One Company's Exit May Be Another's Gain

As published in the Fairfield County Business Journal

With vacancy rates on the rise, rents will go down. Additionally, commercial landlords are already becoming increasingly generous in the negotiation of the terms and conditions contained in their leases to attract tenants.

For example, small- and mid-sized businesses are now being offered moving allowances, increased tenant improvement allowances, more flexible renewal and expansion options, and even lower rental rates.

Just recently, one of our mid-sized, Stamford-based clients - a company in the energy industry - had this firsthand experience. After researching the commercial real estate market both in and outside of Stamford, the company chose to remain in the central business district of Stamford, due largely to the flexibility and willingness of its current landlord to work with us in developing a lease with 'tenant-friendly' terms and in modifying the space to better meet our client's current and projected needs.

The announcement of decisions by Diageo and FactSet Systems to relocate to Norwalk, coupled with Cadbury Schweppes' pending move to Rye Brook, N.Y., has created a somewhat negative impression of the current state of Stamford commercial real estate. With a vacancy rate of 16 percent, approximately 2.5 million square feet of vacant commercial space currently exists in Stamford. These facts have some people wondering if Stamford is still a viable choice for commercial tenants.

The recent loss of these three large corporations has created a unique opportunity for small and mid-sized companies. While local "asking rates" have remained relatively stable thus far, savvy negotiators are enjoying significant reductions in lease price.

The average commercial rate per square foot in Stamford is $30.91 for class A space, down from $33.30 at year-end 2002, and $24.85 for class B space, down from $25.34 at year-end 2002, while Greenwich is higher at $49.63 and $43.73, respectively.

Class A commercial space refers to newer, well-located buildings with amenities such as fitness centers, cafeterias and shuttle services. While class B space is also desirable, it tends to be older and offers fewer amenities.

Stamford's "softer" commercial market offers yet another benefit. Small and mid-sized businesses now have the opportunity to lock into seven- to 10-year leases with lower rates and more favorable options. For business owners who need flexibility, having the ability to expand, extend or renew, are critical elements to making their leases more pliable to their business cycles.

For example, if a company anticipates that it will need more space in a few years, it can leverage an expansion provision in its current space, generating significantly less expense and business disruption than a move to a new facility. This is a big advantage for any business.

Another option for tenants to consider for their lease terms is an 'option to cancel' after a defined period of time. This provides tenants with the 'best of both worlds' - the option to lock into today's lower rates, to amortize the tenant improvements over a longer time period and to retain the flexibility to cancel a portion of their lease or its entirety, based upon business factors, e.g., an expansion or reduction in their space requirements, or perhaps the acquisition of a company or sale of their company.

Stamford's current commercial market can be the impetus for a more stable environment for the "City that Works." As it attracts and retains more small and mid-sized companies, multiple tenants versus a single large corporate tenant will occupy the vacant space. This will help stabilize the local commercial real estate environment in that the city will become less dependent on large corporations and the decisions that they make.

Diageo, for example, will leave a significant amount of vacant space in the downtown Stamford central business district. If this space is leased to multiple small or mid-sized companies as experts predict, the impact of one of them relocating in a few years will be far less significant - not only on the city of Stamford, but also on the local commercial real estate market and the building's landlord.

So while Stamford will be losing some large corporate tenants in 2004, this year could see those spaces filled by smaller and mid-sized corporate tenants who can cash in on the current market. Importantly, the concessions that they receive may encourage them to stay in Stamford for years to come.

John Hannigan, principal of Choyce Peterson Inc., a corporate real estate brokerage firm, can be reached by phone at 356-9600 or (914)442-5700, or at www.choycepeterson.com.