Westchester office market: The cup is half full

BY HOWARD E. GREENBERG

The first half of 2015 was a tale of two very different quarters. On the office leasing side, the first quarter was anemic at best, with negative absorption across the board, totaling more than 700,000 square feet. The return of 540,000 square feet at 1 Pepsi Way in Somers represented the majority of that negative absorption and added almost 2 percent to the countywide availability rate.

“Renewals drove this quarter”™s leasing velocity, accounting for 61 percent of the leasing total, at approximately 260,000 square feet,” said Karolina Pardo-Alexandre, research manager for the real estate firm Newmark Grubb Knight Frank. “New transactions fell significantly, to roughly 150,000 square feet, a 40 percent drop from last year and last quarter.”

Howard Greenberg

But the second quarter definitely looked brighter. Space inspection tours have increased. The blockbuster deal of the quarter was Pepsi turning its 228,000 square feet of temporary swing space, leased during the renovation of its headquarters in Purchase, into a long-term lease of 361,000 square feet for the entire park at 1111-1129 Westchester Ave. Jones Apparel quietly vacated its space and left the park, disappearing into the ether to make room for Pepsi. In a typical Westchester scenario, the Pepsi Bottling Group will relocate from Somers to White Plains, leaving behind 540,000 square feet in Somers for 361,000 square feet in White Plains. Pepsi not only owns its Purchase headquarters but is now the lessee of the largest block of space on the east side of the county.

Even without Pepsi, leasing activity is up 41 percent over Q2 2014. Overall, lease renewals were on par with Q1 in terms of number of transactions, but the volume of square footage shrunk by more than 40 percent in Q2 versus. Q1. Much of this is due to the large companies significantly downsizing when leases expire (see western submarket below). The quarter ended with a total of almost 800,000 square feet of leasing versus about 500,000 square feet in Q1, so things are heading in the right direction.

Even better, Q2 absorption is positive 82,512 square feet. And midsize deals are again showing good volume. The 5,000- to 10,000-square-foot size range had a 24 percent increase in the number of deals versus Q2 2014 and a 31 percent increase from Q1 2015. There also was a 35 percent jump in the 10,000- to 25,000-square-foot size range versus Q1. Some sublease spaces have come to market, but there is little activity in the sublease market. These are good signals for our market.

Downsizings in western submarket

In the first quarter in the county”™s western submarket, Hudson Health Plans renewed its 57,000-square-foot lease at 303 S. Broadway in Tarrytown while Coca-Cola gave back 46,000 square feet at Taxter Corporate Park in Elmsford. The soft drink maker renewed for only 10,800 square feet of its original space. There seems to be a lot of real estate activity in the soda space this year. In the same complex, Nextel Communications gave up more than 30,000 square feet, while remaining in just 5,000 square feet. Both of these givebacks were in the portfolio recently purchased by Keystone Property Group from Mack-Cali Realty Corp. Even with a significant amount of renewals, this submarket ended the quarter with a negative absorption of more than 76,000 square feet.

The downsizing trend evidenced by the Coca-Cola and Nextel transactions has been a recurring theme over the last few years. A combination of more work being done outside the office and the reduction in the amount of square feet of office space per person has resulted in the large companies uniformly shrinking when their leases come up for renewal. This is the new world order and will not likely change in the future.

Last year, landlord RXR lost Bayer Pharmaceuticals, which consolidated into New Jersey, leaving almost all of 555 White Plains Road vacant. This large block of space ”” in a building that needs a complete makeover ”” will now have competition from the large blocks Coca-Cola and Nextel have left behind nearby.

The western submarket certainly bounced back in the second quarter, with a 72 percent increase in leasing velocity over the same quarter in 2014. But Intelligrated added 30,000 square feet to the sublease market in Q2 at 555 Taxter Road ”” the same park in which Coca-Cola and Nextel downsized ”” and First Niagara added 15,000 square feet of sublease space at 520 White Plains Road after initially signing a lease for 30,000 square feet; they now plan to occupy half of it.

