Is there a light at the end of the tunnel, or is it an oncoming train?
The pandemic had varying effects on office tenants and office building owners, and there are still many more questions than answers about the future of work in the office setting. With the onset of the delta and omicron variants, companies have continued to delay office openings.
In speaking to many clients and other executives, I have learned that they have had few issues with remote working. The technology is here to support it, and the general attitude is “it is what it is.” Management and employees have risen to the occasion and produced the work they need to produce to keep businesses moving, and (in many cases) growing. It is not perfect, but it is functioning. Some significant form of remote working will be here for the long term.
As of this writing, offices in Westchester still have very limited physical occupancy, which seems to be about 15%. Many office building amenities where people would gather (i.e., cafeterias and fitness centers) have been shut down.
Employees have adapted to remote working very readily. They like the flexibility and not having to spend time commuting, especially on public transportation. For those with young children it has reduced the cost of childcare. Expenses for train tickets, gasoline, business attire, dry cleaning and lunches are down, putting more disposable income in their pockets.
Executives and (especially younger) employees agree that they are missing valuable training, mentoring and collaboration due to remote working. The heads of large corporations are concerned that those at the beginning of their careers will not learn the “soft skills” that they need to succeed, and that an entire generation of employees that should be moving up in the executive ranks will not be qualified to do so. These people are not meeting their colleagues, team members, customers or clients face to face, which is a substantial change in the way business is conducted.
When people finally do come back to the office, the concept of hybrid work looks like the wave of the future. This format brings some employees into the office for two or three days per week and the rest for the other days. When they are not in the office they work remotely.
Remote work is also becoming an employee retention and recruitment issue. Increasingly scarce and valuable employees have let it be known that they would move to other jobs if they were required to be in the office for even a few days per week.
Companies are concerned that their competitors who allow 100% remote working will attract their employees and/or prospective hires from those employers who insist on time to be spent in the office. It seems as if every company and professional firm is struggling to find employees at all levels, to the point of paying signing bonuses and actively soliciting new hires from competitors. There are simply not enough people to get the work done and no one seems to know where they have gone.
At the beginning of the pandemic, there was a huge spike in office space put on the market for sublease throughout the country. In retrospect, it seems this was a knee-jerk reaction in response to the prospect of tenants being obligated to pay rent on empty office space.
Some of this space has been taken off the market, as companies have determined they would re-occupy it. Other blocks have been subleased by companies attracted by the bargain rents and short lease terms.
Government PPP money was a boon to many commercial tenants and commercial property owners, as it had to be directed to payroll or rent, and these loans (some of which were in the millions of dollars) were ultimately forgiven without tax consequences.
Ironically, the largest leases around during the pandemic are being signed by tech companies, many of which have announced that their employees can either work wherever they like or work 100% remote for the future. Remote working is most possible in the tech industry, and the young cohort of employees seems to like it. It is not clear why this industry is loading up on office space, which is often the most expensive space in whatever market in which they are leasing.
Also, there has been extraordinarily little news about the issues of office building owners who have not received rents, either from tenants whose businesses were negatively affected by the pandemic, or those who were gaming the system to avoid paying rent on empty space. If not for the PPP program, there could have been a substantial number of defaults on office building mortgages during the pandemic.
These owners still had their mortgages and real estate taxes to pay, and the cost of operating an empty building (which had to be insured, staffed, cleaned, sanitized, heated and cooled) is not significantly less than operating a full one.
The Westchester office market has had a difficult couple of years. In pre-pandemic 2019, Westchester leased 1.73 million square feet of office space. The availability rate (all vacant space, including that being offered for sublease) was 20.1%.
In our 27 million-square-foot multi-tenant office market, about 5.5 million square feet of space was available for lease or sublease. This has been a fairly stable number for many years. Westchester had a positive net absorption of 274,000 square feet at the end of 2019, so we leased a bit more space than was vacated.
What a difference a year made. At the end of 2020, we had leased only 1.15 million square feet of space (down about 35%), while the U.S. generally suffered a leasing decline of about 40%. Westchester’s office availability rate increased to 24.9% (up 24% from 2019). The county had a huge negative net absorption of 1.3 million square feet, so an additional 4.8% of our office space became vacant.
Through the first three quarters of 2021, leasing has been about 1.45 million square feet, or about 300,000 square feet more than in all of 2020. The year-end numbers are not yet in, but we will likely lease less space than we did in 2019. The availability rate at the end of the third quarter is up to 25.7% and year-to-date net absorption is negative 200,000 square feet.
Karolina Alexandre, research manager for commercial brokerage firm Newmark, said the following about our current market: “The pandemic brought challenges to the Westchester County office market, but also positive changes, notably the opportunity for executives to reimagine the workplace and adapt to a new wave of employees working on a hybrid schedule both remotely and in-office. The economy and property markets have proven their resilience, though there are obstacles to navigate with a necessity to continue to repurpose obsolete assets.
