The Platinum Mile has become the Medical Mile. Office buildings are being demolished to make way for multifamily residential, retail and other types of new developments. Northern Westchester is awash in vacant office space formerly occupied by IBM and Pepsi Bottling Group.
It is fitting that some of the oldest office stock in the county is now being demolished and the sites redeveloped with higher and better uses. In part due to this trend, the Westchester County office market is now considered to contain less than 28 million square feet of multitenant office space. Ten years ago, it was calculated at about 32 million square feet.
There are five obsolete office buildings, totaling 421,875 square feet, on Corporate Park Drive in the town of Harrison that are being demolished to build a 421-unit multifamily residential building and a 125,000-square-foot Wegman”™s supermarket.
In Tarrytown, the 134,000-square-foot 555 White Plains Road was recently sold to the Robert Martin Co., whose principals have said they intend to demolish it and develop a self-storage facility and a fitness center on the site.
In recent years, major corporations have been significantly reducing their office footprints, but large medical and hospital groups have been increasing their leased space exponentially. WestMed, Scarsdale Medical Group, Memorial Sloan-Kettering and Hospital for Special Surgery occupy hundreds of thousands of square feet on the Platinum Mile, the I-287 East corridor. Recently, the first new office building built since the mid-1980”™s was a build to suit for WestMed in Purchase. And Montefiore Hospital recently renewed its 300,000 square feet of office and data operations leases at Mack-Cali”™s South Westchester Executive Park. This Yonkers space is in addition to the approximately 200,000 square feet of office space that Montefiore occupies at the former Kraft research campus it purchased in Tarrytown in 2013.
In 2017, there are really two very distinct office markets within Westchester. The current countywide Class A availability Rate of 24.6 percent does not tell the entire story of the market.
The northern submarket”™s Class A availability rate is a staggering 39.9 percent, according to the Newmark Knight Frank Second Quarter Report. It is highly unlikely that the 1.6 million square feet in the former IBM and Pepsi Bottling campuses, both in Somers, will ever be re-leased as office space. If we look at the largest submarkets in lower Westchester ”” the I-287 East and West corridors and the White Plains Central Business District ”” their weighted average availability rates are 19.2 percent, or less than half that of the northern submarket.
In recent years, Westchester has been a market of small deals, most under 5,000 square feet. In the second quarter of 2017, deals of over 50,000 square feet accounted for more than 32 per cent of the total leasing activity. We have again reached a point in the county”™s real estate cycle where there are very few large blocks of space available. With this in mind, building owners are reluctant to divide full floors to protect themselves against losing larger leases. They are effectively holding these spaces off the market until a 25-30,000-square- foot tenant arrives that will lease the entire floor.
We have had some major leases in the market this year, including New York Life”™s 176,000-square-foot lease at Westchester One and Sumitomo”™s 101,000-square-foot lease at 1 N. Lexington Ave. Both of these represented new absorption of space.
It is no surprise that rents, which have been literally flat for decades, are beginning to move upward a little in response to all of these changes. For the first time in my 31 years in the business, some suburban buildings are asking over $30 per square foot.
Westchester”™s flex space market – office/warehouse and office/light assembly space ”” is unbelievably tight, with rental rates rising significantly. The warehouse market is beyond tight, with gross rents rising into the low 20s per square foot for the very few properties with ceiling heights of 22 feet or more and good loading. These are almost office building rents. Simone Development recently paid $154 per square foot for an older warehouse building in Elmsford, a price that is a multiple of recent sales prices for office buildings, and is reportedly in negotiation with Tesla to rent the entire building at a premium rent.
I make my living representing commercial tenants in relocations, lease renewals and expansions. When I research the market for available spaces for my clients, I am finding many fewer spaces in each size range than I used to. And not many of these are what I would call prime spaces. This is in stark contrast to the period from the Great Recession until recently, when tenants always had a very large number of alternatives to choose from.
So all of these incremental changes over the years have now combined to create significant impacts on our market. It is my opinion that we are moving from what has been for decades a purely tenant”™s market to what I call an opportunistic market.
There are now a number of office buildings that are at or near full occupancy. There are other buildings that continue to have high vacancy rates. Some of those buildings are being sold at bargain prices. The new owners will make major capital improvements. They will spend significant sums on long-overdue work, including new lobbies, public corridors, restrooms and amenities. They will then be aggressively looking to fill those buildings and will compete hard for those important new deals, offering more attractive rental rates to win them. These are where the opportunities will be for tenants to obtain attractive space at below market prices.
Those tenants who are locked into certain locations will definitely have fewer choices. Lease renewals require better negotiating skills, as building owners know that their existing tenants have fewer alternatives in the market.
My advice to my clients will be to think about their real estate needs earlier. It will be very important to study the market and your company”™s business needs and growth projections, carefully. It will be more complicated to plan for growth than it was in the past.
It”™s a new day. It is a much more balanced market. That is a huge step forward for the county and the health of its commercial real estate sector.
Howard E. Greenberg, is president of Howard Properties, Ltd., White Plains. He has represented commercial tenants in Westchester and throughout the U.S. for more than 31 years. He can be reached at 914- 997-0300 or howard@howprop.com.
