Realtors offer forecast for 2010
More companies will vacate Westchester office space in 2010 and rents will continue to decline, according to Realtors predicting a tough year ahead in both the commercial office and retail markets.
In short, 2010 looks to be more of the same of what befell commercial real estate in the county in 2009, panelists told a holiday luncheon audience of the Commercial & Investment Division of the Westchester-Putnam Association of Realtors.
In late 2009, “There”™s been leasing activity, but there hasn”™t been a lot of negative absorption going on,” said broker Glenn Walsh, senior director in the White Plains office of Cushman & Wakefield Inc. He cited the pending moves of Reader”™s Digest Association Inc. from its long-time Chappaqua campus and of Malcolm Pirnie Inc. from its Harrison headquarters. Both companies are relocating within the county ”“ to Westchester One at 44 S. Broadway in White Plains ”“ but are leasing downsized space, he said.
“We”™re getting activity,” Walsh said, “but it”™s not the right activity because we”™re losing space.” In a Westchester office market of 28 million square feet, Walsh said, there is 700,000 to 800,000 square feet of negative net absorption this year.
William V. Cuddy Jr., executive vice president in the Stamford, Conn., office of CB Richard Ellis Inc., said CBRE”™s average annual leasing velocity in Westchester over 10 years is 2.3 million square feet. Through the third quarter this year, leasing amounted to 900,000 square feet, he said. With about 400,000 square feet expected to be leased in the fourth quarter, CBRE”™s leasing activity here for 2009 will be “about 60 percent, at best” of the company”™s 10-year average, he said.
Looking at new trends, Cuddy said the office market in late 2009 has seen deals that won”™t support the building owner”™s debt because owners are deciding it”™s better to actively lease than let a building sit vacant in a tenant”™s market.
“I think the challenge of the market has forced owners, lenders, real estate services professionals to adapt how they work dramatically,” said Cuddy, “more so in this recession than in any of the four previous recessions that I”™ve been through. People are reinventing how they”™re approaching their business in a more creative fashion, and I think that bodes well.”
Cuddy said Westchester has too much office inventory and those in the industry “need to think out of the box” about how to change that. “We”™ve been grappling for a decade with a vacancy rate of about 20 percent,” he said. “That”™s not healthy.”
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Cuddy suggested if 10 percent of office inventory were pulled from the market, “It would change the dynamics of the market pretty dramatically.” Office properties such as the Reader”™s Digest space in Chappaqua can be adaptively reused, he said.
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Walsh and Cuddy offered differing views of one of the largest relocations recently announced, the move in 2011 of Starwood Hotels & Resorts Worldwide Inc. headquarters and 800 jobs from White Plains to Stamford.
Walsh questioned whether the deal was worth the financial incentives package offered by Connecticut, reportedly about $90 million, “to bring a company 10 to 15 miles down the road.” Most Starwood employees living in Westchester will remain as residents here, he said.
“The money they gave them I don”™t think was a good thing,” Walsh said of Connecticut officials. “They won the battle, but lost the war.” He wondered “how many more arrows they have” to draw other companies from New York.
Cuddy, though, called Connecticut”™s Starwood deal “a very aggressive package. It”™s well thought out. It”™s enough to stimulate demand.
“It creates a huge gap in occupancy costs for New York City and Westchester County too vis-Ã -vis Connecticut,” he said. “There isn”™t a doubt that other companies are evaluating it to take advantage of the program.”
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Though multifamily buildings still are a good investment and banks are lending for those deals, Westchester”™s investment property market also has been down in 2009, said John M. Barrett, first vice president for sales at Massey Knakal Real Estate Services in New York City.
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For investment deals of $1.5 million and up, sales velocity in Westchester was 2 percent of inventory from 2004 through 2007, Barrett said. In 2009, velocity was 1 percent of inventory.
Capitalization rates on investment properties have been higher in 2009, Barrett said, especially in the county”™s low-income neighborhoods, where cap rates are up 300 basis points “because of a lack of buyers and a glut in the market.”
In the retail market, “The good news is Westchester has fabulous, fabulous inventory,” said William Hesse, president of Aries Deitch & Endelson Inc. in Hartsdale. “The bad news is Westchester has fabulous, fabulous inventory.”
Two years ago, said Hesse, retail rents along Central Avenue from White Plains to Yonkers ranged from $30 to $45 net per square foot. Central Avenue rents in 2009 ranged from $20 to $35 net. “It”™s rollback time,” he said. “We”™re rolling back to the ”™80s.”
For retail brokers, “The main problem in 2009 has been finding the moms and pops,” store owners that typically lease from 3,000 to 5,000 square feet, Hesse said. “They”™re just not there. They haven”™t come back yet.”
“Rents are now at a point where we”™re going to see more absorption, I hope,” Hesse said.
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In the commercial office market, both Walsh and Cuddy said 2010 will resemble 2009, with rising vacancies, more opportune subleases for tenants, declining rents and landlords looking to make deals ahead of a greater glut of class-A and class-B inventory.
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“It”™s going to be a long year for 2010, Walsh said. “Hopefully the second half will pick up.”
Walsh said Cushman & Wakefield brokers are seeing more small companies leasing 2,000 to 3,000 square feet in Westchester office buildings. “A lot of small blocks of space, that”™s the space we”™re getting the showings on” from Yonkers to Yorktown, he said. “Five-and-under (5,000-square feet) is back again,” he said. “That”™s going to be our market.”
Cuddy predicted the new year will bring new players into Westchester commercial real estate. “I think the dynamics of the market will change,” he said. “We could have some new and different players, some new owners stepping in.”
“The good news is that Westchester is going to be one of the first to come out of this in the country,” Walsh said.
Comparing Westchester with New York City and Connecticut, Barrett said, “I think we”™re going to come out of it better than our neighbors on either side.”