Westchester’s office market 2015: Biotech and soda pop

The Westchester County office market has been up and down through the first three quarters of the year. The biggest piece of news in the very quiet first quarter was the announcement of PepsiCo”™s return of the entire 540,000-square-foot One Pepsi Way in Somers to the market when its lease expires in early 2016. This news propelled the market to a net absorption of negative 710,000 square feet for the quarter. Renewals rather than new leases drove the activity.

Much better general velocity in the second quarter led to a healthy 1.2 million square feet of leasing activity for the first half of the year, including positive net absorption of 83,000 square feet. Once again, PepsiCo made the big news. It leased two entire buildings totaling 361,181 square feet at 1111/1129 Westchester Ave. There were a higher number of leases, more new leases and the important 10,000-to 25,000-square-foot transactions jumped 35 percent in Q2 vs. Q1.

The third quarter did not offer any significant changes in the market, but the blockbuster PepsiCo deal in White Plains helped the year-to-date figures for 2015 exceed leasing for the entire prior year. New deals in Q3 increased by 26 percent but the total square footage was smaller than last year. Renewals increased by 31 percent over Q2, staying on par with 2014 numbers. Leases of under 5,000 square feet were not dominating the market in terms of the number of transactions, as they have for many years.

As of this writing, we do not have final Q4 statistics. However, it looks like Westchester will end the year with only slightly negative absorption. Reportedly, there are a significant number of deals still working through the lease negotiation process. Depending on how many of those close by year end, we could be flat or even a little positive in terms of absorption. The availability rate has hovered around 23 percent for almost the entire year and it does not look like there should be any significant movement after the full year numbers are in.

A pretty good year

Overall, it has been a pretty good year. The average size of leases is up about 50 percent from 2015, to about 9,000 square feet. A good number of companies of all sizes are growing and extending their leases, which is a welcome and positive trend.

The big issues seem to be flat leasing activity in the White Plains Central Business District and the dearth of mid- to large-sized blocks of space along the 287 corridor, which can hinder new tenants from finding enough alternatives in their desired locations in the county. Statistically the northern submarket looks pretty dismal and its numbers continue to impact negatively on the market as a whole.

There is already 2 million square feet of leasing for the year, against about 1.5 million square feet in 2014. The PepsiCo transaction in White Plains helped to move the needle, but so did many expansion/renewal leases in sizes in excess of 10,000 square feet in almost all submarkets.

“Without a lot of big deals, we will exceed a healthy 2 million square feet of leasing activity,” said Karolina Pardo-Alexandre, research manager for Newmark Grubb Knight Frank. “The average deal size increased by 39 percent over last year and companies of all sizes expanded and extended their lease commitments. All in all, it speaks to a healthier market going forward.”

Biotech”™s giant

Regeneron, certainly the county”™s fastest growing company, inked an expansion lease of 116,000 square feet with its landlord BioMed Realty Trust at the Landmark at Eastview. The company now leases about 1.1 million square feet of the development”™s total of 1.4 million square feet and the campus is now 99 percent occupied, including multiple new laboratory buildings custom-built for Regeneron. Interestingly, these numbers do not impact the office statistics, as these are laboratory spaces.

In order to protect its future growth, Regeneron spent $73 million to purchase 100 acres of land adjacent to Landmark, which was previously intended for mixed-use development, including hotel and big box retail. Wisely, Regeneron made sure to obtain zoning approvals for a variety of uses prior to closing on the purchase. It now has certainty that it can develop the land for its own use and it has protected its downside in the event it needs or wants to sell off some of it. This purchase will enable the county”™s largest generator of high-tech jobs to continue its phenomenal growth in Westchester. Well played!

No one is stepping up to develop laboratory space and Westchester has no more laboratory inventory available. We need more lab space to develop a more vibrant biotech cluster. As I have said before, biotech is the perfect industry for Westchester. It employs educated, highly compensated people who can afford to live in our county. That is a win for the companies, a win for the residential real estate market and a win for their employees as well. A California-based developer has just purchased most of the former Pfizer site in nearby Pearl River and plans to offer much of its laboratory space for lease, creating additional competition for Westchester in this product type.

PepsiCo puts fizz in the market

PepsiCo has had the most leasing activity of any corporation in the county this year. First, it announced that it would not renew its 540,000-square-foot lease at One Pepsi Way in Somers. Then it leased 361,181 square feet at 1111/1129 Westchester Ave. in White Plains to house the people that had previously been located in Somers. This lease, and some midsized deals, including a 63,000-square-foot renewal/expansion by Central National-Gottesman at Centre at Purchase, drove the east submarket to 1.1 million square feet of leasing, the best in the county.

