Jim Fagan, Cushman & Wakefield
The Stamford, Connecticut, office market has everything going for it: proximity to New York City, a good transportation system, a wonderful quality of life, a superior public school network, great recreational possibilities being on Long Island Sound and great professionals. The one negative: almost zero growth in the state for the past 25 years in terms of both population and office-using jobs. This lack of growth has led to a very soft economic climate as it relates to office space. The vacancy rate for class A office space has hovered at more than 20 percent for the last seven years or more and has dipped below that only a few times since 1990.
Vacancy Rate Favors Tenants
In Fairfield County, the point of equilibrium is an office vacancy rate of approximately 15 percent. In other words, when the vacancy rate is 15 percent, neither landlords nor tenants have the upper hand in the negotiation of a lease transaction. In Stamford, the current vacancy rate resides at just over 23 percent — and that gives significant negotiating leverage to tenants that are looking for space.
Interestingly enough, landlords of some of the better Class A institutional buildings are willing, and able, to hold rents at high rents in the $48- to $58-per-square-foot range. Their attitude is that the best tenants should and will pay for quality space, while the balance of buildings compete tooth and nail for tenants at rental rates ranges between $22 and $32 per square foot.
Landlord Concessions
For tenants, moving can be an expensive proposition. Expenses can include the cost of the move, the acquisition of all new office furniture, and an upgrade of IT infrastructure. In order to incentivize tenants to move to their space, landlords in the Stamford marketplace generally offer free rent and a tenant improvement allowance.
Generally speaking, tenants can expect to receive slightly more than one month of free rent for each year of lease term. For example, if a tenant were to commit to a 10-year lease, the company would receive between 10 months and one year of free rent from the landlord.
Similarly, tenants can expect to receive a tenant improvement allowance of about 10 percent to 15 percent of their rental rate per year of tenancy. So if a tenant were to sign a lease for 10 years starting at a rent of $45 per square foot, the company could expect a tenant improvement allowance contribution from the landlord in the neighborhood of $45 to $65 per square foot.
Hot Topics on Tenants’ Minds
Two trends dominate the conversation in the local office market: densification and transportation-oriented developments (TODs).
Today’s tenants are consolidating more people into less space. While it wasn’t uncommon to have three people per 1,000 square feet not too long ago, tenants often aim to get five or six people into the same amount of today. In addition to further reducing demand for space, densification also causes infrastructure problems: cooling a space that has 50 percent more people and equipment can be challenging, and parking those employees when most buildings provide less than three parking spaces per 1,000 square feet causes jammed lots and often forces landlords to consider solutions such as valet or tight-pack parking in order to solve for the increase in tenant density.
Developments adjacent to mass transit facilities are highly desired by municipalities, developers, and tenants alike. Municipalities are highly in favor of TODs as they allow for more dense projects while lessening potential traffic congestion. Developers like TODs because they can build more densely while providing for less parking. Tenants like TODs as they open up their employee pool to a much wider audience. It is much more palatable to have employees commute from Manhattan to Stamford if those employees can walk (or take a short shuttle) from the train station to their office.
In short, the Stamford office market is a vibrant place to do business, and tenants can provide a vast array of amenities to their employees, in addition to promoting work-life balance by making it feasible for employees to take an hour off for a child’s concert or athletic event and get back to work for the balance of the day. All of this comes at a price that favors tenants and a location that is a short train ride from Manhattan.
— By Jim Fagan, Cushman & Wakefield Market Leader, Connecticut & Westchester. This article originally appeared in the November/December issue of Northeast Real Estate Business magazine.