The office availability rate in Westchester has modestly but steadily increased through 2022. It now is at its highest level on record, 26.2%. Leasing velocity has been lower than in the past. There is an ever-increasing amount of space being offered for sublet, most of which just remains on the market statistics with little or no deal activity.
Absorption through the third quarter of 2022 is negative 341,000 square feet, according to Newmark”™s market statistics. This means that we continue to lease less office space than is being returned to the market through tenants vacating or shrinking. We will likely come up well short of Westchester”™s typical 2 million square feet of annual leasing in 2022.
Hybrid work is here to stay, with most employees now working in the office two to three days per week, and at home the other days. Even buildings that are well-leased have a physical occupancy no greater than 50% during the middle of the work week, with Friday being a very common work from home day. Many companies and professional firms continue to have most of their employees working fully remote. Whether hybrid or remote, worker productivity has not suffered during the pandemic.
Employers are accepting hybrid work, even though it creates shortfalls in training and collaboration. Many businesses need more employees, and those that insist their people come to the office even a few days per week are having a very hard time competing in the hiring market. Employees want remote work to avoid the time and expense of commuting, to have at least some flexibility in working hours and to spend more time with their families.
The lower demand for office space puts pressure on landlords to keep rents low, which makes it more difficult for them to do deals that make economic sense. Building operating costs and real estate taxes continue to increase, further eating into landlord margins. The costs to build out tenant space have increased significantly in the last three years, and there are still some supply chain issues that delay construction.
There are already a number of building owners that do not have the funds available to build out space, which significantly inhibits their ability to increase occupancy. Their buildings will continue to lose tenants, which will exacerbate their financing issues, eventually leading them into default with their lenders.
While we have repurposed about 6 million to 7 million square feet of office space to other uses in the last decade or so, it is hard to remove obsolete space from the market fast enough to keep up with the reduction in tenant demand.
Touring activity has slowed significantly for all sizes of space, and the county is entering into another cyclical period when we have a number of large blocks of vacant space, which will likely keep the vacancy statistics up for 2023. One reason for this can be seen in what happened with Transamerica. The company’s space usage shrank from about 117,000 square feet to about 27,000 square feet when it renewed its lease at 440 Mamaroneck Ave. in Harrison. Our average lease is typically around 5,000 square feet, so the re-leasing of just this one block of empty space can and will take years to accomplish.
Tenants are now at the point where they are willing to make long-term leasing commitments, unlike their propensity to extend for only a year or two early in the pandemic. The dilemma for all tenants is how to estimate how much space they will need in the future, based not only on their present employee count, but how the future of hybrid and remote work will affect their need for office space.
It would appear that 2023 will be a difficult year for the Westchester office market. The overwhelming majority of our office buildings were developed in the 1980s, so they are now almost 40 years old. Almost all of our office leasing is intra-county deals, where an existing tenant relocates from one building to another, with almost no positive absorption from companies moving to Westchester from other areas.
———————–
Howard E. Greenberg is president of Howard Properties Ltd., located in Valhalla. He has been active as a commercial real estate broker since 1986.
