Market report. The Long Delayed Recovery Finds Some Traction. Fairfield & Westchester County Office. Rents and occupancy levels improve

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1 Market Report Q Fairfield & Westchester County Office Market report The Long Delayed Recovery Finds Some Traction Rents and occupancy levels improve In both the Fairfield and the Westchester County markets, rent levels ended the first quarter of 2012 higher than at the end of This was the second consecutive quarter of an overall increase in the average rent level. At the end of 2011, the increase in rent levels was noted, but we were cautious about calling that the finish of the slide in rents for these markets. With an additional quarter of higher asking rents, it does appear that the end of the decline in rents for this cycle has likely occurred. Including Classes A, B and C properties, the average asking rent for Westchester County equaled $25.32/sf, was up from $25.24/sf FAIRFIELD AVAILABILITY RATES in the fourth quarter of 2011 and $24.93/sf at the end of the third quarter of The peak level reached before the 2008/9 recession was $28.45/sf. For Fairfield County, the average asking rent in the first quarter reached $32.23/sf, up from $31.34/sf in the fourth quarter and $30.11/sf at the end of the 2011 s third quarter. The first quarter increase, though, was driven in large part by substantial gains in a few select markets. With the peak of $33.25/sf reached in 2008, the current trend would bring the average rent level back to the previous peak sometime during the next year. This encouraging news about asking rents, however, still has to be related to current availability and vacancy rates relative to those prior to the last recession. The first FAIRFIELD AVERAGE ASKING RENTS quarter 2012 overall availability rate for Fairfield County was 20.3 percent, down modestly from the average of 20.5 percent during the latter half of The vacancy rate was 13.6 percent. These current levels are nearly five percentage points higher than what existed in the 2006 through 2008 period. The story is roughly similar for Westchester County. At 17.9 percent, the availability rate is almost five percentage points above the 13 percent to 14 percent range that persisted for several years before the last recession. The average vacancy rate in the Westchester market has actually had a slight upward trend over the last three quarters. Even assuming that this is just statistical noise, the current 13.1 percent vacancy rate is three percentage points higher than the pre-recession level. FAIRFIELD NET ABSORPTION 20.3% $23.74 (14,212) 24.7% $ , % $66.11 (56,331) 20.9% $ ,957 Eastern 13.7% Eastern $ % 10% 20% 30% $0 $10 $20 $30 $40 $50 $60 $70 Eastern 86,729 (in 000s SF)

2 The news about firmer rent levels is an encouraging sign that property market conditions are improving. Occupancy levels, however, are still below historical norms, creating some caution about the sustainability of such a pronounced up trend. Also, potentially adding to the hesitancy about the trend is the weakness in leasing activity during the first quarter. In both the Fairfield and Westchester County markets, closed deals as measured in square feet ran at less than one-half the average rate for A similar decline, but not as large measured in percentage terms, in leasing activity occurred in the Manhattan market. The actual business and economic fundamentals in the Manhattan market improved in the first quarter of The news about employment was encouraging; and the stock market recorded one of its strongest gains in over a decade. The delayed response to recession fears in mid-2011 likely accounts for the decline in actual closed leasing transactions during the first quarter. A similar phenomenon may have been at work in the Fairfield County and Westchester County markets. Before leaving the issue of reconciling rent performance with the picture of current occupancy, one other element has to be added to the mix of factors that could be impacting the pricing of space. Our data show that there is little measurable office