In Q1 the eastern submarket ”” our largest submarket, which is normally the leader in transaction volume ”” had a decline of 13 percent from last year”™s lease volume to finish with 170,000 square feet of activity. Notable transactions included UBS Financial Services”™ renewal for 29,000 square feet at 709 Westchester Ave., and Gerber Life Insurance”™s renewal and expansion at 1311 Mamaroneck Ave. into 22,000 square feet of office space. But it obviously snapped back in Q2, with the blockbuster Pepsi transaction leading the way. Other notable transactions included Compass Group at 2 International Drive and the FBI at 600 Midland Ave. in Rye. This is our only submarket with positive absorption of 126,000 square feet to date this year.

1129 Westchester Ave. in White Plains.

Quiet reigns in Central Business District

In the White Plains Central Business District, a renewal and expansion by PURE Insurance for a total of 44,000 square feet at 44 S. Broadway and Legal Aid Society”™s relocation to a 27,000-square-foot space at 150 Grand St. led the way to a total of 150,000 square feet of activity in the first quarter of the year. Second-quarter leasing activity was down 57 percent versus Q2 2014, with only 13 deals done versus 20 in the same quarter last year.

Arcadis has put 63,000 square feet of sublease space on the market at 44 S. Broadway, adding to the Disney sublet space in the same building. The CBD has been generally quiet for quite a while now, even though New York Life and Dannon are still reportedly focusing their large requirements on this submarket. If one or both do come, they will leave behind other, possibly larger, inventory in the county, as they will both be intracounty relocations. Pearson Education has had a 42,000-square-foot sublease on the market at 10 Bank St. for about three years without success. Our CBD should be doing better on the leasing side.

Ivy Properties has re-entered the Westchester office market by taking control of White Plains Plaza at 1 N. Broadway and 445 Hamilton Ave. Heyman Properties lost the complex this year after it suffered tenant defections, including its largest tenant, the law firm Jackson Lewis. Ivy already owns the rest of this office/retail complex, consisting of the Wal-Mart building and the shared parking structure. This hands-on owner is working on substantial renovations to the buildings, including lobbies, the outdoor plaza and the parking structure to bring this complex to full Class A status. With many months spent in the process of being deeded over to its lender, White Plains Plaza had not been a factor in recent CBD leasing. Under new ownership, and given its location at the center of restaurants, bars and service retail, it should be a formidable competitor for future tenants.

A new marketing strategy

Primarily in the Class A buildings in the CBD, owners such as Empire State Realty Trust and Reckson are taking a marketing tactic from New York City and bringing it to Westchester. Previously, when office spaces became vacant they were typically left in their existing state, with the generally optimistic rationale that owners felt that some of the old installation would be useful for a new tenant. Today, in spaces generally of 5,000 square feet or smaller, owners are demolishing them and pre-building brand-new spaces before any prospective new tenant even walks through. They typically include full glass office walls, high-quality finishes, and showcase open kitchens with high-quality cabinetry and granite countertops.

This concept has worked very well in New York City. The process of negotiating for space becomes simplified for a tenant. The construction is already done. The finishes are modern and beautiful, and the hope is that the prospective tenant says, “I”™ll take it.” The spaces today are designed with a high proportion of workstations to private offices. They show beautifully and allow everyone in the office to take advantage of natural light. Pre-built spaces also command premium rents. They should, as the cost to pre-build them, which ties up capital before a tenant signs a lease, is very significant.

1 N. Broadway in White Plains.

Down the road when the first tenant leaves, the intent is that space is repainted and re-carpeted and is ready for the next tenant, at a much reduced cost for the building owner. We are just at the beginning of this trend in Westchester, but some of the spaces that have been pre-built have already been leased and others are garnering serious interest from prospective tenants.

Pre-builts generate a “wow factor” that makes it difficult for other spaces to compete with. The tenant can visualize itself in the pre-built offices much more easily than it can in space built many years ago for a previous tenant, or even in raw space. It”™s like seeing the shiny new car on the showroom floor and saying, “I”™ll take it today,” instead of ordering one and waiting months for it to be delivered.

All the national real estate publications are talking about TOD ”” transit-oriented development. Millennials want to live near the train and have entertainment and services that are within walking distance of their rental apartments. White Plains is not a hot spot like Stamford is, with lots of demand from young workers to live in cool buildings with bars, restaurants and entertainment venues nearby. There is talk going on about redevelopment of the White Plains Metro-North station, which would be a boon to the city. But it is a long process.

