Column: Westchester’s 2016 office market

By Howard Greenberg

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The real estate news for the first half of 2016 is generally good. As has been the case for a few years now, multifamily residential is the hot product, but office activity has been solid and medical and medical-related uses are surging again after a brief quiet period.

“Though the final numbers are not yet in, the second quarter of the year seems to be continuing the positive trend seen in Q1,” says Karolina Pardo-Alexandre, research manager for Newmark Grubb Knight Frank. “There are a couple of major leases that are close to signing or are selecting their short lists. When and if one or both of these are finalized, it is anticipated that there will be a significant improvement in the Central Business District velocity and vacancy statistics. But the market is really a ‘tale of two counties’ with the large overhang of former corporate headquarters space in the Northern submarket dragging down the overall occupancy numbers.  We are also seeing a resurgence in leasing activity for medical and for entities providing services related to the medical community. Overall, the market is healthy, repurposing of existing buildings continues to reduce available inventory, and average deal sizes continue to grow.”

 MULTIFAMILY MANIA CONTINUES

Multifamily continues to be the superstar product in development. LCOR has begun construction of 500 units near the White Plains Metro-North station. The 707-unit project by Lennar (consisting of two 24-story towers) that will replace the Westchester Pavilion on South Broadway is fully approved and this obsolete former shopping center has been fully vacated. There is no official start date to my knowledge, but the demolition of the former Westchester Pavilion and the subsequent construction will have a big impact on the South Broadway/East Post Road corridor. Hopefully it will also spur redevelopment of the vacant, dilapidated retail corner opposite this new development and decrease the very high retail vacancy rate on East Post Road.

The nearby Esplanade, a former senior residence, has received approvals to be converted to market-rate apartments — an interesting repurposing of a very old building.

The Residences at Corporate Park Drive has received a key approval from Harrison for 421 market-rate apartments on the site of two 1970s-vintage office buildings. And SunCal and Diversified Investors have broken ground on Edge-on-Hudson, a mixed-use development including 1,177 residential units on the site of the former General Motors plant in Sleepy Hollow. Avalon Bay has applied to Yonkers for approval of 609 units on the Hudson River. The target markets for all of these units are projected to be a combination of millennials and empty nesters.

In addition, S.L. Green has closed on the sale of a land site at Reckson Executive Park on King Street in Rye Brook. This site, formerly approved for about 350,000 square feet of office space, will now be developed as single-family, market-rate cluster housing. Along with the Residences at Corporate Park Drive, this will be the second residential development in Westchester in a corporate park setting. These will definitely be higher and better uses for this land, which would never again see office development.

And SUNY Purchase is moving forward with a plan to add 385 units of housing for people 62 and older on 40 acres of its campus. This will include multiple formats, including apartments, single-family duplex and triplex homes, and beds for assisted living and memory care. Apparently, this has been a trend around the country, as the number of people over 65 continue to increase each year, and many of them are auditing college courses to stimulate their minds and involve themselves in the arts. Purchase College President Thomas Schwarz noted that “interacting with seniors who have firsthand experience in epoch-making events such as the civil rights movement or the Vietnam War would give students a better understanding of modern history.” So it is not just about housing. It is about creating an intergenerational community.

Given the bifurcated target markets (empty nesters and millennials) for the thousands of units of multifamily housing approved and under construction, it looks like there will be a lot of intergenerational communication in the future!

Obviously, there is a big repurposing component in multifamily as well as in office. An obsolete shopping mall, a former automobile factory and two office building sites are morphing to residential uses.

OFFICE IS IMPROVING

Leasing activity in Q1 outpaced Q1 of 2015 by 36.7 percent. Deals of more than 10,000 square feet accounted for 72 percent of the leasing total. Smaller deals accounted for only 28 percent. Not that many years ago, some 85 percent of all lease transactions were for spaces of under 5,000 square feet. Increasing deal size is a good sign for the county, as it shows not only are existing tenants are growing but we are attracting more businesses that have attained a reasonable size. A 10,000-square-foot office tenant in today’s densely packed world employs 50 or more people. We are moving in the right direction.

However, construction costs for office interiors are increasing, in part because general contractors and subcontractors are seeing a good flow of work. And tenants today want more expensive installations, with glass office walls and upgraded open kitchens.

My expression for quite a while has been “seven is the new five,” meaning that the new standard lease term is lengthening to seven years rather than the old standard of five years. This helps building owners have enough time to amortize their construction costs and free rent and still make a profit.

