Read the statistics all you want, but they do not tell the full story of the state of Westchester”™s office market in 2023. Leasing is still lagging, and space availability is high (as it is in most of the U.S.). The nuances of our local market add a lot of very important color to the raw data.
Three office buildings in the Westchester West Side submarket are either in financial distress or looking to be converted to residential use. The buildings at 580 White Plains Rd. (168,719 square feet) and 560 White Plains Rd. (147,402 square feet) are currently in receivership, and the ownership entity is located in Australia.
While the leasing representative for these buildings tells me that the Receiver is approving funding for tenant test fits and buildouts, legal fees, commissions and the like, the future ownership of these buildings will not likely be settled for quite a while.
At 303 South Broadway in Tarrytown (197,764 square feet), the long-time owner of the building has been trying to get Tarrytown to approve a conversion of the building to multi-family rental apartments. No success yet, but the owner is holding out hope that it will happen in the future. The result is that 303 is only doing “as is” deals for short lease terms as of this writing. So, a total of 513,885 square feet of space (13.7%) in a submarket totaling 3.75 million square feet is in some type of marketing dilemma at this time for tenants.
On the East Side, a 977,856 square foot office portfolio known as The Exchange has been in Special Servicing by the lender since July of this year. The East Side is the largest submarket in Westchester, totaling approximately 9,474,000 square feet. Special Servicing can make it very difficult to do new lease deals, as the significant capital costs to build out space are typically not funded by the lender, so tenants are pretty much limited to “as is” deals that require only new paint and carpet.
These buildings are a significant part of the original 3-million-square-foot Schulman portfolio built in the late 1970s through mid 1980s, and five of the seven buildings involved are located just east of Downtown White Plains.
According to Newmark”™s Q2 report, the entire Westchester Office Market now stands at approximately 26,154,000 square feet. Repurposing of office properties to medical use and demolition of obsolete office buildings has reduced the market from approximately 33 million square feet over the last 10 to 15 years. The properties noted above total approximately 1,492,000 square feet, or about 5.7% of the total market and 10.3% of the East Side submarket that is currently in some type of financial distress.
Other buildings in Westchester are benefiting from the distress noted above. Their owners have the capital needed to do new lease transactions, and in many cases, they have kept up the properties to a high standard and spent capital on much-needed renovations to the common areas and adding amenities to help attract new tenants.
The future of these ten buildings will be worked out, one way or the other. We have seen these things many times before. Often the solution is that a new owner buys the property at a significant discount and spends the capital needed to improve the infrastructure, lobbies, public corridors and bathrooms and re-tenants the buildings. This is Real Estate 101, simple “blocking and tackling” as we call it in the industry, and it works as long as the cost basis on the purchase is low enough. Other solutions could be to empty and demolish or repurpose some of these buildings to medical and/or residential use. This has been successful many times in recent history.
There are literally trillions of dollars of commercial real estate mortgages coming due in the next three years, and banks and other lenders are struggling with how to deal with them. They don”™t want to take the keys back and have to operate the buildings and spend the capital that they need to in order to bring them back to a condition where they can be competitive in the market.
Howard E. Greenberg is President of Howard Properties, Ltd. in Valhalla, New York. He has been a prominent commercial real estate broker for over 35 years and founded his own firm in 1998. He specializes in Tenant Representation and Corporate Services for clients in Westchester and throughout the United States. He can be reached at (914) 997-0300 or at howard@howprop.com
