Column: Westchester’s complex office market: A broker’s view

by Brian Carcaterra

The Westchester County office market is a complex story riddled with strengths, weaknesses and constantly changing factors that affect values, rents, occupancy and development.

To better understand the market, its current condition and it”™s near-term prospects, I”™ll outline and dive into those fundamentals that shape it.

Strengths

Proactive municipalities and special interest groups, especially the Westchester County Association and its Blueprint for Westchester program to reduce the county”™s glut of vacant office spaces.

Surging biotech and health care sectors, led by Regeneron Pharmaceuticals and mergers and acquisitions in the county by New York City hospitals.

Westchester is home to Regeneron, one of the world”™s largest and most innovative biotech companies. Recent investment and its expansion at its headquarters at the Landmark at Eastview and the company”™s forging into the ownership side of the market by acquiring neighboring parcels for future development proves its long-term commitment to the county. A 1 million-square-foot footprint is not out of the question for Regeneron and it will continue to be a harbor for some of the most sophisticated intellectual capital in the world.

 As I predicted last year, 2015 was bombarded with monumental M&A activity in the health care sector. Six of the largest hospitals in the county have been either bought, merged or established partnerships with leading New York City institutions of elite health care. Growth from this myriad of activity is certain as capital will be deployed, health centers redeveloped and new facilities repurposed from old and otherwise antiquated office inventory.

 Adaptive repurpose measures are being embraced.

 The county”™s aging, mostly vacant office product stock ”” some dating back to the 1960s ”” has been aggressively pursued by alternative-use developers and businesses. Local municipalities to date have been very supportive of that pursuit and have made the process to re-entitle and rezone properties much more expeditious from a historical perspective.

The constituents of the county realize that an old, ugly vacant building, generating nothing, is not a desired long-term solution. Facilities like Lifetime Fitness Center and Memorial Sloan Kettering”™s West Harrison cancer center have brightened the landscape and have created better solutions for those living nearby.

Population growth in Westchester”™s largest central business districts.

Continued quality development of multifamily residences has created more places to live in the commercial centers of the county such as White Plains, Tarrytown and Yonkers. We continue to see creative and sustainable developments being presented and believe that where there is a multitude of living options, there will be retail and office growth.

Weaknesses

Contraction of financial services and the corporate sector.

Westchester has long been a location for large financial companies and corporations to house lines of businesses that are critical to the overall function of the business at a lower cost than their alternative location in New York City. That trend has reversed since the Great Recession for financial services companies and, from the corporate side, since the early 1990s.

Aging product stock, no real new office development.

 As mentioned, the county”™s aging office product stock has been highly sought after by alternative-use developers and businesses. That doesn”™t change the fact that the remaining office space is still way behind the times in terms of design development, efficiency and sustainability.

Lack of growth beyond biotech and health care.

I can”™t think of another business that is growing in the county.

Factors affecting the market

Significant property dispositions are scheduled for year end in the class A office sector, including, in White Plains, 701-777 Westchester Ave., 44 South Broadway, 140-150 Grand, 440 Hamilton Avenue, and White Plains Plaza.

There currently are eight office properties being marketed for sale. Most are well-stabilized assets that should trade in a rather frothy investment market.

With a new herd of owners with new basis, the market should expect rising rents and more challenging concession packages for tenants. Owners buying well- leased assets typically underwrite for net operating income growth based on their own abilities and the thought that they can do it better.

New leadership for WCA.

Marissa Brett has stepped down as president of the business organization. Who will fill her shoes?

Workplace strategy and densification impacts.

Standard utilization metrics for office leasing used to be 1 person for every 250 square feet of space. But that standard measure no longer applies with the proliferation of offsite data centers, the elimination of paper records that require large filing areas, desk sharing and more flexible furniture technology that allows for mobile offices.

This trend is real and will have great impact on office buildings with respect to technology, heating, ventilation and air conditioning requirements, and parking.

Competition with a struggling Fairfield County.

In Connecticut, General Electric, the Royal Bank of Scotland and UBS Financial Services, among others, have all started their own downsizing processes. Anticipate a continued trend and a large impact on the office inventory balance sheet.

Undoubtedly, when a large user circulates through the tristate area in search of office space, there will be plenty to see in Fairfield County.

Bold predictions

I predict a six-figure reduction in office footprint through adaptive repurpose. There are several existing office buildings in sale discussions with developers and businesses. We foresee some if not all of those of properties trading in 2016.

There will be a compression of quality market inventory driven by lack of quality supply.

There are very few large blocks of space available that are deemed market -ready and are in the most desirable parts of a building.

Redevelopment will gain momentum at the White Plains Transportation Center. This has to happen and will continue to slowly plod along. The city needs a big development at the train station and will surely get it at some point.
Government will be increasingly involved in large corporate strategies that include Westchester for potential opportunities.

It will be a year with no large deals, just lots of small deals.

Rent increases will come with new ownership and capital expenditures.

There aren”™t a lot of big fish out there. I don”™t expect any really sizable office space requirements to hit the market for a 2016 close.

I do, however, see very healthy leasing activity in the less than 10,000 square feet range. We anticipate more leasing activity in 2016 than this year and, in particular, in downtown White Plains, where the market is coming off a historically slow year.

Brian Carcaterra is senior vice president at the Westchetser/Fairfield office of CBRE Group Inc. in Stamford. He can be reached at 203-352-8903 or by email at brian.carcaterra@cbre.com.