construction underway in either the Fairfield County or Westchester County markets. Moreover, as the mix of industries changes in both markets, at least some of the existing stock of space will not offer acceptable alternatives. With this set of supply factors, even moderate business expansion can push asking rents up. Steady gains in the economy Over the last few months understanding the economy s direction and its strength has become even more complicated and confusing. There are multiple measures of employment, for example, and sometimes they tell slightly different stories. This is especially true when the underlying business structure of a region is changing, with new industries and firms appearing and more established sectors stagnant or worse. Nevertheless, one must analyze the statistics and draw a conclusion. In Fairfield County, the unemployment rate continues to decline. The latest reading for February 2012 brought the level to 7.6 percent, which is down from the year earlier figure of 8.9 percent. This decline in the unemployment rate is the product of an actual increase in the level of employment of 2.3 percent over the last year. Additionally, the measured labor force increased during the same period by 1.1 percent, which reduces the size of the decline in the unemployment rate. This body of employment data comes from the survey of households that are in this market and shows a very respectable rebound in the region s economy. The survey of employment that counts employees at establishments located in Fairfield County, a different measurement shows that employment has been essentially stagnant over the last six months after increasing modestly in the latter half of 2010 and the first half of While less upbeat than the household numbers, the survey of business establishments indicates no further deterioration. The mix of employment figures for Westchester County are different from those found in Fairfield County, but the sum total still produces a positive story. Total private sector employment was up by 1.1 percent in February 2012 over the February 2011 level. In January 2012 and for much of 2011, the year over year gains were in the 1.5 percent to 2.0 percent range. These numbers come from the survey of companies and other reporting entities. UNEMPLOYMENT RATES (February of Each Year) 12% Westchester County Fairfield County United States 10% 8% 6% 4% 2% 0% Sources: U.S. Bureau of Labor Statistics and Colliers International The average unemployment rate for the first two months of 2012, however, was unchanged from last year s average level for the same two months. The unemployment rate in Westchester County has been running well below the national level for the last year; and for the first two months of 2012, the unemployment rates in the two counties are virtually identical and below the national average. As with the Fairfield County s set of numbers, the net conclusion is that steady but moderate growth has taken hold. Colliers International p. 2

3 WESTCHESTER AVAILABILITY RATES WESTCHESTER AVERAGE ASKING RENTS WESTCHESTER NET ABSORPTION 18.4% $29.91 (25,664) 15.7% $23.92 (11,306) 24.1% $ , % $ , % $24.51 (16,684) 0% 5% 10% 15% 20% 25% $0 $5 $10 $15 $20 $25 $30 (in 000s SF) Considerable variance among Fairfield s submarkets The submarket is the largest in Fairfield County, with nearly 19.5 million square feet of office space, and the overall performance in this market has remained stable for the last year. The large corporate occupiers have tended to be quiet during the last four years, which is especially true for the large financial institutions in the commercial and investment banking sectors. These financial institutions are finding it very difficult to increase their top line revenue as many of their traditional business lines are facing tough competition, weak economic growth, and a draconian regulatory environment. These forces have eliminated the need for financial institutions to take more space. On the other hand, it has made them reluctant to incur the added expenses associated with moving. As a net result, a property market