Development Boom Strengthens Commercial Real Estate Market
Lifestyle, demographic, economic, and regional trends create a perfect storm for Westchester’s 2019 commercial real estate market.
Multifamily developments, like this downtown White Plains 434-unit project from LMC, A Lennar Company, are helping drive the market.
For developers, brokers, landlords, and construction companies, it’s a wonderful time to be in Westchester. And even though rents are edging up, residential and commercial tenants are pleased to benefit from new site options and amenities that make this county the place to be.
As our population shifts, our economy booms, and our neighbor to the south grows more expensive by the hour, Westchester enjoys a flourishing commercial real estate market. We looked at the four major segments of that market and found positive stories nearly everywhere.
Multifamily mixed-use development is exploding; the office market is heating up; industrial/flex properties are in greater demand than ever before; even retail space is showing signs of health, if not exactly prosperity.
Rental buildings, like Ginsburg DevelopmentCompanies’ 1177 @Greystone, are popping up all over Yonkers.
Rendering courtesy of GDC
Multifamily Development Transforms Cityscapes
Bulldozers and tower cranes are everywhere, it seems, but they’re not erecting new office buildings. Most of them are working on multifamily mixed-use rental developments in our urban centers. The boom in development demonstrates the confluence of lifestyle and demographic changes, as well as the escalation of rents in NYC.
“The cost of living in the five boroughs has driven development projects to Westchester,” says Garry Klein, regional manager for Houlihan Lawrence Commercial. “The demand for live-work-play communities and transit-oriented development comes from the desires of Millennials for eco-friendly and mass-transit options. They don’t buy cars. They walk to shops and services. They hop on the train. They hire an Uber.”
Joining them, says Paul Adler, Esq., chief strategy officer of Rand Commercial, are empty nesters looking not only to downsize from their four-bedroom Colonials but also from their tax bills, into rental properties where they can enjoy amenities like on-premises fitness centers, pools, and even libraries. Nearly all of the new multifamily residential developments include multiuse features, like street-level retailers, restaurants, office space, or even medical facilities to accommodate both demographic groups.
“White Plains, Yonkers, and New Rochelle are all hot to the touch,” Adler says, the direct effect of economic, demographic, and lifestyle forces in the urban centers. White Plains has more than 3,000 residential units approved for construction and another 2,000 proposed, while in New Rochelle, ground has broken for several projects as part of the city’s 279-acre downtown development zone, which allows for 12 million square feet of new development that includes 6,370 new residential units. Yonkers has over 1,500 units currently being leased near the waterfront, with another 1,800 units proposed, not to mention yet another plan to develop Chicken Island into a multiuse mecca.
Many of the multifamily projects are new construction, and a significant amount is coming from repurposing existing office space. A prime example of this is City Square, developer Martin Ginsburg’s plan to reconfigure the 1980s Westchester Financial Center office complex in White Plains to add 188 rental apartments and nearly 20,000 square feet of new retail space to the two high-rise towers. Combined with his adjacent 124-unit apartment building at 34 South Lexington and a drop-in park, City Square will be a live-work campus with shops, restaurants, offices, and apartments just a very short walk from the White Plains train station.
A proposed project in Harrison exemplifies perhaps the ultimate in repurposing. Boston-based Marcus Partners purchased 3 Westchester Park Drive with intent to knock down the 160,000 sq. ft. office building and erect two residential buildings with 450 apartments totaling 560,000 square feet on the 10-acre property. It’s next door to Life Time Fitness, which was built on the site of the former Gannett building. Under construction nearby are The Carraway, a 421-unit Toll Brothers apartment development, and a Wegman’s Food Market, both replacing office-building teardowns.
County Executive George Latimer’s office estimates that some 16,000 new rental units are under construction or planned for Westchester in the near future. Can the county absorb them? There were about 142,000 rental units here in 2017, a number that’s grown less than 1% over the last five years, so the new construction represents a very substantial 11% increase. If vacancy rates are any indication of future demand, however, the prospects for renting all those apartments are pretty solid. In 2017, fewer than 3% of the total rental units were looking for tenants.
Charles Epstein, vice president of development, LMC, A Lennar Company, believes the county will easily absorb the new rental inventory. “Westchester has nearly half of the rental units as compared with the US average,” Epstein said in a recent presentation to BOMA Westchester. Because Manhattan and the outer boroughs are so expensive, he adds, “Westchester has a high level of demand.” LMC is working on two major projects in White Plains, a 434-unit project on Mamaroneck Avenue and a mixed-use 814-unit project at the former site of the Westchester Pavilion mall.
CBRE executive VP William Cuddy says a couple of other factors will allow the county to absorb the new rental units. “You have to look at [these projects] in terms of delivery duration,” he says. “The time frame from concept to approval can be a period of years, then you have another two years or so for construction, then you’ve got the leasing-up period.” In addition, Cuddy says, “You have a lot of geographic diversity. New Rochelle projects are not perceived as conflicting with those in Yonkers or White Plains, for example.”
Danone North America recently moved its corporate HQ to White Plains.
