Medical heals a repurposed market

BY HOWARD E. GREENBERG

There were a small but very significant group of real estate transactions in the Westchester County market in 2013 that had literally no effect on our office vacancy rate. That notwithstanding, they will add thousands of construction jobs and permanent jobs and they reinforce the continuing trends of repurposing of existing buildings and the explosive growth of medical and biotech in the county.

These transactions involved almost 1 million square feet of space. They include the 250,000- square-foot office building at 19 Skyline Drive in Hawthorne, vacated by IBM and immediately sold by Mack-Cali to New York Medical College; Montefiore”™s purchase of the 300,000-square-foot Kraft research campus in Tarrytown; Regeneron”™s 300,000-square-foot build-to-suit laboratory expansion at Landmark at Eastview and WestMed”™s 85,000-square-foot build to suit at Harrison Executive Park.

These were the key deals of 2013 and they did not “move the needle” at all on the office vacancy rate. But if 19 Skyline and the Kraft campus had come to market as 550,000 square feet of newly vacant office space, there would have been a significant increase in the vacancy rate. More than that, these properties would have required huge capital investments for renovations and that would have taken many years to lease up, if they could have been leased at all.

A trickle from outside

We continue to see only a trickle of new tenants coming into Westchester from other areas. Large companies continue to downsize their headcount and square footage leased per person. Some smaller, primarily privately held tenants are growing. Notwithstanding the fact that we are only 38 minutes from midtown Manhattan by train, Westchester has not attracted any statistically significant relocations from the Big Apple in recent years.

Repurposing of buildings and land continues and is actually accelerating. This trend toward recycling underutilized buildings and rezoning land to permit more popular uses is our best hope for rebalancing the market. The ultimate goal is to achieve equilibrium, which is the point at which supply of space and demand are approximately equal. For far too long, our supply has far outstripped our demand in Westchester.

A number of office building owners and leasing representatives I spoke to said they had a good leasing year, notwithstanding the fact that annual deal velocity continues in the 1 million-plus-square-foot range, rather than the close to 2 million-square-foot range annually prior to the recession. These days, tenant retention is critical in Westchester and tenants do not make that easy. They drive hard bargains, but building owners know that the cost of losing them and sitting with vacant space is too high.

Medical the driver

Medical continues to be THE growth engine. Indeed the first new office building to be developed since the late 1980”™s will be a pre-leased 85,000-square-foot medical office building for WestMed at Harrison Executive Park along Route 287 in Purchase. Montefiore Hospital closed on its purchase of the 300,000-square-foot former Kraft campus in Tarrytown and is still signing new leases for significant amounts of administrative space in multiple submarkets. Scarsdale Medical Group has planted its flag at Saxon Woods Corporate Center and continues its strong growth as well.

Glenn Walsh, executive managing director of Newmark Grubb Knight Frank, says “the east side of 287 is turning from Platinum Mile to Medical Mile” and he is right. WestMed has its administrative operations at 2500 Westchester Ave. as well as all of 210 Westchester Ave. for medical offices and will occupy the new 85,000-square-foot building in Purchase. Sloan Kettering continues the buildout of its cancer treatment center on Westchester Avenue for a 2015 opening. The 150,000-square-foot Harrison Executive Park in Purchase is almost all medical, as are Harrison Court and 244 Westchester in White Plains. This represents a huge repositioning of this submarket.

The largest “traditional” lease deal of 2013 was Xylem – 67,000 square feet, with net absorption of about 20,000 square feet- relocating from 1133 Westchester Ave. to Reckson Executive Park in Rye Brook. This was really a carryover lease from 2012 that got bumped out of 1111 Westchester when Pepsico committed to the majority of the building.

Some landlord successes

The Normandy portfolio in the 287 East submarket had a very good leasing year in 2013, according to Brian Carcaterra, senior vice president of CBRE, who represents it as leasing agent. They did about 90,000 square feet of new leases and 80,000 square feet of renewals in that 1.5 million-square-foot portfolio. Tenants responded well to the new cafeteria, fitness center and conference room installed by ownership in 2500 Westchester Ave. and brought that building to almost full occupancy.

Normandy”™s next focus is the repositioned 701 Westchester Ave., which has already attracted Misys (12,300 square feet) from White Plains, as well as Fusion, which is new to the market and leased 9,000 square feet. There is currently only one block of space over 25,000 square feet in the Normandy portfolio, versus 11 blocks of that size in Q1 2009. They went from 40 percent occupied in Q1 of 2009 to about 70 percent currently.