like the one found in remains suspended between these two opposing forces. Market performance data for the Class A sector brings the impact of these forces into sharp focus. In the first quarter of 2012, the overall vacancy rate at 20.0 percent was essentially unchanged from the 19.9 percent level in the fourth quarter of 2011 or the 20.2 percent figure one year earlier in the first quarter of The availability rate at 25.9 percent has declined by 1.1 percentage points over the past year; but the overall level is quite high. Neither the vacancy rate nor the availability rate indicates that significant net absorption of space occurred over the last year. The overall Class A rent level in the first quarter of 2012 actually dipped to $38.99/ sf from $41.14/sf in the fourth quarter of 2011 and $40.48/sf in the first quarter of With the overall supply/demand balance for space in this submarket constant during the past year, it is probably safer to not attach too much significance to small to moderate quarter to quarter changes in the average asking rent. In fact, the asking rent in the first quarter of 2012 was only modestly different from the level one year earlier, and it was really the pop in the fourth quarter of 2011 that is the outlier. Additionally, though, one can not completely discount the impact of the decline in leasing activity on the level of asking rents. Leasing velocity was down 28 percent in 2011 from the 2010 level, and the first quarter 2012 pace was only one-third the average quarterly level in Obviously, in this submarket, the positive signs in the Fairfield County economy are not being reflected in the demand for office space. Most leases signed in the first quarter were for relatively short terms and involved modest amounts of space. One partial exception to that general observation was the 4,000 square foot leased signed by Regeneration Finance at 300 First Place. This transaction did involve a lease with a 10-year term. The initial rent was right around $40/ sf, with a minimal concession package. The Class B office sector has about 4.5 million square feet, and the trends noted for the Class A properties carry over. The vacancy rate at the end of the first quarter was 14.1 percent versus 13.9 percent in the fourth quarter of 2011 and 14.5 percent at the end of first quarter of The availability rate ended 2012 s first quarter at 20.8 percent. The average asking rent has remained within pennies of $26.30/sf for the last year. Contrary to the torpid property performance seen in the market, the Class A office sector in reported a very large jump in its average asking rent for the first quarter of This 2.9 million square foot market saw the average asking rent jump to $69.48/sf from $54.03/sf in the fourth quarter of 2011 and $51.96/sf in the first quarter of The vacancy rate declined to 16.1 percent from 17.1 percent in the fourth quarter; and the average asking rent had been increasing for most of 2011, with the first quarter s level at $51.96/sf, as noted. Colliers International p. 3

4 Just before the 2008/2009 recession and the meltdown in the hedge fund industry, asking rents in the Class A sector were well over $70/sf. At that time, though, the vacancy rate was one-half the current level. With no new construction and a steady improvement in the boutique financial services sector, it wouldn t take long for the Class A office vacancy rate to again fall below 10 percent. It may be that landlords are anticipating that train of events. Outside of the and markets, both rent levels and occupancy levels remained relatively stable. In the Eastern Fairfield market, the average asking rent for Class A space finished the quarter at $22.40/sf, which was unchanged from the $22.41/sf in the fourth quarter and $21.89/sf in the first quarter of Vacancy and availability rates were steady. In the submarket, the average asking rent has averaged very close to $25.40/sf for the last year. In short, these markets are holding steady, but there isn t enough force coming out of the business sector to push occupancy levels higher. Westchester County s market