NORWALK, Conn. – The lack of validity of putting office space on the highly visible piece of Norwalk property now owned by a mall developer is shown by the problems brewing in Norden Park, Ernie DesRochers said.
While the Land Disposition Agreement (LDA) for the 95/7 site calls for 600,000 square feet of office space, many people say there isn’t much of a market in Fairfield County for it. DesRochers has concrete evidence – the departure of Northrop Grumman from Norden Place is likely to cause a $72.9 million loan to go into default, according to an article posted last week on Commercial Real Estate Direct.
The loan, the third largest in the collateral pool for Credit Suisse Commercial Mortgage Trust, has been placed into special servicing, the article states. Barclays Capital projects that the loan is likely to default in the coming months, as Northrop had been leasing 52 percent of the building, and, if that 615,357-square-foot space is not leased, the cash flow for the property would fall to less than 30 percent below that needed to keep the Commercial Mortgage-Backed Securities (CMBS) loan current, the article states.
General Growth Properties (GGP) is expected to ask the Norwalk Redevelopment Agency and the Common Council to change the 95/7 LDA to allow it to build a mall.
DesRochers said in an email to NancyOnNorwalk that the Northrop departure offers evidence that the LDA needs to be changed. “Office space to the amount being discussed is a bad idea at 95/7,” he said.
“This decision shows the rapidly changing nature of the local office market. A longtime Norwalk employer is leaving town after 40 years and leaves a 600,000 square leasing hole that will take a very long time to fill up,” said DesRochers, managing director of NorthMarq Capital. “There are not large users looking for office space in the Fairfield County market largely due to cost and the simple fact that the sector is downsizing because of technology. How can anyone seriously justify construction of new space for the foreseeable future because of this real world example?”
Michael McGuire of the Austin McGuire Company, who has more than 20 years’ experience in real estate, agrees that large corporations are not renting office buildings.
Big buildings are “basically becoming obsolescent,” he said.
Corporations don’t need to have their employees in one place anymore because of computers and the Internet, he said. They are typically shipping their operations south of the Mason Dixon line because of the much lower cost of living there, McGuire said.
Buildings in certain locations, such as near a train station, are doing better, but office space in more suburban locations will not survive unless they are cut up, McGuire said. “The buildings that can be cut up have already done so. Those that haven’t been cut up because it’s just not feasible to do so have vacancy rates overall of 40 or 50 percent plus,” he said.
“The office park is not going to come back as it was, at least I don’t see it in the future, unless the taxes rise so much in New York it drives businesses out. That would only be for a short run because I think the way businesses are evolving right now because they’re just going to low-cost states,” McGuire said.
That’s why you see Texas Gov. Rick Perry visiting Connecticut, he said. Perry comes up to pilfer business in a form of corporate warfare, he said. The corporate warfare is local as well, as New York Gov. Andrew Cuomo offers tax-free zones and Gov. Dannel Malloy tries to swipe businesses from neighboring states, he said.
There’s an approach that can help this area weather the storm of corporations moving south, he said.
“We’re just not going to attract business around here. … But what we do have going for us is the highest density of educated people in the country is here, and access to capital. So what we should do is start businesses here and when they mature, ship them down south or to other parts of the country,” he said.
That’s a cycle that would take place over 10 to 20 years, he said.
“We’re a real incubator for starting businesses. That’s a positive, that’s why they say growth up here in the Northeast, or this area, is going to be small businesses,” McGuire said.
When the 95/7 LDA was drafted for Fred F. French Investing LLC, it was all office space, McGuire said. No one in the ’80s could foresee that large office buildings would become obsolete, he said.
When Spinnaker bought the land, the LDA was changed to make it mixed use, including the 600,000 square feet of office space. “You can’t build an office building unless you have it 50 percent pre-leased,” McGuire said, because you can’t get the funding. Spinnaker had AIG lined up as a lead tenant. AIG suffered a meltdown in the 2008 recession.
The Catch 22 of the need to get a big tenant lined up for a new building is that eventually the tenant will exit, leaving a big hole in the cash flow, McGuire said.
DesRochers said there is an additional reason that Norwalk should not put office space on the 95/7 property.
“Norwalk also needs to protect from cannibalizing Merritt 7. That is probably the largest taxpayer in town and a business backbone,” DesRochers wrote. “This is a serious discussion that folks need to have. The mall increases the tax base in a very serious way when it is built.”