For two straight years, the amount of space available in Westchester County’s office market has continually edged downward.
That’s according to numbers in Newmark Knight Frank’s third quarter 2018 office market report released earlier this month. The county just completed its eighth consecutive quarter of occupancy gains, according to the report. In that time, tenants have leased, or landlords have removed, 910,000 more square feet of space than has become vacant in the market. The county’s availability rate has dropped in that time from more than 25 percent to just above 21 percent.
The steady positive absorption is a shift for a county that has struggled for more than a decade under the weight of abandoned corporate headquarters and underperforming office parks. The past two years have seen many of those buildings leave the market entirely through conversion to residential and other uses.
“It’s almost the reverse of what used to happen,” said Larry Ruggieri, NKF’s senior managing director in Rye Brook. “Previously, we would have corporate headquarters put on the market as office buildings and that would just add inventory and vacancy. Now, we are taking buildings off the market, so it’s obviously shrinking the supply.”
To illustrate the recent shift, CBRE Group Inc.’s William Cuddy Jr. said he dug up a 1999 office market report from his company. The total square footage in the Westchester market at that point, leased or not, was 33.3 million square feet, he said. In CBRE’s third quarter 2018 report, the company measured the market at 26.7 million square feet.
But office conversions have accelerated in recent years and helped trim the market. “As we compress the market size, it’s a very simple function of supply-demand,” he said.
To accelerate that trend even further, Westchester may be headed toward the king of all office conversions. The owner of the former IBM campus in Somers, where 1.2 million square feet has remained vacant since the company vacated in 2016, is seeking approvals to convert the office complex into a STEM-focused private high school. That would mark the largest office conversion in the county’s history.
The town just started reviewing those plans and the developer and landlord still haven’t officially reached an agreement, but the implications for the county office market are significant. CBRE reported that taking the IBM space off the office market would decrease the overall availability rate from 21.9 percent to 17.8 percent. That would mark the county’s lowest availability since the end of 2013.
And as more space comes off the market, brokers say they are not sweating this year’s lower leasing numbers.
Sean Cullen, director of research for Colliers’ Stamford office, said Westchester’s year-to-date leasing activity had only reached about half of last year’s level. But, he said in his firm’s report, “the repurposing trend will likely be the biggest driver to shape the market in the near future.”
CBRE found that 213,000 square feet of space was newly leased this quarter, about 28 percent below the five-year quarterly average for the county. The report chalked that up to a “mismatch of supply and demand.”
The largest lease deal, as measured by CBRE, was relatively modest: a 30,000-square-foot sublease by Montefiore at 555 Taxter Road in Elmsford.
Newmark measured total leasing activity, meaning renewals and new leases, as up about a third from a quarter earlier, but still behind last year’s numbers. Karolina Alexandre, research manager for NKF, said the slower activity is not from lack of demand, but from a thinning of options. Even while calculating IBM Somers as vacant space on the market, NKF found the overall availability rate in the county reached its lowest since the end of 2014.
“As we’re seeing less and less office space available, there will be less leasing activity,” Alexandre said. “People can confuse that and say there is a lack of demand. There’s not, it’s just harder to find office product now.”
That’s particularly true in White Plains. Cushman & Wakefield noted in its report that downtown White Plains saw the steepest year-to-year decline in leasing activity, falling 54.2 percent among its Class A product. The real estate firm similarly attributed that decline to shrinking supply in the district.
In the past two years, the White Plains Central Business District has captured more than 60 percent of the net occupancy gains realized in the county, according to NKF. Meanwhile, rental rates of Class A properties in the business district have increased 10 percent over the past three years, from an average of $31.72 per square foot to $34.91 per square foot at the end of this quarter.
CBRE’s Cuddy concluded that predictions earlier this year that Westchester would become a landlord’s market have proven accurate.
“The data is supporting that, with a reduction in vacancy rate and continued increase in average asking rents,” he said. “We are very confident that trend line will continue and it will continue to be a landlord’s market. That’s a seismic shift for Westchester County, which has been for a long time a tenant-driven market.”