The Westchester office market going into 2024: We cannot buck the trends

Moody’s Analytics on Jan. 8 reported that the office vacancy rate in the U. S. is at an all-time high of 19.6%, shattering the 2022 record of 19.3%. Part of the reason is overbuilding in the 1980s that was fueled by cheap bank debt, which still weighs on the national markets some 40 years later.

Nearly 6% of all CMBS office building loans are delinquent, up from 1.6% at the end of 2022. A CMBS loan also is known as a conduit loan. CMBS loans often are packaged and sold to other investors by the parties that issue them. The number of delinquencies could continue to rise as interest rates remain elevated and $117 billion of office debt is expected to mature this year. Refinancings of maturing mortgages are very difficult due to increased interest rates and decreased building values.

As Westchester has always trailed behind the national numbers, nothing has really changed in 2023. Our absorption was negative 168,000 square feet in Q4 in our roughly 27-million-square-foot market this year, according to CB Richard Ellis, with a year-end availability rate of a little over 21%.

Leasing in Q4 totaled 204,000 square feet, which has been our rough five-year average, but 2023 annual leasing activity of 742,000 square feet was 25% lower than in 2022 and 26% below the 10-year average. Net absorption for 2023 was 198,000 square feet, even with four of our five submarkets showing negative absorption in Q4.

Asking rents are fairly flat, but they will likely rise a bit as financially distressed lower-priced buildings move to special servicing (where they cannot transact new leases) and better quality, higher-priced buildings become more popular with tenants.

There is a long list of reasons for these poor numbers: old, generally undesirable office product (we have not built a new multi-tenant building since the mid-1980s), hybrid work causing tenants to typically downsize by approximately 20% on new or renewal leases, and some large deals done at sublease spaces or in off-market buildings.

There was a lot of “rearranging of the deck chairs” in 2023 as tenants left older, less desirable buildings (some of which are in financial distress) for higher-quality, financially stronger buildings. These leases were generally shrinkages or lateral moves in terms of square footage.

Some of the largest deals in Westchester this year literally did not affect the market statistics or affected them negatively. Atlas Air (60,000 square feet) relocated out of Morgan Stanley’s building at 2000 Westchester Ave. in Purchase to a sublease from Sumitomo Bank at the Gateway Building in White Plains. The Rebecca School relocated from New York City but leased 60,000 square feet in Mount Vernon at an owner-occupied building. And Fuji Film renewed its lease early at 200 Summit Lake Drive in Valhalla but cut its former 120,000-square-foot space literally in half.

The New York Power Authority is looking to downsize from its current 400,000-square-foot headquarters at 123 Main St. in White Plains to approximately 250,000 square feet. It has made it clear in its Request for Proposal that no existing buildings would be considered, and that the winner of the RFP would have to build a brand-new building to accommodate the agency.

Overall, business is good in Westchester. Office tenants are now in a mode to make long-term decisions on new leases and renewals. While there is an increasing number of buildings in financial distress (many of which will become candidates for repurposing to other uses), we do have a number of owners who are doing well and have the capital to transact new deals. And approximately 135,000 square feet came off the market vacancy this year when Mavis Tire purchased the long-vacant office building at 100 Hillside Ave. in Greenburgh for its own use.

As many tenants are now “right sizing” when they do a new lease, they can afford to spend a bit more per square foot on rent to be in a better, more solvent, more attractive building. At today’s costs, landlords do not become cash-positive for a new lease until well into year four, so new leases continue to be a minimum of seven years.

Notwithstanding the woes of the office market, multi-family development is booming in Westchester, with literally tens of thousands of rental units being built in White Plains, Yonkers, New Rochelle, and other cities. Industrial space is in high demand with extremely limited supply, and rents are rising sharply in this product type. Retail strip centers are leasing well, and enclosed malls are diversifying their tenancies with “experiential” tenants, including auto showrooms, indoor golf simulator venues and dining options.