Column: A year of renewals in Westchester office market

BY HOWARD E. GREENBERG

Westchester County is still “rearranging the deck chairs” in its office market. As in the past, virtually all our leasing activity is intra-county. But there are signs that the diversification of the market into the medical and biotech sectors is helping to shore up occupancy levels, and increased interest in multifamily development will provide housing alternatives for a younger workforce that could be a key to attracting new companies to the county in the future.

Leases of under 5,000 square feet, which have traditionally been more than 80 percent of the deals here, have declined in number this year. It would appear that smaller companies are being conservative in their commitments. Consequently, the inventory of small office spaces has increased.

The midsize deals, between 5,000 and 10,000 square feet, have increased in number, but the larger deals ”” between 25,000 and 50,000 square feet ”” are way off last year”™s total. The largest lease of the year was MasterCard”™s expansion and renewal at 100 Manhattanville Road for 121,000 square feet. This is a major commitment to the county, as is PepsiCo”™s total renovation of its headquarters in Purchase.

While the final figures will not be in until mid-January, we will have negative absorption for 2014, and leasing velocity has been very slow this year. The great majority of our leases have been renewals, some with expansions.

Medical was the star of 2013, but it has taken a break in 2014, as the hospitals and physician groups figure out how to use all of the space they have leased and purchased. This sector could ramp up again in 2015 as new hospital alliances are finalized.

The leasing activity and absorption figures for the first three quarters of the year have been lackluster, with net absorption of negative 168,000 square feet through the third quarter, according to Karolina Pardo-Alexandre, research manager at Newmark Grubb Knight Frank.

She told me that during the third quarter, Westchester had declines in leasing activity in the Western submarket of 55 percent, in the White Plains Central Business District of 39 percent and in the Eastern submarket of 18 percent. These figures represent a 14.6 percent decline from the second quarter and 20.5 percent decline from last year. Only the Southern and Northern submarkets posted leasing gains through Q3.

Back on the market

IBM continues to give back space to the market, as it has been doing for decades. But these days, it is on the campuses it owns in Armonk and Somers.

In 2012 it put approximately 200,000 square feet of its space on the market in Somers, and in 2013, it put an additional 285,000 square feet on the market at its Armonk headquarters. The entire 287,000-square-foot MBIA campus in North Castle is on the market for sale. And Chappaqua Crossing, the former headquarters of Reader”™s Digest, has had some leasing activity but is still struggling to lease hundreds of thousands of square feet of office space. These properties represent well over 1 million square feet of space on the inventory that is skewing the vacancy rates higher. We have had only one lease of more than 100,000 square feet so far this year, and two leases between 50,000 and 100,000, so there is not a high level of demand for large blocks of space.

One of the largest leases of the year was MBIA”™s 85,000 square feet at Centre at Purchase. With the bond insurance company”™s North Castle campus on the market, it will be interesting to see who lands there. It could be a corporate headquarters or some alternative use. The vacancy of the former campus means that the new MBIA lease is really a negative 202,000 square feet of absorption for the market.

Distress and success

A number of office buildings have fallen into financial distress or receivership after losing major tenants. The 3 Westchester Park Drive property, formerly 3 Gannett Drive, is in receivership after Heritage Realty Services defaulted on its mortgage following the loss of its anchor tenant, Wilson Elser, to RPW Group”™s 1133 Westchester Ave.

The 1311 Mamaroneck Ave. property went back to its lender after a stint in receivership and was purchased at a discount by its former owner, Onyx Equities. Onyx is reportedly in the process of buying the complex on the south side of Route 287, at 1111 and 1129 Westchester Ave., that currently is master-leased by Jones New York and occupied by that company and by PepsiCo for swing space while its Purchase headquarters is undergoing a major renovation.

White Plains Plaza, at 1 N. Broadway and 445 Hamilton Ave., lost law firm Jackson Lewis to 44 S. Broadway ”” 44,000 square feet for the firm”™s lawyers group ”” and 1133 Westchester Ave. ”” 23,000 square feet for its administrative group.

There have been some successes as well. Faros Properties has exceeded all expectations in its lease-up of 120 Bloomingdale Road ”” also bought out of receivership ”” and has reportedly agreed to sell 555 Theodore Fremd Ave. in Rye at a significant profit after improving occupancy in that asset. GHP has purchased Taconic Corporate Park in Yorktown at a very favorable price from its lender. With low-cost bases in these distress purchases, new owners can afford to do necessary renovations and still offer competitive rents.

Brian Carcaterra of CBRE is leasing agent for the 1.5 million-square-foot Normandy portfolio in the 287 East submarket. He reports his firm has been pleased with its year. But its activity has been composed primarily of renewals, some with expansions and early commitments by tenants to longer lease terms. Its retention rate was over 90 percent, which is very impressive in this market. Overall, the portfolio has signed about 125,000 square feet of leases, with documents being negotiated for an additional 75,000 square feet. Its goal for 2015 is to supplement this year”™s success with new transactions.