PepsiCo was already leasing the larger building at the 1111/1129 Westchester Ave. park as short-term swing space while its headquarters on Anderson Hill Road is undergoing a complete renovation to LEED standards. By the way, Nine West, the former full-building tenant of the smaller building of the two-building park, very quietly terminated its lease and vanished into the ether, providing the additional long-term space for Pepsi.

A little interesting history of the site: Starwood Hotels, which vacated this same campus for Stamford a few years ago when Connecticut offered it a $92 million incentive package, was just purchased by Marriott. It will be interesting to see whether Connecticut will get the benefit of its bargain once the purchase is completed and corporate decisions about whether to keep the Starwood headquarters in Stamford are made.

So PepsiCo left behind 540,000 square feet in the northern submarket and leased 361,000 square feet of space in White Plains. When you look at the two deals together, it was a negative absorption of about 180,000 square feet for the county. The Somers building will add to the huge overhang of vacant space in the northern submarket, including many large parcels such as IBM”™s space being marketed on its Armonk and Somers corporate campuses; the former Reader”™s Digest property in Chappaqua; and the 300,000-square-foot former MBIA campus in Armonk. This site has been purchased and will reportedly be “aggressively marketed” in Q1 of next year as a multi tenant campus and for adaptive reuse of some of its 38 acres.

These large blocks of space add about 2 percent to the countywide vacancy rate. The reality is that they will be very difficult to lease and will likely remain vacant for significant periods of time or hopefully be redeveloped for other uses.

What”™s new in the CBD

Generally, leasing activity has been fairly flat in the White Plains Central Business District versus 2014, at about 300,000 square feet to date. For some unexplainable reason, our buildings sited in the best locations at the Metro-North station have not attracted a lot of tenants in the last few years. The significant amount of residential development going on near the station will change the makeup of this area of the city to a more 24/7 population, rather than a 9 to 5 population, in the next few years.

Reckson has had significant success in filling its CBD buildings. Last year it attracted Legal Aid Society of Westchester to more than 26,000 square feet at its renovated 150 Grand St. and has continued to keep 140 Grand St. relatively full. Reckson”™s 360 Hamilton is essentially full and is a great example of how a quality, well-thought-out gut renovation can reposition a building to attract high-end corporate tenants willing to pay top dollar rents, even in Westchester. The office space component of the Ritz-Carlton development has gone from empty to almost full, with only two small spaces left.

Empire State Realty Trust has signed a large number of expansion leases with tenants of 10 Bank St. during 2015. They are currently renovating their lobby and cafeteria and are in the process of adding new amenities to the building as well.

Mack-Cali is rumored to have renewed Bunge, its anchor tenant at the Westchester Financial Center, for about 66,000 square feet. They also are in the planning stages of capital improvements and additional amenities for the financial center buildings at 50 Main St and 11 Martine Ave.

At 44 S. Broadway, PURE Insurance renewed and expanded to 44,000 square feet.

Ivy Properties has assumed control of White Plains Plaza ”” 1 N. Broadway and 445 Hamilton Ave. ”” and is embarking on a multimillion-dollar upgrade to the parking structure and to the common areas of both buildings. These buildings are already attracting significant tenant interest and recently signed a 15,000-square-foot lease with Ristorix, which is relocating from Tarrytown.

In a very quiet deal, White Plains Hospital leased the entire 50,000 square feet at 101 E. Post Road for back-office functions. The building had been vacated by the New York State Attorney General”™s office, which had relocated to 44 S. Broadway. As this building is only a few blocks from the hospital, the driving force for the transaction was location, location, location. Had the hospital not rented this building, it likely would have languished on the market.

However, there is a significant amount of “shadow space” in the CBD, with large leases expiring in the next few years. This includes tenants such as Disney, Arcadis, AboveNet, Pearson Education and others. This portends higher vacancy in a number of CBD buildings in the next few years once these leases expire. Some of these spaces have been on the sublease market for long periods of time without success.

Renewals rule

Renewals were the biggest continuing story in 2015. And many of these renewals happened as part of expansion transactions. As in most tenant-favorable markets, building owners just cannot afford to lose tenants. They are using all the tools in their toolboxes to keep tenants in their buildings. Given the cost and disruption of moving, tenants would typically prefer not to relocate if their existing building fits their needs.

