As corporate tenants reassess their space needs as they come off leases this winter and spring, they are attempting to time an office market that is in many ways a pendulum at the extreme end of its arc ”“ and it is anyone”™s guess when that pendulum will swing back.
A return trajectory is inevitable for a market that has “overcorrected by most measures,” according to James Fagan, senior managing director of Cushman & Wakefield”™s Stamford office. In the meantime, however, it is a tenant”™s market with lessees able to negotiate discount rents and concessions, including “blend and extend” deals in which existing lease payments are lowered in exchange for tacking on an extra few years to a rental agreement.
Above all else, landlords are fearful of increases in vacancies that will cut into their cash flow even as they have mortgage payments come due, and Cushman & Wakefield”™s chief local economist Kenneth McCarthy said some will not be able to stay above water.
“In 2010 we are likely to see several commercial properties come under pressure (and) get sold in distress,” said McCarthy, managing director of research for Cushman & Wakefield in the New York City region, in remarks at a Connecticut Business & Industry Association conference in Stamford. “There is going to come a reckoning. It probably will not be this year, because ”¦ lenders are willing to extend (loan terms), but it is going to come due.”
That could result in a 10-percent drop in rents, according to McCarthy, as landlords attempt to keep their elevators full. In the meantime, in a bizarre twist on the vetting process between landlords and tenants, it is now the latter group that is doing due diligence on the former.
“We are telling tenants that if you are looking at signing a long-term lease, be sure of the financial stability of the owner,” McCarthy said.
Tenants large and small appear to be willing to bide their time, uncertain both of their own near-term needs and of the long-term value of any lease they sign.
Cushman & Wakefield is currently handling about a half-dozen corporate site searches in southern Connecticut for at least 100,000 square feet of space. “I don”™t have a clue when it will all get done,” Fagan said. “There is much more momentum to slow them down then speed them up. It”™s not tragic ”“ we just certainly are not surfing the wave the way we were in mid 2007.”
Just two office leases exceeded the 100,000-square-foot barrier last year, the largest being General Re Corp.”™s decision to move from downtown Stamford to a General Electric Co. building at 120 Long Ridge Road. At more than 300,000 square feet of space, the Gen Re deal was more than double the size of Deloitte L.L.P.”™s renewal on 135,000 square feet of space at 10 Westport Road in Wilton.
Still, in Stamford, Westport and most other municipalities, overall office vacancy rates edged upward, but nothing to match fourth-quarter headlines of job losses. The notable exception was Greenwich, where nearly 200,000 square feet of space became available, most of it in the form of sublease space available at the office buildings prized by hedge funds.
“The bad news seems to be contained in the Stamford-Greenwich market, because that is where the finance is,” Fagan said. “The eastern side of the market is still pretty strong ”“ in fact, they are having to fight for deals.”
Asked to characterize what real estate professionals are going through as they wait out the frozen market, Fagan likened it to what goes through his mind as he goes through the pendulum windup up for a golf shot.
“When I swing a golf club and I get to right here,” Fagan said, miming the high point of a golf windup, “I am somewhere between ”˜oh crap”™ and ”˜oh boy.”™”