Mack-Cali had a good year as well, selling off 19 Skyline and re-tenanting another 42,500 square feet left vacant by IBM. It did a major expansion and extension with data center operator Xand (now 85,000 square feet) and leased a long-vacant 30,000-square-foot floor on Taxter Road to Intelligrated. They re-tenanted much of the 130,000 square feet of industrial space left vacant by SanMar Laboratories in Elmsford, relocating Barrie House Coffee from Yonkers for 77,000 square feet and adding another 16,000 square feet from Ultrafabrics, both prior to the vacancy hitting the market. They are in discussion with deals for the rest of the space.

Reckson Executive Park in Rye Brook had huge leasing activity this year, beginning with the 67,000-square-foot Xylem lease ”“ which also spun off a 30,000-square-foot relocation by Verizon to Reckson”™s 500 Summit in Valhalla to make room for the new tenant. New deals included First Key Holdings (a division of Cerberus Capital) for 16,000 square feet, BCI (a new cable TV company) for 13,000 square feet and an unidentified health care company for 15,000 square feet. Overall, 120,000 square feet of new leases and expansions were done in this 540,000-square-foot park.

Reckson also had success at The Summit in Valhalla, with a 37,000-square-foot expansion and extension by existing law firm tenant Kaufman Borgeest & Ryan, and a 28,000-square-foot lease by USI, relocating from Briarcliff. They also made progress in the leasing of the office space at the Ritz Carlton in White Plains and at 150 Grand St. in White Plains.

Corporate giants stir

MasterCard just announced an expansion of the building it owns in Purchase, as well as an expansion of its leased space at 100 Manhattanville Road, potentially adding about 270 jobs. Add that to Pepsico”™s major reconstruction of its Purchase HQ and its now 270,000-square-foot lease to house its employees during the multiyear project at 1111/1129 Westchester Ave., and it tells us that corporate America is not yet dead in Westchester.

But IBM has put large blocks of space up for lease on its campuses in Armonk and Somers, continuing its multidecade reduction in space. MBIA reportedly has a deal to sell its campus in New Castle and is shopping the county for about 100,000 square feet of space to lease.

Pernod Ricard has 83,000 square feet listed for sublease at 100 Manhattanville Road on a term that only runs through September 2017, as this company is returning to New York City. This space has been on the market for about 18 months with no takers.

Bayer is giving back over 100,000 square feet at 555 White Plains Road in Tarrytown as it consolidates into its new HQ campus in New Jersey. There has also been consolidation by WestCon at 520 White Plains Road, resulting in two floors being vacated. Other than these two units, the West Side submarket is very tight, with Tappan Zee Constructors taking almost 31,000 square feet at 555 White Plains Road earlier this year and some smaller leases for other companies involved in the building of the new Tappan Zee Bridge.

White Plains CBD slow

Generally, activity in the Central Business District of White Plains has been slow this year and there are a number of significant subleases on the market. Disney consolidated its operations back in California and put 71,000 square feet on the market at Westchester One. Pearson Education is decamping for New York City and has 42,000 square feet for sublease at 10 Bank St. MindSpark left for “funky loft space” in Yonkers, giving a full floor, 33,000 square feet, back to 1 N. Lexington.

Also at 1 N. Lexington, Alliance Bernstein has quietly subleased about 78,000 square feet to relocating tenants that include Argus, doubling its size to 50,500 square feet from a building across the street; IHS, coming from Valhalla for 15,000 square feet, and shoe company Donald J. Pliner in a 13,000-square-foot relocation from New York City. Don”™t forget that this was space already under lease and so these transactions did not absorb any space statistically.

The star building of the White Plains CBD is Westchester One, which signed almost 80,000 square feet of leases with New York state government entities and 44,713 square feet with Jackson Lewis, in a lateral relocation (i.e. no net absorption) of its attorneys group from 1 N. Broadway a few blocks away. Even though Reader”™s Digest downsized, leaving the very desirable top two floors vacant, it extended its lease for more than 50,000 square feet. All in all, Westchester One achieved the best CBD leasing success in 2013.

There were no major catastrophes and there were some significant gains in the Westchester County market in 2013. Medical and biotech continue to grow. Building owners continue to focus hard on working their properties to achieve maximum tenant retention and occupancy. Large buildings that are either functionally obsolete or require major capital infusions are candidates for sale or repurposing.

Thank goodness for medical, the “great white hope” for Westchester.

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