Renewals continue to dominate, with a significant number of them being renewal-expansions, including Nomura Holdings at Reckson Executive Park for 51,032 square feet and Merrill Lynch at 360 Hamilton Ave. — also a Reckson building — for 46,122 square feet.

There is not a lot to report on the eastern or western submarkets as of this writing. Things are fairly quiet on the west side, but the law firm of Traub Lieberman Straus & Shrewsberry renewed its lease for 28,000 square feet at Mack-Cali’s 7 Skyline Drive in Hawthorne in Q1. There are reportedly a number of 20,000- to 30,000-square-foot deals in proposal stages on the eastern side of the county, including at least one lease that will be new to Westchester.

Also in the eastern submarket, substantially all of the 230,000 square feet of space is available or coming available during the next year at 900 King St., which is reportedly now controlled by its lender. This certainly fits the definition of “big block” space at more than 100,000 square feet per floor. But it really needs deals of at least 30,000 square feet to divide these super large floors, which narrows the pool of prospective tenants substantially.

IT’S COLD UP NORTH

The northern submarket is awash in vacant former headquarters space. The 550,000-square-foot One Pepsi Way has been fully vacated and is being marketed to prospective tenants. IBM has announced that it will vacate its entire Somers campus — 1.2 million square feet — and shift its workers remaining there to its Armonk campus.

Short of some massive economic incentives that would entice major companies to relocate to these buildings from outside the Hudson Valley, they will likely remain vacant in perpetuity unless some very creative alternative use is found for them or the land is sold to be redeveloped with different product types. It is not yet clear when the IBM vacancy will hit the statistics, but the Somers closure is a continuation of an ongoing corporate downsizing that has affected Westchester since it began almost 30 years ago. When and if this corporate campus is added to the Northern submarket vacancy statistics, it will heavily skew the entire county’s vacancy rate in a negative direction.

This being said, GHP Realty is having success with its Strang Boulevard buildings in Yorktown Heights. Most recently they leased 15,660 square feet to New York Presbyterian/Hudson Valley Hospital for administrative offices. Digitech Computer services also relocated within the northern submarket, from Briarcliff Manor to 15,000 square feet at Chappaqua Crossing, the former Reader’s Digest headquarters.

WHILE THE CBD IS HEATING UP

The White Plains Central Business District has been quiet for a number of quarters, but it looks to be surging back in the first half of this year. There has been significant activity at 44 S. Broadway, which has secured the NY State Insurance Fund (34,000 square feet). This tenant is relocating from 105 Corporate Park Drive, which will be demolished to make way for the Residences at Corporate Park Drive.

Vital Decisions, headquartered in Edison, N.J., is establishing a 20,000-square-foot location at this 850,000-square-foot CBD building. The company “assists patients and their families to live well by identifying and incorporating their personal goals into their health care decisions,” according to the company’s website. A company from out of the area that opens up an office this size in Westchester is a news event.

In addition, New York Life is reportedly eyeing a 176,000-square-foot space on the top four floors of 44 S. Broadway, which will reportedly incorporate back office and disaster recovery functions. This would not only re-lease the top two floors of the building, which were vacated by the bankrupt former Reader’s Digest, but will also incorporate two floors currently occupied by Arcadis, which has been offering them for sublease for some time.

It is also — almost — a new day at Mack-Cali. It is no secret that the Westchester Financial Center at 50 Main St. and 11 Martine Ave. has had limited leasing activity in recent years. Under the REIT’s new executive leadership, Mack-Cali is on the road to making significant changes in this key CBD development. The location is ideal — just across the street from the Metro-North station — but the buildings have not seen any capital investment since they were built more than 30 years ago. Now they are planning major improvements, which may include a conference center, fitness center, new food service, and new lobbies. They have also quietly bought the former Pace University condominium,which occupies the lower portion of 11 Martine Ave., and will incorporate that into the redevelopment, adding 82,000 square feet of office space to their inventory. These buildings can and should be strong competitors in the train station portion of the CBD, pending completion of the capital improvements.

Dannon, whose lease expires in 2017, is also reportedly still in the market for up to 150,000 square feet to relocate from its present space on Hillside Avenue in Greenburgh. This, too, may turn out to be a CBD transaction.

The study on the White Plains Metro-North station continues. It seems like there are a lot of opinions by citizens about pedestrian, bicycle and vehicular access and parking. However, I am not reading much about any significant dining or retail being included. Given the large amount of office space in this area, as well as more than 1,000 residential units nearby that are in place or under development, I think these amenities and services are desperately needed in this section of the CBD.