Dannon is currently in the market for about 120,000 square feet, as the end of its term nears at its Hillside Avenue building in Greenburgh. It too is looking for a way to keep everyone on as few floors as possible, and is reportedly focusing on the huge 44,000-square-foot floors at 44 S. Broadway in the White Plains CBD.

Acadia Realty Trust has signed a lease for about 29,000 square feet at 411 Theodore Fremd Ave. in Rye. This represents an interesting dynamic, as it will leave its current space at 1311 Mamaroneck Ave., which has been in receivership, for a building that had its economic problems years ago, that has been sold to new ownership and has recapitalized. U.S. Alliance Credit Union in Rye has also signed for about 10,000 square feet at this building.

A fairly quiet CBD

A couple of bright spots in the White Plains Central Business District include increased leasing activity at the Ritz-Carlton office space, where luxury women”™s wear shop Mary Jane Denzer leased the prominent retail space this year, and continued subleasing success by Alliance Bernstein at 1 N. Lexington Ave. Argus Information and Advisory Services, a company that provides analytics and information to consumer banks and their regulators, is reportedly taking an additional 33,000 square feet of the Alliance Bernstein space, after doubling its size to 50,000 square feet when it relocated into that space a few years ago. Fortistar Capital renewed and expanded to 18,266 square feet in direct space at 1 N. Lexington. The Westchester Bank is establishing its new headquarters at 12 Water St. in about 11,000 square feet. It will occupy 25 percent of the building and will have exterior signage rights.

But activity in the CBD in general has been quiet this year. Large CBD sublease spaces continue to languish, including the 42,000-square-foot Pearson Education sublet at 10 Bank St. and the 44,000-square-foot Arcadis sublet at 44 S. Broadway.

Mack-Cali has invested money in its CBD properties for exterior upgrades to 1 Water St. and 1 Barker Ave., as well as lobby upgrades at 50 Main St. and demolition of vacant spaces.

John Barnes of Reckson/S.L. Green tells me it had strong activity in its CBD buildings. Soon Reckson hopes to be over 90 percent leased at the Ritz-Carlton office space. It has done well at 360 Hamilton Ave., where it did an approximately 20,000-square-foot renewal/expansion with Arch Capital Services, and 140 Grand St. is now in the mid-90s occupancy. He tells me it did very well in small deals and small-deal renewals portfoliowide.

Route 119 deals

In the largest investment sale of 2014, Mack-Cali has sold its entire Route 119 office portfolio ”” consisting of 200 and 220 White Plains Road and 555, 565, and 570 Taxter Road ”” to Keystone Property Group. This reduces the firm”™s office portfolio by about 600,000 square feet. Mack-Cali has been hired to do the leasing, space planning, construction and legal work for the new owner. With the shrinkage of its footprint, its remaining Mack-Cali Westchester portfolio is now over 90 percent occupied, with particularly strong activity this year in its flex and industrial space. Its office space in Yonkers is full, with a 19,000-square-foot renewal with Progressive Insurance this year.

Greg Frisoli of Newmark Grubb Knight Frank is leasing agent for RXR”™s portfolio on the Route 119 corridor in the West submarket. He tells me it had a pretty good year, primarily with internal renewals and expansions. The flagship deal was a 15,000-square-foot expansion by Prestige Brands at 660 White Plains Road, bringing it to a total of about 58,000 square feet. Greg feels there is interest by larger tenants in keeping most or all of their employees on one floor ”” not an easy feat in our market when your office needs get over 25,000 square feet.

RXR finally lost Bayer Pharmaceuticals, which occupied most of 555 White Plains Road, after an announcement about three years ago that it would consolidate its operations in New Jersey. The building will need significant refurbishment, but it is one of only a few buildings on the west side that has a large block of space available, so it will get inspected by those companies that want the location and will have few, if any, other places to go.

Reckson”™s First Niagara Bank lease at 520 White Plains Road in Tarrytown was one of the largest deals of the year and one of the few that represented fresh absorption to the market.

A healthy health care market

The first new building constructed in the county since the mid-1980s will open early next year at Harrison Corporate Park, recently renamed Purchase Professional Park. Its entire 85,000 square feet is preleased to Westmed. The 114,000-square-foot Memorial Sloan Kettering Cancer Center has opened at 500 Westchester Ave. And buildings like 440 and 450 Mamaroneck Ave., 550 and 600 Mamaroneck Ave. and others continue to lease space to new medical tenants, which are boosting their occupancy. New York Medical College is in process of renovating 17 Skyline Drive, a 248,000-sqaure-foot building it purchased from Mack-Cali in 2013, and it has just opened a biotech incubator building on its campus.

A 184,000-square-foot portfolio of multitenant medical office buildings at 222-244 Westchester Ave. was sold by ProMed to Healthcare Trust of America for a whopping $350 per square foot, which is “telephone numbers” compared with what office buildings are selling for today.

The biotech sector continues to grow in the county. Regeneron, named the best company to work for by Science magazine again this year, occupies about 600,000 square feet of primarily purpose-built laboratory buildings at Landmark at Eastview. There is apparently demand for vacant space in the complex coming from companies out of the area. Acorda Therapeutics, the anchor tenant at Ardsley Park, expanded by 25,500 square feet earlier this year. And the North 60 project is reportedly moving forward in an effort to create a new medical and biotech park on county-owned land in Hawthorne.