holds steady on light activity For the county as a whole, Class A office rents have been essentially unchanged over the past year. At the end of the first quarter of 2012, the average asking rent was $28.29/sf, which was down 3 pennies from the fourth quarter level and up a nickel from the reading in the first quarter of This stability in the rent level was mirrored in the occupancy statistics. The availability rate has been fixed at 22.5 percent for the last year; while the vacancy rate has seen a modest increase over that period, ending the first quarter of 2012 at 16.6 percent. For Class B properties, the overall trend is slightly stronger. The vacancy rate for the first quarter of 2012 was 9.7 percent, which is down slightly from 10.5 percent in the fourth quarter of 2011 and 10.4 percent in the first quarter of The availability rate is also down, reaching 13.8 percent in the first quarter of 2012 from 14.6 percent one year earlier. The average asking rent is up about 5 percent over the last year, and ended the first quarter of 2012 at $21.73/sf. It is interesting that the Class B sector has performed better than the Class A buildings over the last year. With ample space among Class A properties and a competitive pricing environment, one might have expected the Class A sector to acquire tenants from Class B buildings, which in the aggregate doesn t seem to have happened. Apparently the nearly seven dollar differential in asking rents has been sufficient for the Class B sector to maintain its competitiveness. The White Plains Class A sector had a modest give back on average asking rents in the first quarter of At the end of the quarter, the average asking rent was $31.63/sf versus $32.28/sf in the fourth quarter of However, the fourth quarter number had an unexpected jump from the average level during the previous three quarters in At $31.63/sf, rents in the first quarter were still above the level one year earlier when they averaged $29.95/sf. With the vacancy rate actually increasing slightly over the past year and the availability rate slightly over 20 percent, overly substantial gains in asking rents shouldn t be expected. Reflecting the overall statistics for Westchester County, the Class B properties in the White Plains market had higher occupancy levels, and average asking rents that at $23.20/sf were well below the average for Class A properties. The relatively large Class A sector in the East I-287 market had a challenging time during the first quarter of This market with 10.4 million square feet of space experienced a significant jump in the vacancy rate during the first quarter of The vacancy rate reached 17.3 percent in the quarter from 14.5 percent in the fourth quarter of 2011 and 14.0 percent in the first quarter of Additionally, the availability rate remained high, ending the first quarter at 27.2 percent. The average rent level, additionally, fell to $28.94/sf from the $29.50/sf level that had persisted through As noted at the beginning of this report, the economic data for the New York State economy is solid, which holds true for the Westchester County area. Unfortunately, there appears to be substantial doubt about the sustainability of the economic recovery, meaning that companies are hesitant about committing to long term obligations. This condition is not unique to the Fairfield/ Westchester market and has been reported from numerous markets across the United States. Hopefully, more confidence about the future will eventually develop. Colliers International p. 4