Since Ivy Properties took over White Plains Plaza at 1 N. Broadway and 445 Hamilton Ave. last year, they have been busy working on major overhauls to everything from lobbies to the parking structure. This will make these buildings much more formidable competitors in the part of the downtown with the most services and amenities.

SALES ARE TAKING PLACE

S.L. Green Realty Corp. and Renaissance Office Partners sold the 71,000-square-foot office segment of the Ritz-Carlton, Westchester for $20.7 million, or about $290 per square foot, an excellent price in our market. As soon as Reckson became a partner in this project, they spearheaded a successful leaseup of a building that had not seen much activity for quite a while.

For comparison, two other sales in Westchester were the former Webb School, now an office building, in Hartsdale at $128 per square foot and 140 Huguenot St. in New Rochelle at $100 per square foot.

In Armonk, 100 Business Park Drive has been sold for $9 million, or $150 per square foot. This 60,000-square-foot flex building on 11.3 acres has been on the market for a significant amount of time. It is not known whether the buyer is an owner-user or an investor, and there is potential for additional development on this site.

MEDICAL SURGES AGAIN AFTER A PAUSE

After taking a brief hiatus, the pace of medical deals has increased again. Hospital for Special Surgery’s 50,000-square-foot lease at RPW’s 1133 Westchester Ave. was the largest deal of the first quarter. This will be the biggest outpatient center in its system. With this addition, the 85,000-square-foot WestMed building at 3030 Westchester Ave, the WestMed building at 210 Westchester Ave., Memorial Sloan Kettering’s new facility at 500 Westchester Ave. and Healthcare Trust of America’s medical office park, the Platinum Mile is really looking like the Medical Mile.

Montefiore Medical Center’s 28,430-square-foot renewal at Mack-Cali’s 4 Executive Boulevard in Yonkers this year is more significant than it would seem. The hospital system purchased the 300,000-square-foot former Kraft research facility in Tarrytown a couple of years ago. It was occupying about half of it while Kraft remained in place in the other half. Then Kraft asked for, and received, an early exit. So in total, Montefiore is occupying well more than 328,000 square feet for administrative and IT space alone in the county, not counting any medical facilities outside its hospital campuses.

Visiting Nurse Association of Hudson Valley also renewed its lease at 540 White Plains Road in Tarrytown, while new leases by Merritt Healthcare for 15,660 square feet at GHP’s 2651 Strang Blvd. in Yorktown Heights and DaVita Healthcare’s new lease for 8,353 square feet at Simone’s Purchase Professional Park rounded out the significant amount of medical activity in the first half of this year.

White Plains Hospital quietly leased an entire 50,000-square-foot building on Post Road in White Plains last year to relocate administrative operations off its campus. The new Vital Decisions deal mentioned above is a service related to medical. Reportedly Burke Rehabilitation is also in the market for about 20,000 square feet.

HARRISON AT THE FOREFRONT OF NECESSARY CHANGE

Harrison has been a leader in approving well-thought-out repurposing of obsolete buildings. The portion of the Platinum Mile in that town contained some of the oldest office buildings in Westchester. LifeTime Fitness, the Residences at Corporate Park Drive, Memorial Sloan Kettering and Fordham University are just some of the examples of how the town has helped revitalize this key section of the Interstate 287 corridor.

The White Plains side of the Platinum Mile has slightly newer office product with higher occupancy rates. Normandy Real Estate Partners, which owns seven buildings on the White Plains side of the highway as well as all of Corporate Park Drive on the Harrison side, has done a significant amount of leasing in the last few years as they market the White Plains portion of their portfolio while quietly emptying the older buildings on the Harrison side, possibly to prepare for a new round of repurposing.

COUNTY ASSOCIATION ON THE CUTTING EDGE

The Westchester County Association is working hard to bring Westchester into the future. It recently held a smart-growth meeting, which included participants from business, academia, not- for-profit organizations, land use professionals, developers and others. The purpose was to brainstorm answers to the pressing questions on how the market can adapt to the way business is done today. Breakout groups included those on infrastructure, mobility, planning and financing for smart growth, housing for the workforce and millennials and branding and marketing of Westchester.

A couple of months ago, the WCA also held a seminar featuring the mayor of Chattanooga, Tenn., the most internet-connected city in the country, a developer of co-working space from Raleigh, N.C., an education advocate from Austin, Texas, and the former commissioner of economic development for New York City during the Bloomberg administration. This was an all-star panel with great ideas that are working in other cities. There are a lot of smart people at the Westchester County Association table, and I look forward to good ideas coming out of these meetings to move Westchester forward.