Normandy Real Estate Partners had an excellent leasing year, signing about 360,000 square feet of leases, about twice the portfolio”™s normal leasing volume. The drivers in many cases have been expansions, which have been combined with renewals of the existing leases. They have also been the beneficiary of a number of new deals from inside and outside the county.

The RPW Group portfolio has had a good year and occupancy is up throughout. There are some pending transactions at 440 and 450 Mamaroneck Ave. that could significantly increase occupancy in those buildings. At 1133 Westchester Ave., some of the 40,000 square feet that EMC Corp. left behind has already been leased and ITT has expanded.

Reckson renewed Compass at 2 International Drive in Rye Brook for 26,000 square feet and added the Leukemia and Lymphoma Society in the same park for 42,000 square feet. They brought 520 White Plains Rd. in Tarrytown to 100 percent occupancy with new 30,000-square-foot tenant Clarfeld Financial Services, which relocated from a neighboring building.

Big changes at Mack-Cali

Mack-Cali, one of the county”™s largest owners of commercial property, has undergone a total corporate restructuring. Former CEO Mitch Hersh is out and new CEO Mitch Rudin is in place at this NYSE-traded REIT.

After an intensive study of the portfolio by the new top executives, they determined that the company will now focus on four core areas: the New Jersey Gold Coast, where they have a very significant presence; the suburban markets of White Plains CBD, Parsippany and Paramus, N.j.; their portfolio of office and warehouse flex properties and their Roseland multifamily division.

The good news for us is that the flex properties are primarily located in Westchester, and that the Westchester Financial Center will now get the benefit of some much-needed capital investment. These changes, in addition to the sale of about 500,000 square feet of office space on the Route 119 corridor in Elmsford and Tarrytown a couple of years ago, have significantly changed the composition of the Mack-Cali portfolio, which now includes more high-occupancy flex and warehouse space and less office space.

One example of the new corporate attitude is that the company is seeking final municipal approval to demolish its 50,000-square-foot long-vacant office building at 101 Executive Blvd. in Elmsford. It will replace it with a new 35,000-square-foot high-bay warehouse building, which will probably be fully leased before construction is completed.

Multifamily mania

Multifamily continues to be the preferred product type for developers in Westchester. LCOR is currently under construction on 561 apartment units on Bank Street just south of the White Plains Metro-North station, adding to the 500 or so units it constructed adjacent to the site a few years ago.

White Plains has recently retained a consultant to study the redevelopment of the Metro-North station area. Given the dearth of services, retail stores, restaurants and entertainment venues for the existing office buildings and what will be a doubling of the number of new apartment residents in this gateway to the city, this project now becomes even more important to bring to fruition.

National residential developer Lennar bought the Westchester Pavilion retail mall from Urstadt Biddle and is preparing to submit plans to White Plains for a development of 707 multifamily residential units as well as 96,000 square of retail space and restaurant space at 60 S. Broadway. (rendering) Hopefully, this major development will help to revitalize the significantly vacant East Post Road retail corridor.

On a nontraditional note, Toll Brothers is partnering with Normandy Real Estate Partners to develop about 400 residential units on Corporate Park Drive off Interstate 287. This project is currently in environmental review by the Harrison Planning Board. The partners would have to demolish two of the oldest office buildings in the county, totaling about 200,000 square feet, which will remove them from the statistical inventory.

When they receive approvals for the new residential development on Corporate Park Drive, they will have achieved a much more valuable use for those parcels of land than the old, dated office buildings could ever have. This will be a creative repurposing of two of the oldest office buildings on the I-287 corridor.

This would be a game-changer for Westchester, creating multifamily residential in a suburban office park setting. The adjacent 209,000-sqaure-foot LifeTime Fitness facility ”” within walking distance of the proposed development ”” certainly offers a great amenity. It will be interesting to see how the demand for these suburban residential units will compare to those in Westchester”™s TOD (transit- oriented development) locations.

Buckingham Partners/Sun Homes is pursuing approvals to build free-standing houses on the grounds of Reckson Executive Park in Rye Brook. Reckson has had approvals for years to build 350,000 square feet of office space at that location. When they realized that the market would not support the new office development, they began to entertain alternative uses. They were turned back by opposition at public hearings when they proposed to build an ice hockey facility on the site in 2013.