5 Market Report Q Q Notable Transactions Fairfield County TENANT ADDRESS CITY STATE SF Tronix One Plaza CT 28,000 Air Castle Partners 300 Place CT 19,241 Cowan Medical 300 Atlantic Street CT 13,000 Aris Global 1266 East Main Street CT 13,000, Ct 1055 Washington Boulevard, CT tel FAX New York City: Peter Kozel, Ph.D. Chief Economist Executive Managing Director 380 Madison Avenue New York, NY tel FAX Yale/New Haven Hospital 747 Belden Avenue Norwalk CT 11,675 Westchester County TENANT ADDRESS CITY STATE SF TAL International Container 100 Manhattanville Dr Purchase NY 27,718 Byram Healthcare 120 Bloomingdale White Plains NY 27,053 Voletra Turtle Beach 100 Summit Lake Valhalla NY 20,817 Reliance Standard 7 Skyline Drive Hawthorne NY 19,401 Hudson Medical 120 White Plains Road Tarrytown NY 18,000 About Colliers International Colliers International NY LLC is the New York - New Jersey - Connecticut hub of the world s third largest commercial real estate services organization. Our company is a leading provider of specialized realty services, including tenant advisory services, owner representation, corporate services, capital markets, retail, industrial, consulting, financial services, asset management and project management. With nearly 300 employees and offices in Manhattan, New Jersey and Connecticut, the firm advised on more than $4.5 billion in sale, lease and capital markets transactions over the last 12 months. The firm manages more than 16 million square feet of prime commercial property in the tri-state region. Over 522 offices in 62 countries on 6 continents Over 12,200 professionals Over 1,250 million square feet under property management US $59.6 billion in transaction value US $1.5 billion in global revenue Entrepreneurial culture emphasizing For more information, please visit the Colliers International web site at Information contained herein has been obtained from sources that we deem reliable. We have no reason to doubt its accuracy, but we do not guarantee it. Some statements in this report are forward-looking statements or statements regarding future events, which involve risk and uncertainty, and there can be no assurance that the results described in such statements will be realized. Accelerating success. Colliers International p. 5

6 Fairfield County Submarket Statistics Change 1Q11 2Q11 3Q11 4Q11 1Q12 Last Year Last Qtr Eastern Fairfield County Availability Rate (%) Class A 9.8% 9.4% 10.2% 10.5% 10.2% pp Class B 19.4% 19.6% 19.2% 20.1% 19.2% pp Class C 7.1% 7.0% 6.1% 7.0% 6.7% pp Asking Rental Rate Class A $21.89 $21.89 $21.83 $22.41 $22.40 $0.51 -$0.01 Class B $20.74 $20.64 $20.87 $21.40 $21.29 $0.55 -$0.11 Class C $19.94 $19.68 $19.71 $20.01 $ $0.22 -$0.29 Leasing Activity (Qtr) Total 41, ,801 91, ,263 40,596-1, ,667 Absorption (Qtr) Total 25,714 8,959 90,860 (81,713) 86,729 61, ,442 Fairfield County Availability Rate (%) Class A 23.3% 20.8% 20.2% 19.4% 19.6% pp Class B 23.5% 23.6% 23.6% 24.6% 24.3% pp Class C 16.2% 15.7% 15.3% 13.9% 12.9% pp Asking Rental Rate Class A $30.97 $32.14 $32.09 $32.61 $31.70 $0.73 -$0.91 Class B $25.55 $25.97 $26.23 $26.47 $26.80 $1.25 $0.33 Class C $23.84 $23.83 $23.25 $23.63 $ $1.38 -$1.17 Leasing Activity (Qtr) Total 254, , , ,352 87, , ,725 Absorption (Qtr) Total (82,109) 180,303 41,776 20,345 19, , Availability Rate (%) Class A 29.9% 22.7% 23.1% 23.9% 25.2% pp Class B 17.2% 17.7% 17.0% 17.1% 17.9% pp Class C 7.3% 7.1% 3.9% 4.4% 4.8% pp Asking Rental Rate Class A $51.96 $49.94 $50.33 $54.03 $69.48 $17.52 $15.45 Class B $49.89 $46.56 $53.27 $54.73 $53.73 $3.84 -$1.00 Class C $32.70 $31.40 $32.25 $31.83 $33.76 $1.06 $1.93 Leasing Activity (Qtr) Total 137,822 87,765 86,256 58,375 28, ,030-29,583 Absorption (Qtr) Total 16, ,660 21,598 (27,397) (56,331) -72,791-28,934 Availability Rate (%) Class A 28.0% 28.7% 26.6% 26.6% 25.9% pp Class B 21.7% 20.9% 21.0% 22.5% 20.8% pp Class C 39.5% 25.4% 26.1% 26.0% 26.3% pp Asking Rental Rate Class A $40.48 $40.17 $40.87 $41.14 $ $1.49 -$2.15 Class B $26.21 $26.38 $26.38 $26.82 $26.30 $0.09 -$0.52 Class C $22.39 $23.57 $23.74 $23.72 $23.91 $1.52 $0.19 Leasing Activity (Qtr) Total 400, , , ,464 94, , ,376 Absorption (Qtr) Total 314, , ,897 (65,520) 161, , ,195 Fairfield County Availability Rate (%) Class A 24.6% 24.6% 23.6% 23.0% 23.6% pp Class B 18.3% 18.6% 18.6% 19.4% 19.3% pp Class C 15.3% 16.5% 14.2% 15.3% 15.4% pp Asking Rental Rate Class A $25.48 $25.39 $25.58 $25.39 $ $0.08 $0.01 Class B $22.85 $22.73 $22.81 $22.83 $23.14 $0.29 $0.31 Class C $17.91 $17.82 $17.87 $18.96 $18.53 $0.62 -$0.43 Leasing Activity (Qtr) Total 25,472 35,117 76,161 27,623 3,600-21,872-24,023 Absorption (Qtr) Total 33,206 (24,656) 71,122 (20,701) (14,212) -47,418 