EMPIRE STATE REALTY TRUST DOING SOME THINGS DIFFERENT

I always call out examples of good marketing where I find them, and I have found them at 10 Bank St. and 500 Mamaroneck Ave. Owner Empire State Realty Trust is doing the usual capital improvements, including new and expanded fitness centers and cafeteria and lobby renovations. But they are also taking a long-term approach and marketing space that is not yet in their inventory.

Some blocks of 20,000 to 42,000 square feet space in their Westchester buildings have been on the market for years as short-term subleases. Instead of watching these “get stale,” the building ownership has taken it upon itself — with the permission of the tenants, of course — to demolish these empty spaces and present them as clean, open, well-lit “white boxes.” Now prospective tenants can see them as “clean slates” and envision them as the starting point for new, modern installations.

The spaces look more attractive and have already attracted interest from new prospective tenants. Being marketed by the owner, this also avoids the complicated, multi-stage process of a tenant having to make a sublease deal with the existing tenant, then negotiating with the owner to extend it, etc. The owner is being proactive. And whether a deal happens or not, the existing tenants are still paying the rent. If a new tenant is attracted, it will lease the space for many more years than are left on the existing term. ESRT is investing money and effort now that will pay off in the future. And the tenants who have just a few short years on their leases will benefit as well.

Empire State Realty Trust has also been at the forefront of taking a page out of New York City’s book by pre-building empty spaces. As tenants vacate, the owner demolishes the old installation and puts in a new one. Some have open ceilings, all have full glass fronts in the offices and conference rooms, and feature open kitchens with granite countertops and interesting carpet tiles. They all have a great “wow factor” with sunny open views throughout the spaces. ESRT has already had success in leasing some units and has expanded some tenants from smaller pre-builts to larger ones.

The concept is that when the next tenant vacates, new paint and carpet will once again make these spaces new and attractive. It takes a capital investment but shortens the leasing cycle, and is really “heads up” marketing.

FLEX IS FLEXING ITS MUSCLES

Mack-Cali has long had the flex or office/warehouse market corned in Westchester. Its predecessor company originated the product and populated the Route 9A corridor with it in Elmsford and Hawthorne and created the South Westchester Executive Park in Yonkers.

They are taking it to the next level now by building a new high-end warehouse building on the site of a demolished office building. It will have a 24-foot clearance, with 10 percent office space , and they are asking a big rent number. But my prediction is it will be rented before it is fully built. It will be the first new spec flex product built in more than 25 years.

Mack-Cali is also looking strategically at options when spaces become vacant. This includes combining spaces and/or reconfiguring them to create the most valuable units possible — that is, by improving loading areas where possible. They are also demolishing old installations and showing clean shells — a much better marketing method than under their previous leadership.

GHP Realty just bought 375 Executive Blvd in Elmsford. It was formerly the records storage building for Westchester County. There is about 61,000 square feet of its 81,500 square feet available for lease.

PROGRESS IS SLOW ON THE NORTH 60

John Fareri is proposing a major development on a site primarily owned by Westchester County in Mount Pleasant. It would include biotech labs, medical, office and other uses. The county legislature has to approve the land lease, and Fareri has been frustrated with the pace of its review. In my opinion, this is an important development for the west side of the county. It is particularly important in that we desperately need new laboratory space, as our current inventory is fully occupied. If we want to encourage this industry, we must provide new capacity. Assuming the land lease is approved, it will take years to get approvals from Mount Pleasant and additional years to build out the proposed 1.2 million square feet. We will lose momentum in the biotech industry versus existing competing buildings in Rockland County and New Jersey.

FINAL WORDS

In summary, leasing velocity in the office market is looking pretty good. Deal size is growing, and renewing tenants are often growing. I think most of the downsizing by the big corporations is past us. We are seeing some companies actually move into Westchester, which is great for the market. Medical deals are accelerating again after a pause last year, and office buildings and office building sites are being repurposed for higher and better uses.

I will be very interested to watch residential leasing activity as the thousands of new multifamily units in the pipeline come to market over the next few years. I am sure the developers have done their analyses of demand in our market, but I see three things that need to happen. Empty nesters need to sell their homes and decide the rental apartment lifestyle is for them. Millennials have to move to or remain in Westchester in big numbers, and we need to have a strong employment base to attract employees to the county.

All of these will be good for Westchester, and I think they will all be needed in order to fill these new buildings. And if they do, will older apartment buildings undergo Repurposing 2.0?

Howard E. Greenberg is president of Howard Properties Ltd. In White Plains, which specializes in tenant representation and real estate consulting. He can be reached at 914-997-0300 or howard@howprop.com.

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