The housing is the latest alternative use for this site and probably the least objectionable to the community. I think it is a good one and another example of out-of-the-box thinking on the development front.

Buildings on the market

There are a number of office buildings officially on the market for sale as of this writing, including the 850,000-square-foot 44 S. Broadway and 7-11 S. Broadway in the White Plains CBD. It is also rumored that 140 and 150 Grand St. in White Plains are on the market as well.

Likewise the Pace condominium at 1 Martine Ave., which might be sold for a non-office use. This is the lower portion of the 1-11 Martine Ave. building, which is part of the Westchester Financial Center. The purchaser has not been determined. It will be interesting to see what happens to this important piece of space at the Metro-North station and what the future use of the space will be, as hotel and/or residential are possibilities.

Normandy Real Estate Partners is also marketing 701, 707, 709 and 711 Westchester Ave. They have taken 707, 709 and 711 Westchester Ave. from about 50 percent occupancy in 2009 to 93 percent occupancy today. I guess they feel they have added as much value as they can to these buildings and have put them on the market to reap some rewards from their hard work.

Most if not all of these buildings will likely go to owners not already in this market. Westchester-based owners are concentrating on keeping their existing buildings full, rather than adding to their portfolios.

And some things remain the same

The fate of the proposed French-American School at the former Ridgeway Country Club is still unresolved. The White Plains Common Council failed to attain the supermajority vote it needed to approve the project and it consequently did not get approved. Now the school is asking the courts to reverse that decision. It has been years of time and millions of dollars spent by the purchaser and its neighbor opponents.

Likewise, the former Reader”™s Digest property is still not done with its approvals after about a decade of applications and litigation. The developer and the town of New Castle have entered into a lease agreement to create a new performing arts center at the 400-seat DeWitt Wallace Auditorium rather than demolishing the building. The developer will donate the building to the town if the project gets all its development approvals, according to a news article. It has been a long slog since Reader”™s Digest left the site in 2009 after its first of three bankruptcies.

From driving range to drive-in building

Federal Express has purchased the former golf driving range in Fairview Industrial Park in Elmsford and received approvals to build a large distribution facility on the site. It will consolidate its smaller facility in that park and its 66,000-square-foot Stamford facility into the new building. It have also received approvals to build another distribution facility on a former hotel site in Yonkers.

Development and redevelopment in Yonkers

On the Yonkers waterfront, the U.S-based investment arm of a Chinese construction and real estate conglomerate will invest about $200 million to purchase two residential buildings developed by Collins Enterprises and build the third and final tower on the site.

Simone Development is underway in its gut renovation and redevelopment of the Boyce Thompson Building on North Broadway in Yonkers. This building has been vacant and deteriorating for decades, with many redevelopment proposals made that never came to fruition.

Simone has already leased 15,000 square feet to the nearby St. John”™s Riverside Hospital and 5,600 square feet to Fortina Restaurant, a fashionable pizzeria restaurant that will include an outdoor pizza oven.

Simone”™s concept is to co-locate retail, restaurant and high-quality medical and business office space in one building. It is a little unusual. If it works, and I think it will, it will be a great success.

In summary

This has been an unusual leasing year. Without much fanfare, a lot of deals have been done in generally larger sizes than in past years. They are still overwhelmingly intra-county relocations, but at least we are seeing a number of small and midsized companies expanding, which is a positive trend.

While the vacancy statistics have not changed very much, the practical reality is that there is a shortage of space in certain sizes on the 287/119 corridors, particularly in the over 25,000 square-feet range. Dealmaking has also been stalled in some of buildings that are on the market for sale, not to be resumed until those buildings are in the hands of new owners.

There is a significant amount of multifamily residential activity in Westchester these days, both at the approval and construction stages. Some of this is replacing old office buildings and taking place on land parcels that would have seen office development in a more vibrant office market. It”™s another step toward repurposing not only outdated building inventory but also office building sites. And with the new FedEx building and Mack-Cali flex building, we are actually seeing some new industrial development as well.

From an economic recovery point of view, I think the year has helped to improve the health of the Westchester office market. As buildings currently for sale trade, we will likely have new owners enter the market, who will hopefully invest in upgrading their buildings. Some older, primarily empty buildings will be mothballed and will set the stage for the next iteration of repurposing and redevelopment.

Howard E. Greenberg is president of Howard Properties Ltd. In White Plains, which specializes in tenant representation and real estate consulting. He can be reached at 914-997-0300 or howard@howprop.com.