6,489 Total Fairfield County Availability Rate (%) Class A 24.1% 23.1% 22.1% 22.0% 21.8% pp Class B 20.7% 20.7% 20.5% 21.5% 20.8% pp Class C 16.3% 13.8% 12.9% 13.2% 12.9% pp Asking Rental Rate Class A $35.74 $35.78 $35.94 $37.16 $38.38 $2.64 $1.22 Class B $24.63 $24.59 $24.97 $25.58 $25.68 $1.05 $0.10 Class C $22.46 $22.94 $22.84 $23.26 $23.08 $0.62 -$0.18 Leasing Activity (Qtr) Total 859, , , , , , ,374 Absorption (Qtr) Total 307, , ,253 (174,986) 197, , ,804 pp: percentage points northern eastern southern Fairfield County Eastern Bridgeport Fairfield Shelton Stratford Trumbull Bethel Brookfield Danbury Darien Newtown New Canaan Ridgefield Norwalk Westport Wilton Colliers International p. 6

7 Westchester County Submarket Statistics Change 4Q 10 1Q11 2Q11 3Q11 4Q11 Last Year Last Qtr Westchester Availability Rate (%) Class A 24.6% 24.6% 23.6% 23.0% 23.6% pp Class B 18.3% 18.6% 18.6% 19.4% 19.3% pp Class C 15.3% 16.5% 14.2% 15.3% 15.4% pp Asking Rental Rate Class A $25.48 $25.39 $25.58 $25.39 $ $0.08 $0.01 Class B $22.85 $22.73 $22.81 $22.83 $23.14 $0.29 $0.31 Class C $17.91 $17.82 $17.87 $18.96 $18.53 $0.62 -$0.43 Leasing Activity (Qtr) Total 595,080 32,553 13,264 27,674 12, ,076-15,670 Absorption (Qtr) Total 277,030 31,866 (623) (23,266) (16,684) -293,714 6,582 Westchester Availability Rate (%) Class A 15.6% 14.9% 13.1% 12.5% 11.6% pp Class B 13.9% 15.6% 14.9% 13.0% 13.6% pp Class C 14.5% 16.4% 16.8% 17.4% 16.5% pp Asking Rental Rate Class A $24.85 $24.63 $24.60 $24.73 $ $0.25 -$0.13 Class B $18.96 $18.76 $18.80 $19.26 $21.09 $2.13 $1.83 Class C $16.56 $16.47 $16.30 $15.13 $ $0.91 $0.52 Leasing Activity (Qtr) Total 34, ,582 74,697 70,520 24,905-9,569-45,615 Absorption (Qtr) Total 86,048 (125,174) 31,087 54,337 23,397-62,651-30,940 Availability Rate (%) Class A 26.2% 27.6% 26.8% 26.4% 27.2% pp Class B 22.6% 21.6% 21.8% 26.1% 15.9% pp Class C 5.5% 6.1% 6.5% 7.0% 7.6% pp Asking Rental Rate Class A $29.54 $29.62 $28.86 $29.40 $ $0.60 -$0.46 Class B $18.69 $19.80 $19.64 $19.58 $23.06 $4.37 $3.48 Class C $18.16 $17.75 $17.42 $17.96 $ $0.99 -$0.79 Leasing Activity (Qtr) Total 130, , , ,685 56,083-74, ,602 Absorption (Qtr) Total (421,488) (126,787) 77,378 (54,007) 127, , ,143 Availability Rate (%) Class A 19.2% 18.9% 18.1% 17.4% 15.9% pp Class B 18.5% 17.5% 18.6% 17.7% 20.3% pp Class C 5.0% 4.6% 3.6% 3.7% 3.4% pp Asking Rental Rate Class A $26.84 $26.83 $26.42 $26.11 $ $0.89 -$0.16 Class B $21.66 $21.42 $21.57 $21.42 $ $0.10 $0.14 Class C $20.01 $20.37 $19.78 $19.82 $ $0.48 -$0.29 Leasing Activity (Qtr) Total 91, ,032 65, ,432 54,313-37,016-71,119 Absorption (Qtr) Total ,504 12,036 54,156 (11,306) -11,518-65,462 Availability Rate (%) Class A 21.8% 20.7% 21.0% 20.9% 21.2% pp Class B 15.1% 15.0% 15.4% 15.8% 15.0% pp Class C 9.5% 10.1% 8.9% 9.3% 11.2% pp Asking Rental Rate Class A $29.95 $30.46 $29.99 $32.28 $31.63 $1.68 -$0.65 Class B $23.41 $23.37 $23.29 $23.87 $ $0.21 -$0.67 Class C $22.41 $22.38 $22.68 $22.56 $22.48 $0.07 -$0.08 Leasing Activity (Qtr) Total 55, , ,532 67,760 86,215 30,308 18,455 Absorption (Qtr) Total (63,842) 46,205 (3,954) (9,485) (25,664) 38,178-16,179 Total Westchester County Availability Rate Class A 22.9% 23.2% 22.7% 22.4% 22.5% pp Class B 14.6% 14.5% 14.7% 14.8% 13.8% pp Class C 10.5% 11.3% 11.2% 11.6% 11.6% pp Asking Rental Rate Class A $27.94 $28.18 $27.53 $28.05 $ $0.12 -$0.23 Class B $20.29 $20.37 $20.50 $20.78 $21.73 $1.44 $0.95 Class C $17.85 $17.96 $17.76 $16.97 $ $0.69 $0.19 Leasing Activity (Qtr) Total 906, , , , , , ,551 Absorption (Qtr) Total (122,040) (128,386) 115,924 21,735 96, ,919 75,144 pp: percentage points West i-287 southern Westchester County Harrison Port Chester Rye Ryebrook White Plains Elmsford Greenburgh Irvington Tarrytown Ardsley Dobbs Ferry Scarsdale Mamaroneck Mount Vernon New Rochelle Pelham Pelham Manor Yonkers northern White plains CBd east i-287 Bedford Briarcliff Manor Croton-on-Hudson Courtlandt Manor Lewisboro Mount Kisco Mount Pleasant New Castle North Castle North Salem Ossining Peekskill Pleasantville Pound Ridge Somers Yorktown Heights Downtown White Plains Colliers International p. 7