Leasing velocity in Westchester office market has been significantly reduced during the pandemic and is coming back slowly at best. The cost of constructing space for tenants has increased dramatically, due to supply chain issues and inflation in construction costs. In addition, today’s tenants want high-end contemporary offices, with plenty of glass, exposed ceilings and top-of-the line kitchens with stone counters, stainless steel appliances and high-top seating.
Lease renewal transactions have been the lion’s share of our market in the last two years. Many tenants have renewed for short terms of anywhere from six months to two years. They are not sure of the number of people that will be in their office going forward and are reluctant to make long-term decisions.
While these short-term leases are shown in the absorption statistics, there is no way to separate them from long-term renewals, which are far more valuable to both tenants and building owners. Some tenants have gladly entered into long-term renewals, extracting higher free rent and construction allowances from building owners who want to lock in long-term leases. Real estate is a supply-and-demand business. Just when we thought the county was finally turning the corner to a landlord’s market at the end of 2019, the pandemic turned it back in the tenant’s favor.
While it may seem counter-intuitive to the nonprofessional, rental rates are not going down, for a variety of reasons. First, property owners are not likely to reduce asking prices in a time when there are not a lot of prospective tenants in the market. Second, higher quality spaces (i.e., the previously mentioned Gateway and WestPark spaces) are coming to market. Third, the cost of tenant buildouts has grown significantly, making it harder to make the numbers work.
In addition, rent numbers are important to property owners, as they are required to attain certain income goals by their lenders, in order to be in compliance with their mortgages.
Privately held building owners seem more interested in making long-term deals today, while some institutionally or publicly held owners prefer to leave spaces vacant until they can lock in higher rents.
I have been in the real estate business in Westchester for over 35 years, and we have not seen any rent growth in Westchester during that entire period. In fact, adjusted for inflation, there has been negative rent growth, even as operating costs, real estate taxes and the cost of tenant buildouts have increased significantly.
There have been some tenants who have “right sized” or reconfigured their offices to be more efficient as they have renewed their leases. There have been others who have expanded, as their businesses benefited during the pandemic. As I look at the tenants I have represented during the pandemic, there have been none who have closed their offices and gone totally remote. Most of my clients have renewed their leases at the same size or have grown.
One of my largest transactions was a law firm that renewed and expanded its lease to over 44,000 square feet two years before its expiration. My client knew it wanted to stay in place and we initiated the negotiation very early in order to achieve the best terms and conditions in a market where there was very little leasing velocity.
The result was a win-win transaction for the tenant and the building owner. I was able to negotiate significant benefits for the tenant that we would not have been able to achieve in a more robust market. The building owner gained a long-term lease extension and expansion with a longtime creditworthy tenant. It was able to avoid the risk of the tenant leaving the building, and the downtime and significant costs to acquire a new tenant.
Another client of mine doubled its space during the pandemic. It is a manufacturer of high-tech machinery that assesses the integrity of packaging for Big Food and Big Pharma companies. Needless to say, its business was considered essential, and it thrived during the pandemic as consumers were genuinely concerned about the safety of food and medicine.
I have heard of some other tenants who have closed offices or shrunk their space significantly (or plan to) as a result of fewer people being in the office and the future of remote/hybrid working. Each business and business owner is different, and there are still no consistent patterns in the market. However, every tenant today is much more conscious of its occupancy costs than they were pre-pandemic, as they survey their primarily vacant offices.
The most notable closure I am aware of was a large health care company that closed its 50,000 square foot headquarters in Tarrytown and went 100% remote. With an unknown number of office tenants doing short-term renewals, there may be more shrinkages and office closings coming up.
Hospitality-related businesses have been big losers in the pandemic. At least three hotels in Westchester have closed permanently: The Rye Town Hilton (which was Westchester’s largest hotel, with 445 rooms and a ballroom that accommodated six hundred people on a 35-acre site), the Renaissance Hotel (347 rooms) and the La Quinta Inn in Armonk. No one seems to know when business travel and large in-person events will resume with any kind of regularity, so the future of the hotel industry is as yet unknown.
The former La Quinta building is in the process of being demolished and a 71,000-square-foot modern warehouse building is being constructed on that site. This is a perfect example of repurposing a site to what is now a higher and better use. The Rye Town Hilton site will take many years to plan, obtain municipal approvals and redevelop.
Some restaurants have shut down permanently, but others are doing excellent business now and have significantly increased their capacity and revenue with newly permitted outdoor seating.
Many people are now willing to eat indoors, so the outdoor seating represents bonus capacity and revenue for these establishments. Throughout the pandemic, savvy local restaurant operators have been searching for space and transacting leases at reduced rental rates (often for fully built-out restaurant spaces), which is a key to profitability in this business.
Vacancies in strip shopping centers in Westchester are being refilled rather well. New tenants are personal training fitness centers, urgent care centers, delis, hair salons and similar service establishments.
Malls are looking for more experiential tenants, such as the golf simulator facility that serves beer, wine and food and that opened in The Westchester, to help fill space and draw traffic.
