Health Care, Communications, Tech Sectors Key Drivers of Commercial Real Estate Market in Westchester

John Jordan | November 2017

A rendering of a luxury rental apartment project being developed along the I-287 corridor in Harrison by Toll Brothers Apartment Living that replaces two outdated and vacant office buildings.

WHITE PLAINS—Tenant demand by health care, technology and communications concerns, particularly along the I-287 corridor, are helping bolster Westchester County’s commercial office market.

Commercial brokerage firms Houlihan Lawrence and JLL recently released respective third quarter 2017 market reports for Westchester County. For the most part the two firms agreed on a number of positive prevailing trends including the continued repurposing of outdated office buildings along the I-287 corridor into medical office space and now even some residential housing. Both firms also concurred that the boom of multifamily developments in White Plains, New Rochelle, Mount Vernon and Yonkers that are geared at attracting millennials could have positive impacts on the county’s office market in the future.

Westchester’s office and retail markets showed positive absorption rates in the third quarter and some price concessions appear to have emerged as landlords seek better occupancy rates, according to “The Market Report,” authored by Teresa Marizano of the Houlihan Lawrence Commercial Group.

In the report Marziano noted that rental apartment demand continues to grow in Westchester County. Affordability and lifestyle flexibility have kept apartments as an attractive choice for new households in Westchester. Year-to-date absorption of newly delivered apartment units south of I-287 has weakened from the record-breaking 2016 level of 961 units to a still strong 730, or 1% of the stock, she reported.

Developers are acquiring sites near transportation hubs, which renters prefer, and these hubs are also drawing restaurants and retailers to create a concentration of amenities that draws consumers of all ages and strengthens overall real estate demand, the Houlihan Lawrence third quarter report noted.

In the industrial sector, warehouse space demand continues to exceed supply. In Westchester areas south of I-287, the industrial sector has benefitted from new retail consumption patterns that require direct fulfillment from distribution centers. Industrial and flex properties achieved price gains of 6.8% compared to a year ago.

The report revealed that with eroding demand for traditional store-based retailers, other uses for retail spaces are emerging, including niche fitness offerings, urgent care centers, physician offices, and specialized tutoring services.

On the downside, low compensation for risk in today’s real estate pricing, changes in the interest rate environment and uncertainty about possible tax code changes are some of the reasons behind the prevailing climate of investor hesitation.

“Westchester real estate fundamentals are making solid gains. However, despite a healthy economy, investment sales are only 36% of the third quarter of 2016 level. Buyers and sellers continue to struggle to find common pricing ground that can lead to a transaction. Real estate income drivers are changing and these changes have increased investors’ risk perception,” said Thomas LaPerch, director of the commercial group of Houlihan Lawrence. “However, we continue to think economic growth will encourage buyers to be more optimistic about real estate income prospects. At the same time, changes in the interest rate environment may act to motivate some owners to capture today’s robust pricing.”

JLL in its office market report stated that the countywide office vacancy rate stood at 24.3% at the end of the third quarter and Westchester’s gross average office asking rent was $26.84-a-square-foot. JLL is forecasting that the county’s office vacancy rate and asking rent will likely go down in the future.

The brokerage firm noted that average asking rents regressed in all but one (I-287 West corridor) major Westchester submarket and few big blocks of space are left within the White Plains CBD, which is limiting urban transit options for large companies. JLL noted that the lease-up of space along the I-287 corridor has been dominated by medical and hospital groups such as Scarsdale Medical Group, Memorial Sloan-Kettering and WestMed.

“This regression in asking rents shows how landlords, particularly those in suburban markets, have been forced to adjust their price points to meet tenants’ expectations. In White Plains, a city that has seen a flurry of large leases in the CBD this year, only two buildings offer blocks of space greater than 50,000 square feet- 440 Hamilton and 1-11 Martine Avenue. Large firms considering White Plains will therefore be limited in their options going forward,” the report stated. JLL also noted that Westchester continues to be a hotbed for the life science and pharmaceutical industries.

A major problem spot for the county’s office market is Northern Westchester where the vacancies at the former IBM and PepsiCo buildings in Somers has created a 62.0% vacancy rate, which is more than three times higher than submarkets in southern Westchester County, which have a combined vacancy rate of approximately 20.0%.

Looking forward, JLL predicts, “The transition in the I-287 East Corridor is part of the greater trend of challenged and obsolete Westchester office stock being repurposed for more appropriate and value-add uses such as residential, retail, fitness and even self-storage. Towns in Southern Westchester such as Mount Vernon, New Rochelle and Yonkers have also been targets of developers who see the chance to lure young people from New York with lower prices and hip, new developments. If these developments gain significant traction, it could prove to be a boon for the surrounding office real estate.”

John Jordan
Editor, Real Estate In-Depth