By: Howard E. Greenberg, SIOR
President, Howard Properties, Ltd.
This year has been in many ways a continuation of past trends in the Westchester office market, but some encouraging new trends are beginning to emerge.
As usual, small (under 10,000 SF) lease transactions have dominated the market, and the average lease size is less than 5,000 SF. This has been the case for many years. Deal velocity continues to be very low. Most leases are intra-county relocations, or what I call “rearranging the deck chairs” with little or no net absorption of space. Many transactions have been renewals, including 8 of the 10 largest leases in the 3rd quarter, according to market reports by CB Richard Ellis. New tenants from out of the area coming into the Westchester market are few and far between.
IBM, which has been returning leased space to the market since the mid-80’s, continues to do so. It will vacate the entire 248,000 SF 19 Skyline Drive in Hawthorne at the end of this year, as well as 43,805 SF at 3 Skyline Drive in Hawthorne. It has also put 200,000 SF of space on the market at its headquarters in Somers. To put this in perspective, IBM’s shrinkage this year alone is adding almost a half-million square feet to a market with a bit over 5 million SF available for lease.
On the plus side, medical uses have soared. Montefiore Medical Center has become a voracious acquirer of space. The hospital, which has been continually expanding its back-office space in Yonkers, purchased the 300,000 SF former Kraft Foods Research and Development Center in Tarrytown, and will phase into occupancy over a period of years as Kraft phases out. This certainly represents a good repurposing of what would have been a very difficult property to re-lease. And the hospital is aggressively looking for hundreds of thousands of additional square feet of administrative office space in Westchester. WestMed has recently expanded to about 110,000 SF at Ridge Hill in Yonkers, and occupies a total of over 400,000 SF in the county. And Memorial Sloan-Kettering is refitting an old 120,000 SF office building at 500 Westchester Ave. as a cancer treatment center.
The biotech firm Histogenetics has purchased two buildings on Corporate Park Drive, the first-generation suburban office Park developed in the early 1970’s. One was bought from is lender, who had taken the empty building back when the owner could no longer pay the mortgage. The other was a very expensive ground-up rebuild by Nokia, which left the market in a corporate contraction. This takes more than 200,000 SF of vacant space off the market. With the site of one former office building on Corporate Park Drive already redeveloped as a hotel, and the site of two more rumored to be under negotiation to be redeveloped as multifamily residential, this entire former office park could have a new life that will extend well beyond normal business hours.
The Journal News downsized to from 200,000 SF to 30,000 SF and relocated to 1133 Westchester Ave. Its former HQ was demolished to make way for a new 200,000 SF LifeTime Fitness facility. This is another example of an outdated building making way for a new use, with a cooperative rezoning and quick approval by the Town of Harrison. White Plains has now gotten on the bandwagon and re-zoned the south side of Route 287 to allow additional uses in those office parks, including retail and multi-family.
All of the above are good examples of what the County Association’s BluePrint for Westchester is calling for as a way to reduce the amount of outdated office space for lease, in order to make our commercial real estate market healthier.
While leasing velocity has been in line with recession-era norms so far this year, the fourth quarter is busy with mid to large size deals that will greatly help the 2012 market statistics. PepsiCo, which has just recommitted to Westchester County with plans for a $243 million renovation and expansion of its headquarters, has just leased approximately 240,000 SF at 1111 Westchester Ave, which was vacated by Starwood at the beginning of 2012. This new space will serve as swing space during the multi-year HQ renovation, and could also serve as long-term additional space. As of this writing, there are a number of 15-70,000 SF leases poised to be signed by year end. These will make the fourth quarter a very strong one, and could give Westchester a break-even or possibly a slightly positive year for net space absorption for the first time in 9 years.
In real estate, rent is a function of the market. Anything that helps to rebalance the supply/demand equation will encourage owners to invest in improvements to their properties. We are renting space today for fewer dollars per square foot (in real dollars, not adjusted for inflation) than we were 25 years ago, even though operating costs and property taxes are significantly higher than they were a quarter century ago. A healthy market is one that is in equilibrium (where supply and demand are approximately equal). It will take time to get there, but the Westchester office market is finally taking some real steps in the right direction.