BY BRIAN CARCATERRA
There are many factors that will affect the Westchester County office market in 2015 ”” factors like the continued development and expansion of the biotech/health care sector, the adaptive repurpose measures taking place throughout the county that are re-categorizing the market”™s “balance sheet,” and special interest groups aligning, as in the Westchester County Association”™s Blueprint initiative for economic development, to create paths of least resistance for local and new businesses.
However, I believe that there are three little-discussed factors that will have the most pronounced effect during the course of 2015. They are the Rivertowns”™ continued evolution and enhanced live/work/play profile, linchpin transactions applying historic pressure to the White Plains Central Business District inventory and exiting owners making way for new ownership.
- Brian Carcaterra
Rivertowns
Long thought of as a declining segment of the residential, retail and commercial sectors of Westchester County, the area that I describe as the Rivertowns, extending from the Yonkers waterfront north on Route 9 to Peekskill, will continue to experience a boom in all asset categories. The visionary towns that are ahead of the curve like Tarrytown, Irvington, Dobbs Ferry and Hastings-on-Hudson, will lead the push in becoming the most sought-after residential destinations in the county for people being priced out of Manhattan and Brooklyn inventory.
Why? Because the upper demographic subset of the county is split between two segments: those in asset management ”” Wall Street, real estate and the service providers that support the business of overseeing assets ”” and those in science, arts and technology. The central and eastern side of the county has long been the home to those that represent what I call the “asset management team.” The western side historically has been favored by the science, arts and technology folks ”” those who generally seek culture, diversity and access above property values, country clubs and athletic programs.
The west side has been hampered by a lack of quality inventory, insufficient infrastructure and an aging population. The inventory and infrastructure issues are changing at a historic rate ”” the General Motors redevelopment in Sleepy Hollow is just one example of the many waterfront projects scheduled to be completed in the near term ”” and those developments will provide many acceptable destinations to people relocating from Manhattan and the outer boroughs.
But why are those folks going to gravitate toward the west side versus the east and central sections of Westchester? Because at this point in history, those that will be leaving are the same folks that were priced out of midtown and upper Manhattan 25 years ago and sought locations in areas like lower Manhattan and Brooklyn. They were priced out due to the run-up in values caused by the exponential growth on Wall Street and in real estate. They converted areas like the Lower East Side and Williamsburg and now find themselves “priced out” and “cultured out” again. These are the same people who design code for companies like Google or work in laboratories uncovering the next big pharmaceutical drug. They are architects, authors and designers of the next applications for our handhelds. They don”™t trade fixed-income bonds or charge $800 an hour at a white-shoe law firm. They care more about the weekend farmers market than the weekend high school football game.
With what will be year-over-year population growth, requirements will need to be filled from a retail, hospitality, office and infrastructure perspective. Demand will peak, supply is already limited and deal velocity will gain tremendous momentum. The new members of these communities will need additional places to eat, work, be entertained, shop, bank and drink coffee. With high barriers to entry in this market, values will increase across the asset spectrum.
White Plains CBD tipping point
Last year was one of the worst years in leasing history for the Central Business District of White Plains. An anemic total of 150,000 square feet of leased space, including new leases and renewals, was transacted in the Class A market. That leasing activity represents about 3.5 percent of the CBD”™s approximately 4 million square feet of Class A space. The national average for a healthy market is about 12 percent. So why in the world do I think White Plains will be relevant for 2015? Here”™s why:
There are only four buildings in the CBD that can accommodate a 100,000-sqaure-foot tenant.
There are only an additional three buildings that can accommodate a 50,000-square-foot tenant.
That sounds like a lot of space, but when you drill down, two of the four buildings that can accommodate 100,000 square feet are directly adjacent to the train station. The other two are 15-minute walks or longer to the train station. So if you are looking to secure approximately 100,000 square feet within short walking distance to the train, you only have two options.
That space scarcity doesn”™t really matter if there is no demand. But there are three bona fide tenants in the market in search of more than 80,000 square feet. Once the first deal falls, there will be an immediate chain reaction that will reverberate through the market and through all pending interest in the CBD. If the second deal falls, there will be a seismic shift in supply and absorption, as all three tenants do not currently lease space in the CBD. Seemingly overnight there could be a potential “space grab” for quality space in a quality building in a quality location.
If I were advising any of the three companies currently searching, I would advise them to step up and make their deal before they are the ones standing with nowhere to sit when the music stops. I am forecasting that by no later than midyear, the CBD will lease twice as much space as it did for all of 2014.
Additionally, there are several marquee health care systems searching in this market for office space of less than 50,000 square feet. Institutions like Columbia and the Hospital for Special Surgery will likely be announcing large transactions in and around the CBD.
Finally, rumors abound that a certain potential presidential candidate residing in Westchester County is seeking short-term space to ramp up a campaign headquarters in White Plains. If this rumor becomes a reality, it will put the CBD at ground zero for a very high-profile presidential run.
New ownership
My team and I compiled a “likely” list of office properties that could sell in 2015. We came to 25. There are only 195 Class A and Class B properties in the county that are not owned by their users.
Why is this ownership turnover happening? There are several reasons.
1. The good: Owners who have realized their value and desire an exit with substantial returns. The investment market is strong and owners who selected opportunities during the downturn at a distressed or discounted basis experienced a competitive leasing advantage over those owners who were burdened by high basis and constrained capital.
2. The bad: Sellers in the market that have hung on through the downturn and either recapitalized or restructured their loan. They can take advantage of the hot sales market and get out with their equity (and in some cases, their integrity) intact.
3. The ugly: The “Murphy”™s Law” players. Bought at the wrong time, executed an improper strategy, spent money incorrectly and just flat out failed and gave the keys back to the lender/receiver/servicer. It usually takes 12 months for these assets to cycle through the proper channels and sell to a new buyer.
The transition of ownership will be paramount and opportunities will be created in the market for new players to enter and prove themselves. It”™s a healthy cycle of “out with the old and in with the new,” particularly for assets that are sold by sellers in the second and third categories above. Westchester”™s aging office product stock needs revitalization in capital expenditures. With the lack of new construction, our product pales in comparison to other markets nationally and while rents do not justify new construction, an attractive purchase basis can allow for significant overhauls to the physical aesthetic.
Conclusion
Westchester will have a bounce-back year. Leasing velocity will increase with several key transactions with high-profile groups starting the first half of the year on a good note. Steady and consistent investment in properties and infrastructure will continue to take place and while the year won”™t be record-breaking, it will be foundation-building.
As an investor, we are looking at long-term projects that could have generational value. As a broker, we are looking to secure quality blocks of space that will be short-list contenders for credit requirements.
Overall, we are optimistic and excited for a very productive 2015.
Brian Carcaterra is senior vice president at the Westchester/Fairfield CBRE Inc. office in Stamford. He can be reached at 203-352-8903 or by email at brian.carcaterra@cbre.com.