Could you imagine the “cool factor” of a Grand Central-like Metro-North station in White Plains? Restaurants, bars and upscale retail would attract people to live nearby. It would help companies attract and retain young employees, and it would add much-needed food and service establishments to that side of town. Let”™s hope it moves forward soon. Louis Cappelli proposed this idea years ago, but it never got off the ground.

A glut of northern space

The northern submarket”™s availability is huge. This is our second-largest submarket, with total inventory of about 6.9 million square feet. It shows a 26.7 percent availability rate overall and a whopping 29.5 percent in Class A product. These are large blocks of space on the IBM Armonk and Somers corporate campuses that are on the market for lease, as well as the 540,000-square-foot 1 Pepsi Way building being vacated by Pepsi in Somers and the former Reader”™s Digest property in Chappaqua, whose owner has been attempting to redevelop the site without success for almost a decade. Now the 286,000-square-foot former MBIA campus near Armonk has been added to the inventory as well. These are all very large blocks of space in up-county locations.

It will take something other than general market activity to get these spaces leased. The 1.8 million square feet available in the northern submarket will likely overhang our market for a very long time, as the present market velocity and tenant makeup will not lease up any significant portion of this space in the foreseeable future. I am not sure what the solution will be on this issue, but I am sure it will not be found in our office leasing market.

The northern submarket is extremely large geographically, stretching from Hawthorne and Valhalla on the southern border to the Putnam County line at the northern border. In probably the largest lease in this submarket this year, Putnam County Savings Bank leased 25,352 square feet at GHP”™s newly acquired and repositioned office property at 2651 Strang Blvd. in Yorktown Heights. Yes, the Putnam County Savings Bank is headquartered in Westchester County.

A large renewal this quarter was Matrix Absence Management”™s at Mack-Cali”™s 7 Skyline Drive in Valhalla. It renewed for 19,000 square feet and expanded by 5,500 square feet.

High availability and vacancy rates

Overall Westchester availability is pretty flat, decreasing by just 0.03 percent to 23 percent at the end of Q2. With a total available 6.4 million square feet, we haven”™t really made much of a dent in that statistic since the mid-1980s.

Understand that the availability rate includes all space on the market, including space being offered for sublease on which rent is being paid to the building owner and space in owner-occupied buildings ”” at IBM, that is. The vacancy rate includes only space being offered directly by building owners in multitenant buildings and totals 17.8 percent of the county”™s office inventory, according to Newmark Grubb Knight Frank. That translates into approximately 5 million square feet of vacant space.

2649 Strang Blvd., a medical office building in Northern Westchester Executive Park.

They are both daunting totals, but we should really focus on the vacancy rate as a more realistic number. Ironically, with all the recent repurposing of old office buildings and purchases of such buildings by medical users, the vacancy number of 5 million square feet has not changed very much in the last 30 years. Large corporate space give-backs such as those cited here seem to conspire to keep the vacancy and availability numbers high. IBM once snapped up full buildings when they were under construction. Now it has hundreds of thousands of square feet on the market on its own campuses.

To sum it up, the small southern submarket is in very good shape, east and west submarkets are doing OK, the CBD continues to be very quiet, and the northern submarket is filled with space that is available but will not likely be leased.

Investment sales and properties on the market

The most interesting ”” and puzzling ”” sale transaction this year is the acquisition by Mexican billionaire Carlos Slim of the 540,000-square-foot 1 Pepsi Way in Somers. If the purchaser has a company or companies in his portfolio that he will relocate to this building, it may make sense. If he is putting it on the market as a speculative multitenant office building, it will likely take many, many years to lease it up, if it can be leased at all. There are few enough deals of more than 20,000 square feet in our market in any given year to give such a northern location a good chance to compete for them, and it will take a good number of them to fill this building. It was already known in the market when the purchase disclosed that the full-building tenant Pepsi Bottling Group would be moving to White Plains within the year.

The MBIA campus in North Castle was purchased by Steven Wise and the Manocherian family. Wise has had great success in leasing up the former Clairol manufacturing facility in Stamford with such tenants as Chelsea Piers and NBCUniversal. The proximity of this corporate campus to Greenwich may well offer an economical alternative to companies paying sky-high rents in that Connecticut market.

It will be interesting to see how quickly some leasing momentum can be developed. It will also be interesting to see whether the tenants primarily come from Westchester or Fairfield, and how the challenges of turning a multibuilding, former single-tenant headquarters campus into a multitenant corporate park will be met. Robert Weisz has done very well with single-tenant to multitenant conversions at 800 and 1133 Westchester Ave., but those were single buildings in much more central locations.