Early in the pandemic national mall owner Simon Properties teamed up with a clothing retail specialist and bought substantial stakes in financially weak tenants that occupied multiple locations in their malls and were on the verge of bankruptcy. The mall owners were very concerned at the probability of losing literally hundreds of their tenants to bankruptcy and used this to prop them up financially. The new investment has helped to increase business in these stores as they now have capital with which to operate, and it prevented an even larger flood of mall vacancies.
The Galleria in downtown White Plains has lost Sears and Macy’s, its two anchor stores. There are now preliminary proposals to build multifamily residential on both ends of the mall.
Department stores have fallen out of favor, including Lord & Taylor, which closed all of its stores permanently. Some of the space in their shuttered stores is being redeveloped by the owner of the real estate as SaksWorks, a co-working facility. These will be managed by WeWork, which has gone through its own tumultuous journey. The intent is to reinvent the former retail space for remote workers who want a place other than their dining room table to go to, and provide a full set of amenities, which include the surrounding retail, restaurant, bar, and service establishments.
Many large stores, including Target, Bed Bath & Beyond and others are expanding with smaller format stores of 20-30,000 square feet, which they have found are more profitable than their large stores. As strong stores such as Target shrink their format, it makes the large, empty former department store spaces even more difficult to rent.
Online retailers, including Amazon, Warby Parker and others are opening brick and mortar stores, which they find increases their overall profitability. Retail is now omni-channel, which gets the brick-and-mortar stores involved in many ways, as showrooms, fulfillment centers and places to return or exchange merchandise purchased online.
The small industrial/warehouse market in Westchester is robust. We have extremely limited inventory and extremely high demand. Rental rates are increasing significantly and are approaching or into the low $20’s range. Our stock in this product type is generally less than optimal for today’s users, as they are old buildings with low ceiling heights, limited loading docks and limited parking space for trucks and cars.
A new warehouse being developed on the former site of the La Quinta Inn in Armonk will feature the highest ceilings in the market at 32 feet, as well as a large number of loading docks, ample car and truck parking and direct access to Route 684, which accesses major highways in the Northeast. This building will be very expensive to build and will command an extremely high rent.
Amazon signed on as a full building tenant for a build-to-suit 150,0000-square-foot warehouse being developed in Hawthorne. That is much smaller than its typical 1 million-square-foot plus distribution center but is a decent size for last-mile deliveries so close to New York City and a blockbuster size for Westchester.
The owner the former Elmsford Distribution Center is strategizing to consolidate as many small to mid-size contiguous spaces as possible to make room for large e-commerce tenants. This will force smaller tenants out of the market and the larger spaces that are created will be occupied by better credit public companies. It is a great strategy for the owner, but only shrinks the market further for smaller, privately held tenants.
Multifamily rental apartments are the primary product type being developed in Westchester. Every high-rise building being constructed in the county is a multifamily rental building. Mount Vernon, New Rochelle, White Plains and Yonkers have approved multiple thousands of apartments, many of which have been completed or are currently under construction, and there are many more projects in the approval pipeline of each of those cities. Leasing for the buildings that have been completed has been robust.
Many of these buildings feature magnificent views (of the Long Island Sound and/or Manhattan in New Rochelle, and the Hudson River and Manhattan in Yonkers, for example) and full amenity packages, including roof decks, pools, barbeque areas, business centers, lounges and more. These are an important economic engine to the county, and will result in additional new retail, restaurants, and entertainment tenants in and around them.
In the last couple of years developers have also begun to build apartments in former office parks, to offer a suburban alternative for renters.
New rental apartments attract young people to the county and provide new housing opportunities for corporate transferees, empty nesters, and retirees. Westchester’s enviable demographics have attracted large national developers, including Toll Brothers, Hines, and Rose Associates.
In Downtown White Plains, a proposed new apartment project will replace a row of stores that have been vacant for decades. Across the street, an 800-unit apartment project will be built. The former YMCA building is being demolished for another multifamily building. These will bring new residents and pedestrian traffic for the retail and restaurant tenants on Post Road and on Mamaroneck Avenue.
There are no consistent patterns at the moment for parts of the Westchester County real estate market.
The office, retail and hospitality sectors will continue to be challenged as the pandemic continues. Most businesses will struggle with how they will function in this new world and what amount of space they will need. The year-end 2021 leasing statistics may shed some more light on how the office sector is doing, as will the progression of the omicron variant.
The first half of 2022 will be a bellwether for the office market throughout the United States and will be closely watched to see how the pandemic will affect how our large and small businesses operate for the foreseeable future.
Due primarily to the increase of e-commerce, our warehouse market will thrive with ever-increasing demand for an exceedingly small supply of building product. The multifamily sector will also continue to boom as it provides new housing that is much needed in the county.
Repurposing of obsolete buildings and sites to new uses is healthy for our market. It will and should continue, to replace outdated product with new buildings that are in demand today.
Howard E. Greenberg is President of Howard Properties, Ltd. In Valhalla, New York. He has more than 35 years of experience as a commercial real estate broker and tenant representative in the Westchester County market. He has also represented tenants throughout the U.S. and in Europe. He can be reached at 914-997-0300 or at email@example.com.