Westchester County”™s 2022 year end real estate statistics are out, and as I predicted in last month”™s article they are not pretty. According to the Newmark report, fourth quarter office leasing velocity was down 39.6% from the previous year.
Leasing velocity has been slower in 2022 than in 2021 for three out of four quarters, and Westchester has seen negative absorption of office space in all four quarters. The availability rate has also increased in each quarter, beginning the year at 24.7% and ending it at 26.3%.
This means that there are approximately 6.9 million square feet of vacant space, including sublease space, on the market. That is a huge number in a market whose average office lease is approximately 5,000 square feet.
It is also important to put the inventory numbers in context. The county has repurposed approximately 7 million square feet of obsolete office space and office building sites in the last decade or so, to be replaced by new uses such as retail (notably Wegmans), medical, multifamily residential and fitness centers (LifeTime Fitness).
These new developments are providing new tax revenues and are drawing people to mixed-use parks that used to be office parks. Repurposing has helped to keep the amount of vacant and nonleasable office inventory in check, so imagine what the statistics would have been if we had not repurposed these 7 million square feet.
Westchester ended the year at 1.5 million square feet leased, down 23.2% from 2021. Net absorption was negative 374,000 square feet, meaning that the market continues to vacate more office space than it is leasing.
The percentage of lease renewals against new leases seems to be rising. Particular in the mid and larger size leases, reductions in square footage are frequently involved. There is no question that many of these “right sizings” are a result of remote work and hybrid work causing less than 50% of a typical office space to be physically occupied on any given day. Many new corporate office spaces are being designed with meetings and collaboration in mind, instead of building private offices and workstations that are intended to be occupied by only one employee and would remain vacant more than half of each week.
It is clear that hybrid work is the new normal with employees in the office two to three days per week and working at home for the balance. As of this writing, large corporations are ramping up their insistence that employees be back in the office at least two to three days per week and are pushing back hard against 100% remote work. Interestingly, the employers and the employees are pretty much in synch on how much time should be spent in the office.
The two-building office complex at 1111-1129 Westchester Ave. was purchased by New York-Presbyterian Hospital after Pepsico vacated all the space to return to its Purchase headquarters following its multi-year renovation. This will remove 373,000 square feet of vacant office space from the market. The hospital will reportedly use it for both outpatient medical and administrative purposes. Had this large property remained vacant, it would have taken a huge capital improvement budget and many years to re-lease.
The largest office lease in Westchester County last year was 200,000 square feet leased by Regeneron at 175 King St. in Armonk. It was a very large deal for the fastest-growing employer in the county. But this mega-lease did not move the needle on the vacancy statistics at all, because it was done in a corporate owned and partially occupied building, rather than a multitenant office building.
Westchester is not alone. Nationally, net absorption has been negative for seven of the past 10 quarters and vacancy is at its highest level in a decade. That being said, national availability statistics are about 13%, or about half of Westchester”™s.
I and many of my broker colleagues are predicting that 2023 will be a difficult leasing year. While there are tenants who are expanding and some new types of space requirements in the market, the trend that we see is conservatism with respect to office space. We believe that many office tenants will be right-sizing (which used to be called downsizing) as their leases come up for renewal and respond to the long-term effects of hybrid work. The county must continue and accelerate the repurposing of obsolete office buildings and office building sites to new uses in order to ensure the health of the market.
Howard E. Greenberg is president of Howard Properties Ltd., located in Valhalla.
