With New York City investment properties trading at historically high prices, many New York investors are pursuing investment opportunities in Westchester County. This increased demand, coupled with low vacancy and improving demographics, have resulted in rapid appreciation for multifamily properties in Westchester. Westchester also offers a ready solution for investors looking to reinvest proceeds from the sale of properties in Manhattan and the boroughs and defer capital gains taxes through a 1031 transaction.
That said, a recent vote by the Westchester County Rent Guidelines Board that freezes one-year renewal leases at their current rents and allows a mere 0.5 percent increase on a two-year renewal, effective Oct. 1, is a stark reminder of the limitations inherent to multifamily investments in rent-stabilized submarkets.
A look at lower Westchester
The impact of New York City’s overheated investment real estate market is most apparent in lower Westchester, where New York investors have found asset valuations to be relatively more generous than in Manhattan and the boroughs. Value-added submarkets such as Yonkers and the south side of Mount Vernon offer investors an even more compelling opportunity to reposition assets and create the conditions to improve occupancy and rents.
In the neighboring communities of Larchmont, Mamaroneck, Eastchester and White Plains, investors are attracted to more stabilized assets, which although offering lower returns, benefit from improved demographics. Also creating opportunities for investors in Westchester County are the rezoning of downtown areas in communities such as New Rochelle and Port Chester designed to encourage the development and rehabilitation of mixed-use properties.
Development of new Class A and Class B assets in areas that offer easy access to New York City, as evidenced along the Saw Mill River Parkway, continue to come online across Westchester submarkets. In New Rochelle, a zoning overlay has paved the way for significant new development in the area surrounding the train station. While the location will likely appeal to transit-oriented tenants, there is always a risk of downward pressure on asking rents and occupancy as new housing is delivered into the market.
In neighboring Fairfield County, Stam-ford multifamily landlords are faced with this situation as a high volume of new Class A multifamily development recently coming to market has resulted in the need for incentives and concessions to attract renters.
While demand from investors remains strong for Westchester multifamily and mixed-use properties, it is unlikely that future appreciation in market values will continue to grow as rapidly as they have over the past 12 to 24 months. The same asset class and location that was trading 24 months ago at value equal to 7 times gross rent multiple and/or 7 percent cap rate (the ratio of net operating income to property asset value) is now trading at 9 times rent and sub-6 percent cap pricing on current net operating income. Consequently, the most desirable investment properties in Westchester’s current market may be those viable for rehabilitation or redevelopment.
Westchester’s office market
While Westchester’s multifamily market remains strong, its office market continues to soften as employers relocate operations to urban core locations. Data shows that Westchester’s office vacancy rate rose to 22.4 percent by the end of the second quarter, which is a new five-year high. Further, more than half of the office space leased in Westchester during the second quarter of 2016 was delivered to smaller tenants in spaces less than 10,000 square feet.
As vacancies rise, landlords are faced with the unenviable decision to either offer leasing incentives or lower asking rents.
While Westchester’s office market isn’t nearly as strong as its multifamily market, there are still viable opportunities for investors, particularly those who are willing to reposition older assets to capture the remaining Class A tenants in the market.
Edward Jordan is founder and managing director of Northeast Private Client Group, an investment real estate firm with offices in Shelton, White Plains and Boston. Based in the firm’s Connecticut office, he can be reached at email@example.com.