COVID-19 Pandemic’s Impact Accelerates Trends in Westchester’s Commercial Market
Real Estate In-Depth | January 22, 2021
RYE BROOK— The turmoil of the COVID-19 pandemic has accelerated existing trends in Westchester County’s commercial real estate market with multifamily and industrial/flex sectors faring well, while office and retail vacancies continued to rise and investment sales briefly stalled, according to the Houlihan Lawrence 2020 Commercial Market Report released on Jan. 21.
“The pandemic has had a profound effect on corporate cultures and individual priorities. Companies have realized that business objectives can be accomplished in a more flexible operating environment if a culture of productivity and shared goals is preserved. Individuals have discovered the benefits and weaknesses of working from home as compared to a traditional work setting,” said Tom LaPerch, director of Houlihan Lawrence Commercial.
“Corporations and individuals are resetting their priorities with regards to location of work, length of commute, and financial obligations vs. benefits that are attached to different decisions. The result of these important assessments, and their impact on commercial real estate will begin to crystalize during 2021. There is already tangible evidence that Westchester is likely to benefit from companies and individuals re-evaluating their commitment to New York City’s urban core,” LaPerch added.
Among the highlights from the report include:
Westchester’s multifamily sector has fared better than many urban core multifamily assets.
Reported occupancy levels for multifamily assets in Westchester remain high (at 96%). Vacancy did increase by approximately 1% – 1.5% during 2020, however, demand continues to be strong and the brokerage firm does not foresee major difficulties ahead.
Rental price momentum was robust when entering the “distancing months” but some of this momentum was lost due to the negative impacts of the pandemic. As a result, lease prices were mostly stable during 2020. As of the fourth quarter, there was only a modest reduction in effective lease prices as compared to the same quarter of 2019. Existing pipeline of new multifamily projects is robust (6% of stock). It remains to be seen if some of these projects will be reconfigured to include a different mix of apartment sizes. The popular studio or one-bedroom, catering to the millennials working in New York City, may lose some attractiveness in favor of slightly larger units, the report stated. Millennials may find that the smaller units in New York City are now more affordable and larger households appear to be inclined to choose the suburbs.
Regional and Westchester Office Vacancies Increase
Supply of office space exceeded demand during Q4, 2020 resulting in an additional 1% of office stock becoming vacant. This number reflects positive sublet leasing activity which mitigated occupancy losses. In general, leasing was weak as few tenants felt confident enough in their office space needs to either expand or take new space, the report noted. As a result, the number of deals fell to the lowest level of the last few years. Office lease pricing, as reported by CoStar has remained firm. This suggests that landlords have not shown price flexibility and deals are taking place mainly in full-service buildings that are higher-priced. Going forward, Houlihan Lawrence states that it is beginning to see some landlords increasing term flexibility in order to attract tenants. The firm expects office space turnover and repositioning to increase meaningfully once the tenant market becomes more active and post-COVID tenant needs begin to crystalize.
Westchester Retail Vacancies Rise In the Eye of the COVID-19 Storm
Reported retail vacancies have risen 1.1% for 2020 but only modestly during fourth quarter. We believe that information captured across databases is lagging what we observe on the ground. Retail space classifications include most restaurants and other food related establishments, fitness centers, and personal service businesses, many of which are currently fighting for survival. Despite the government and landlord support that many of these businesses have received, the duration of the COVID related restrictions is putting significant pressure on all property stakeholders. Going forward, new businesses occupying retail space will likely explore different avenues to keep cost and risk under control. Perhaps landlords will identify the “ideal” white box, able to fulfill a broad range of basic retail needs, and a plug and play format ideal for new businesses and start-ups that is ready to be leased on flexible terms. Clearly landlords will require a lease pricing that is consistent with taking a larger share of the risk related to the space, the report stated.
Westchester Industrial Segment Continues To Propel Forward, Riding the Wave of Transitions
The pandemic significantly accelerated e-commerce evolution, compressing multiple years of expected growth into 2020. Consumers expect quick deliveries and companies have been retooling their logistic infrastructure to compress delivery windows. As a result, industrial and flex space demand continues to escalate, and lease prices are on the upswing. With warehouse space in short supply in Westchester, large format retail owners, developers, and municipalities are increasingly faced with demands to create or repurpose existing space in proximity to consumption centers to become warehousing space. For the time being, industrial asset occupancy remains high although some tenant turnover is taking place due to COVID related user dislocation. Lease pricing appears to have spiked during fourth quarter 2020, as per CoStar data. Some of this increase is likely to reflect new contracts on expired leases that were well below market.
Brief Lull in Investment Sales Considered Temporary
Commercial real estate investment sales were depressed, hitting a multiyear low. Similarly, the number of transactions was low, and transactions involved smaller sized assets. These are not surprising statistics as the pandemic has upended property cash flows, and with that, valuation visibility. Investors that were active in this environment, took advantage of poor market liquidity and bought at a discount to replacement value, locking-in attractive future returns. Houlihan Lawrence expects that the investment market will recover during 2021 as the heath crisis subsides and investors contemplate a period of low interest rates, economic recovery, and political continuity.
It is inevitable that some percentage of the current stock of retail and office space in Westchester will have to be re-positioned through investment to regain viability. This reality will encourage investment transactions as current owners may not be willing or able to undertake the much needed, and sometimes costly, repositioning required by their real estate assets.