A dearth of new tenants

Glenn Walsh of Newmark Grubb Knight Frank represents RPW Group as leasing agent, among many other building owners. His take on the market is consistent with his colleagues in that it was primarily renewal-based. He sees smaller companies being very conservative and opting generally for shorter-term renewals rather than long-term commitments. When that is the business plan, it is difficult for them to relocate to another building, as landlords cannot afford to build out space for short lease terms. Generally, he feels that tenants in the market are shuffling around within the county, looking for slightly better economics or upgrades to nicer buildings with more amenities. But, as usual, there is a dearth of new, inbound tenants that would actually increase space absorption and bring new support businesses with them.

The Manhattan office market is very strong now, and the delta between its rents and Westchester rents is as big as it has ever been, but we are still not seeing our fair share of Manhattan tenants migrating north to Westchester.

Landlords, while all needing deals, are trying to get enough net effective rent ”” the rent they actually put in the bank after free rent, construction, legal and brokerage expenses are deducted ”” to make the deal a positive one economically. This is not an easy task, as operating costs, real estate taxes and construction costs have all gone up significantly over the years, while rents have remained basically stagnant since the late 1980s.

”˜Densification”™ an office trend

Densification is definitely in vogue, primarily among larger tenants. This is a fancy word for reducing the square footage per person, primarily through space plans that consist almost exclusively of workstations rather than private offices. Instead of the old formula of three to five people occupying 1,000 square feet of space each, these new layouts can often accommodate six to eight people in the same amount of space.

Office building parking lots are more crowded as a result of this trend. Ultimately, this will restrict buildings from leasing, as they will not have enough parking spaces available to lease the last 10 to 20 percent of space in their buildings.

Office park housing

Normandy Realty and Toll Brothers are partnering to bring multifamily to the office parks along the Platinum Mile. They have applied to Harrison for a zoning change to permit construction of more than 400 units of housing for both millennials and empty nesters on the site of 103/105 Corporate Park Drive. The 103 building has literally been boarded up for probably a decade, while 105 has only one tenant.

This project has the potential of turning 200,000 square feet of obsolete and primarily empty office space into a live/work/play community with walkways connecting it to the adjacent Lifetime Fitness facility as well as ground-floor retail for services, restaurants and entertainment uses. Given that there are no residential neighbors to oppose the project, logic would dictate that it receives approval in a timely manner. It would be attractive to the surrounding corporate parks to have housing literally within walking or shuttle distance for employees.

This park has already moved in new directions with the Hyatt House suite hotel, a child care center and two buildings purchased by biotech company Histogenetics for its own use. It is fitting that the oldest office park on the Platinum Mile could be the first one to morph into a totally new environment.

Building for commuters

Buildings on the Platinum Mile that provide private shuttles from the White Plains Metro-North station are being forced to increase the capacity of those shuttles to serve the increased number of workers commuting by train. Glenn Walsh feels we need a new gateway to the county at the White Plains station.

Developer Louis Cappelli had a proposal several years ago to redevelop the entire area, but it got shelved during the recession. Imagine the boon to our market if the White Plains rail station had a Grand Central Terminal-like retail and restaurant component connected to it! That would provide a great new gateway to the city, as well as much-needed dining options for the office buildings that are near the station. Plans are in the study stage now.

TOD, transit oriented development, is hot. New Rochelle just announced it will hire a partnership including Renaissance Downtowns and RXR Realty to plan for the redevelopment of the area around its train station.

Harrison has recently approved AvalonBay to construct new multifamily housing and parking structures around its train station. LCOR is finalizing approvals for its new apartment buildings two blocks from the White Plains Metro-North station. The attractions of these projects are walkable communities with services, restaurants, and nightlife with direct access to the train for commutation and trips to New York City. The developers believe these buildings will attract empty nesters, as well as young professionals.

There are also new luxury multifamily projects in late stages of construction in White Plains off Maple Avenue that are being constructed in the new modular method, where fully finished units, with walls, kitchens, bathrooms in place, are literally stacked on top of one another. The Cambria Suites hotel, also a modular construction, is now open and operating in the White Plains CBD and has capped off the redevelopment of the entire block of Main Street between City Center and North Broadway.

Retail is also pretty vibrant. Two examples are the 20,000-square-foot store on Route 119 in White Plains that was vacated by Staples and immediately reconstructed for a CVS, while across the street, the retail space formerly occupied by the bankrupt Loehmann”™s chain was quickly leased by Saks Off 5.

There are a lot of good things happening in our market. Biotech companies, along with new medical offices, cancer treatment centers, and urgent care centers are occupying laboratory, office and retail spaces. Older office building inventory continues to be repurposed. New multifamily development, both suburban and transit-oriented, should attract and retain young professionals, as well as provide product for empty nesters who want to stay here.

The Westchester County real estate market has significant development activity in many different product types, and that is a healthy sign for the future.

Howard E. Greenberg is president of Howard Properties Ltd. in White Plains. He can be reached at howard@howprop.com or 914-997-0300.