based fast food restaurant for health-conscious customers that recently opened in Stamford and Haven Hot Chicken in North Heaven are examples of new eateries that are trying to establish a faithful following in Fairfield.

Fairfield’ retail sector has also proven to be attractive for investors. A large Bridgeport grocery anchored shopping center caught the attention of a savvy shopping center investor, resulting in a $46 million purchase transaction completed in the first half of 2023.

Greater Fairfield Office Owners Experience Headwinds

In contrast to Greenwich, the greater Fairfield office markets is showing occupancy weakness despite relatively stable pricing trends. Class A office space, particularly in Stamford, is performing better and helping raise pricing averages. Occupancy is vulnerable and office departures have exceeded newly signed leases over the last few quarters.

According to CBRE and the CT insider, Biotechnology firm Cara Therapeutics and a not disclosed insurance company, signed leases for over 26,000 square feet and close to 100,000 square feet at 400 Atlantic St. The 500,000 square-foot building’s owner was pleased to sign these new tenants after losing Charter Communications. These are examples of the greater appeal that well located office space, offering amenities and parking, has in the current market.

Investment Transactions at a Depressed Level

Scarce debt financing, wide bid-ask transaction spreads and investor’s belief that we are not yet at the top of the tightening cycle are combining to deter investment transactions. Despite all these headwinds, Fairfield transaction volume increased during Q2 2023 and median per square foot price, embedded in transactions, did not weaken.

HOULIHAN LAWRENCE COMMERCIAL TEAM

Interesting commercial real estate investment opportunities will likely become available in the near future given the number of properties that will need to be refinanced in a vastly different interest rate environment. Liquidity is 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 complementary assessment of your real estate, an evaluation of a purchase target, and to receive an in-depth perspective on the dynamic Westchester commercial real estate market.

Fairfield Unemployment stabilizing at prePandemic Levels

FAIRFIELD’S UNEMPLOYMENT RATE

Fairfield’s unemployment rate has stabilized at a range that is similar to the pre-pandemic period. This bodes well for the local economy and real estate markets.

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; July 2023

Office Space – Greenwich Strengthens but Fairfield Weakens

Greenwich Office Market has enjoyed a marked occupancy improvement –over the last year – that continues. Fairfield office markets, resembling other office markets in the Country, is experiencing departures that exceed new demand.

Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets –July 2023 HOULIHANLAWRENCE.COM/COMMERCIAL

Retail Improves in Greenwich but Faces Headwinds in Fairfield

Greenwich retail real estate has continued to reduce vacancy, but leasing rates have declined to entice tenants. The larger Fairfield markets are experiencing better occupancy at the expense of lower leasing rates.

Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets –July 2023

HOULIHANLAWRENCE.COM/COMMERCIAL

Investment Activity Remains at Low Leveled in Fairfield County

Investment activity in Fairfield County remains depressed due to to a difficult funding environment, higher interest rates and uncertain valuations.

FAIRFIELD TRANSACTIONS DECLINE TO VERY LOW LEVELS

Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Fairfield County and Greenwich office markets –July 2023

HOULIHANLAWRENCE.COM/COMMERCIAL