BY BRIAN CARCATERRA
In June of last year, four hospitals in Westchester County filed a request to leave the Stellaris Health Network, which since its start in 1996 was primarily mandated to create cost-reduction initiatives for its members.
Since the announcement, all four hospitals ”” Lawrence Hospital in Bronxville, Phelps Memorial in Sleepy Hollow, White Plains Hospital and Northern Westchester in Mount Kisco ”” have committed either to merge, “exploring partnerships” or be “taken over” by the largest hospital institutions operating in the New York City metro area.
New York Presbyterian has aligned itself with Lawrence, Montefiore with White Plains, and North Shore-LIJ with Phelps and Northern Westchester.
I believe that these announced alignments and their ramifications will have an extremely pronounced impact on the world of commercial real estate in Westchester County. The unlocking of this high-benefit market by those urban hospitals will lead to employee growth, facilities growth, adaptive repurposing and pressure on existing commercial inventory.
I foresee those partnerships by and between the largest hospitals in New York and the local hospitals here in Westchester driving further growth out of New York City to satisfy the patient needs on a local basis here in Westchester County. Hospital systems in many ways are like gas stations. The more you have in the best locations with the best services provided to the best users in that community, the better and bigger the businesses can be.
The former Stellaris Network members”™ real estate footprint contained their main campuses along with adjunct or satellite facilities, which were mostly composed of a series of cost-sensitive one-off locations without a greater perspective utilizing typical necessary drivers for real estate acquisition such as growth, emerging conditions and sustainability. Or, the hospitals came into the real estate via acquisition of an existing business ”” either way lacking strategy. I foresee the growth not only on main campuses fueled by an injection of balance sheet capital and endowment growth but also “smart” expansion and consolidation in the satellite facilities as well.
In most markets where land prices and barriers to entry are low, ground-up development for special use/institutional groups like hospitals and schools are more prevalent. Here in Westchester, the opposite exists. When large special use/institutional groups seek facilities for expansion and consolidation, in many cases they must pursue adaptive repurpose projects.
We have seen this trend start several years ago and now it”™s accelerating at warp speed. Memorial Sloan Kettering”™s project on Westchester Avenue in Harrison in the former Verizon building, New York Medical College”™s planned repurpose in Hawthorne of the former IBM Watson facility and Montefiore”™s purchase in Tarrytown of the Kraft Foods R&D facility are just a few.
I foresee this trend continuing and expect that with the reorganizations of the former Stellaris Network hospitals, it will add incremental pressure on existing office inventory. This will lead to a tightening of the market regardless of new office tenant demand. This fundamental shift in supply will drive availability down and rent and acquisition pricing up.
For a reviving Westchester market, that positive trend is coupled with the march toward the ninth inning of corporate relocations from the county to lower-cost labor and housing markets here in the U.S. and abroad. IBM, General Foods, New York Telephone and other large corporate users blanketed the market with their respective employees and were the genesis for the initial growth and demand. Over the last 30 years, the relocation and consolidation trend had severely impacted the market as seemingly one large building after another was given back to the market for repositioning and multi-tenanting.
At this juncture, very few of these single-tenant corporate structures exist. With the exception of several large financial services companies, all of which recently have either committed to stay or reinvested significant capital into their property, the market is basically through its cycle of re-tenanting. Ninety percent of current transactions involve tenant space of less than 10,000 square feet. So while there hasn”™t been an availability compression, the overhang of redeveloped single-tenant buildings, which in effect replaced and inhibited new construction, is almost nonexistent.
Brian Carcaterra is senior vice president at the Westchester/Fairfield CBRE Inc. office in Stamford, Conn. He can be reached at 203-352-8903 or by email at brian.carcaterra@cbre.com.