Pace University has just put its 37-acre Briarcliff Manor campus ”” with 330,000 square feet of space in nine buildings ”” on the market for sale, as well as its 82,000-square-foot condominium interest in the office building at 1 Martine Ave. in the Westchester Financial Center. The White Plains space will add significantly to the CBD vacancy rate, but it will offer potential users an opportunity to own their space ”” the only such opportunity in the CBD. The zoning also permits residential and hotel uses. It is certainly a transit-oriented development location, which is a hot thing to be today. It will be very interesting to see what users and developers will be attracted to this unique offering.

Regeneron grows and buys in Westchester

The Landmark at Eastview campus.

Regeneron Pharmaceuticals spent $73 million to purchase a large parcel of land adjacent to the Landmark at Eastview in Greenburgh. The company leases the overwhelming majority of the Landmark campus in Greenburgh and Mount Pleasant and it has just added 75,000 square feet of additional space there. It purchased the land, after obtaining zoning variances that will permit a variety of uses, to protect its growth. This is a great indicator that the company will not only continue to grow but will grow in Westchester. Hopefully, Westchester”™s biotech sector will expand with other companies entering the market. Unfortunately, this is not easy to do as Regeneron leases substantially all the modern lab space in the county.

No developer is stepping up to build more laboratory space, which is extremely expensive and risky to bring to market. Fareri Associates is at the front end of approvals for a large health tech and laboratory development on county land in Hawthorne, but this will take many years to come to fruition.

Developments on the horizon

On the residential side, Lennar has purchased the East Post Road multifamily development site in the White Plains CBD from Urstadt Biddle; the site is slated to have about 800 apartments. This represents a national residential developer moving into the Westchester market with a very large project. It is an area of White Plains that really needs some life injected into it. Hopefully this new project will help to provide that and will reinvigorate the dormant Post Road retail corridor.

On the far west side of the county, a partnership between Sun Cal and Diversified Realty Advisors is in the process of redeveloping the former General Motors site in Sleepy Hollow, renamed Edge-on-Hudson. The intent is for this to be a live-play neighborhood with almost 1,200 housing units ”” rentals, townhouses, and condos ”” for both millennials and empty nesters. Situated between two Metro-North train stations, it is considered a transit-oriented development. The work component of the popular live-work-play environment will not be present, as it is expected that the millennials will commute to New York City via Metro-North and the empty nesters will use the train to take advantage of New York City cultural and entertainment attractions.

This is one of a number of projects that are expecting their target market to be split between millennials and empty-nesters. Others include LCOR”™s Ban Street apartment project near the White Plains Metro-North station and the multifamily project proposed by Normandy Real Estate Partners and Toll Brothers on Corporate Park Drive that is working toward its approvals in Harrison. Harrison has also just approved a multifamily development by AvalonBay Communities on the site of the Harrison Metro-North station. This could be the first of many projects that will redevelop unused Metro-North land around its stations.

A diversifying market

In the past few years, many office buildings have been repurposed, removing them from our multitenant inventory. Medical is now a much larger space user in our market than it has ever been. Obsolete office buildings may soon make way for multifamily housing.

1 Martine Ave. in White Plains.

Westchester is clearly diversifying. As in many other markets, the rock star product type is multifamily rental housing. Large residential developers from other markets are investing in the county. Millennials and empty nesters form the target market for these new developments. We already have lots of empty nesters and are working on attracting and retaining millennials.

We are in the same boat as many other communities across the country. Suburban office is just not the popular product type it once was. Technology has given us the ability to work anywhere, and the millennials who now form the majority of the U.S. workforce and the tech companies that hire them want to work in funky loft buildings in urban environments. Large traditional corporations continue to downsize, in part because of these trends, giving back office space to the market. Even IBM recently leased a significant amount of space in a tech hub building in New York City. Other than Regeneron, Westchester is not home to any companies that are in spectacular growth modes.

But the first half of 2015, primarily the more active Q2, tells me that general real estate activity is on the upswing, and even our office market is seeing some more activity. We have less dependence on the leases of less than 5,000 square feet than we once did, and Pepsi and Regeneron have deepened their commitments to the county.

Hopefully, the momentum continues.

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