“However,” she continued, “the opportunity for owners to market their buildings to a different cohort of clients is an exciting one. Specifically, the buildings that feature flexible floor plans and more complete amenity packages are at an advantage. They are able to accommodate a wider variety of tenants, who are continuing to leverage current market conditions to trade up to higher quality spaces with state-of-the-art amenities. Companies that adapt to the new world of hybrid work will be successful in attracting talented employees and keeping them working in the office.”
Part of this big negative net absorption was three large blocks of space that came available that had nothing at all to do with the pandemic.
PepsiCo vacated 376,000 square feet (the entire office park) at WestPark, located at 1111-1129 Westchester Ave. in suburban White Plains. This was expected, as PepsiCo had taken a short-term lease to serve as temporary space while its nearby headquarters was undergoing a major renovation.
At the Gateway Building in downtown White Plains, 250,000 square feet at this 530,000-square-foot building came back on the market that had been occupied by financial firm Alliance Bernstein. About three years ago, the company announced that it was relocating this administrative unit to Nashville to reduce costs.
And a 100,000-square-foot building on Corporate Park Drive came to market because the company that had purchased it for its own use had never occupied it and has opted to lease it. These three spaces represent 726,000 square feet (2.7% of the entire market) that became vacant and available in 2020.
As the typical lease transaction in Westchester is still about 5,000 square feet, and there have been very few new leases over 25,000 square feet recently, it will take a number of years to absorb this amount of space.
Large blocks of available space are also opportunities for major companies to relocate to Westchester. But real estate professionals do not believe that we will see relocations from New York City. The age and quality of our office inventory — our latest speculative office building was completed in the mid-1980s — is often a major negative factor to those companies who consider relocating to Westchester from New York City and other major markets.
And the amount of space available in Manhattan is at record highs, even as leasing starts to accelerate again. The most popular buildings in Manhattan now are the newest and most expensive, with rents up to $200 per square foot. The older buildings that are losing tenants to these trophy buildings are being aggressive in their economic packages to lure new tenants to fill their vacant space.
The repurposing of Westchester’s office inventory continues, as it has for the past 10 to 15 years. Our multitenant office space market used to be measured at 33 million square feet. Due to demolitions of functionally obsolete buildings and repurposings of other buildings and sites to different uses, our present total market is 27 million square feet, or about 18% smaller.
The term repurposing applies to office buildings that have been adapted to different uses, or that have been demolished for a different type of building to be built on the same site. Sloan-Kettering Cancer Center now occupies 400 Westchester Ave., which was an office building formerly occupied by Verizon. The 200,000-square-foot LifeTime Fitness on Westchester Park Drive replaced the former offices and printing facility for hard-copy Gannett newspapers.
On Corporate Park Drive, five office buildings totaling 420,000 square feet that were developed in the 1970’s were demolished to make way for the 125,000-square-foot Wegman’s supermarket. Next to the Wegman’s site, a vacant office building was converted to a pediatric medicine building for Montefiore Medical Center, including the construction of a linear accelerator for cancer treatments.
The demolished buildings were functionally obsolete and would have required significant capital improvements to make them rentable. The empty buildings provided little in the way of tax revenue to the town of Harrison. The new medical, fitness and retail facilities will contribute significantly to the sales and real estate taxes that the municipality will now collect.
Harrison was very much ahead of the curve years ago, when it drafted a new Master Plan that allowed non-office uses in the original office parks of the Platinum Mile. This model has been used in other parts of the country in new developments very successfully, but this was the first time that multiple uses in the same park were accepted by a Westchester municipality.
In downtown White Plains, the former AT&T Building at 440 Hamilton Ave. is now undergoing a complete transformation. This 336,000-square-foot former office building is being turned into a 13-story multifamily residential building, and an additional seven-story building will be built on the site, as well as an outdoor pool and fitness facilities. Another example of reducing our office inventory by repurposing a functionally obsolete building to residential use.
In addition, medical users — which used to be frowned upon as office tenants due to heavy parking requirements and a negative image of patients mixing with office workers — have become large occupiers of office space. Sloan-Kettering, WestMed, Scarsdale Medical Group and Hospital for Special Surgery are examples of such users.
Just recently, a 160,000-square-foot office building on Westchester Park Drive was demolished. This building had become vacant in 2012 when the anchor tenant moved out and was surrendered to its lender. A major residential developer is in the process of building two apartment buildings on the site.
It is very possible that there will be no new speculative office space built in Westchester in the foreseeable future. Any new building, built to today’s aesthetic, health, and sustainability standards and with today’s construction costs, would have to achieve rents almost twice as high as our existing buildings to be financially viable.
(Next week, this article will continue with a consideration of the current states of the office, hotel, retail, warehouse and multifamily sectors within Westchester’s commercial real estate industry.)
Howard E. Greenberg is president of Howard Properties Ltd. In Valhalla. 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.