Office Market Comes Into Balance
Coincidentally, the boom in multifamily development has a positive side effect on the office market. “One of the most important drivers in the office market is how companies attract and retain talent,” says Jim Fagan, senior managing director of Cushman & Wakefield. “They want to locate near their preferred workforce.” The transit-oriented developments in White Plains, New Rochelle, and Yonkers will be attractive to Millennials, which makes those central business districts attractive to office tenants. That’s especially true in White Plains, Fagan adds, because companies can also draw on reverse commuters from Manhattan, as do New York Life and Danone North America, both of which moved to White Plains in the last couple of years.
Cuddy points out another factor that’s positively impacting the office market in the county. Combined with a strong economy, he says, the repurposing of many obsolete office properties has strongly impacted both sides of the supply/demand equation. He explains, “The demand side with job growth and the supply side with the adaptive reuse of inventory is creating a more dynamic, healthier commercial market.”
According to CBRE data, about 37% of the office market in Westchester has changed hands over the last five years, with many of the buildings torn down and replaced by multifamily residential developments, retail properties, and medical facilities. Last year, the former IBM campus in Somers was removed from the office market with plans to convert its 1.2 million square feet to a for-profit school, a project being overseen by Roxana Girand, president and CEO of Sebastian Capital. In addition, two Harrison Platinum Mile buildings — 104 Corporate Park Drive and 3 Westchester Park Drive — and 900 King Street in Rye Brook, were all subtracted from the county’s office inventory. These and others lowered the total office space in the county to 26.7 million square feet, down from about 32 million just a few years earlier. Even more important, the county’s overall vacancy rate at the end of the year was only 16.5%.
More of the same is on the drawing boards. Developer Steven Wise hopes to repurpose property he purchased in Armonk from MBIA into a hotel, apartment building, and townhomes while retaining one office building for small tenants. And the 540,000 sq. ft. building that formerly housed Pepsi in Somers, owned by Mexican billionaire Carlos Slim (who also owns the former IBM property in Somers), is currently being reimagined by Girand as a multi-tenant and coworking space. It is reportedly about 30% leased.
“The market was overbuilt, but now we’re getting to the point of equilibrium,” says Andrew Weisz, VP of the RPW Group, one of the county’s most successful office developers. “We’re not there yet, but we’re close.” The company bought and renovated 925 and 1025 Westchester Avenue in White Plains last year, and he reports strong leasing activity: “The highly amenitized and well-operated buildings are seeing good activity. We’re looking for more well-located solid buildings that need to be refurbished.”
Office Market Vacancies Shrink Along with Inventory
Source: CBRE Research, Q4 2018
The hottest office market in the county is the White Plains Central Business District. “Class A space is renting in the $35 to $40 range,” Cuddy reports. “Larger companies are moving into downtown, while the smaller LLCs and LLPs are moving out to suburban space like on the I-287 corridor, Route 119, Mamaroneck Avenue.” One large company that consolidated in downtown White Plains is Danone North America, while smaller companies locating to suburban space include Red Key Solutions and realtor Re/Max Prestige Properties. Cuddy adds, “Tenants have a real focus on space utilization. The movement toward open-office-plan configurations have allowed companies to compress their space requirements. You can see that in the job growth statistics that haven’t translated into net absorption.”
Houlihan Lawrence Commercial director Tom LaPerch points out another consequence of the tightening market. “You can’t find any big blocks of office space south of I-287,” he says. “You have small offices available but no big blocks.”
Leasing activity is strong in highly amenitized office buildings, like 925 Westchester Ave in White Plains.
Photo courtesy of RPW Group
Industrial Market Constrained
One mark of the demand for existing industrial space is what’s billed as the largest commercial real estate transaction in county history, the pending acquisition of Mack-Cali’s 3.1 million sq. ft. office/flex portfolio by Robert Martin Company (RMC) for $487.5 million. Included are 56 buildings in Elmsford, Hawthorne, Yonkers, Tarrytown, and Stamford. Interestingly, nearly all of the properties were developed by RMC in the 1970s, ’80s, and ’90s and sold to Mack-Cali in 1997. The sale marks the complete exit of Mack-Cali from the Westchester market.
“This major acquisition is an exciting opportunity for our company,” says RMC CEO/partner Tim Jones. “This portfolio gives us a huge market share in Westchester with a product line that is currently in great demand. Industrial/flex space is currently the hottest sector of the commercial market.”
Offering entertainment expereinecs has helped retailers like Ridge Hill in Yonkers stay successful.
Photo by Eduard Huber
Limited availability of industrial and warehouse flex space has pushed rates up in Westchester, but a tipping point may have been reached. According to RM Friedland data, available space in the category fell from 10.1% to 6.5% of the total 37.5 million square feet in the county. Asking rates, though, also fell during the year, from $15.83 to $15.02. While this is substantially higher than the $6 to $9 rates of a few years ago, a market top may have been reached. Part of the problem is lack of inventory, with the most appealing space already booked and what’s left carrying lower asking rates.
Industrial/Flex Market Tight and Expensive
Source: RM Friedland Q4 Market Report 2018
Sarah Jones-Maturo, president of RM Friedland, points to an additional factor in the industrial market. “The county has an aging product. From an infrastructure perspective, it can’t support e-commerce tenants in a bunch of 40-year-old low-ceiling buildings.”
LaPerch agrees, adding, “You can’t find any industrial space. The searches are moving north along the I-84 corridor. There’s nothing left in Yonkers and New Rochelle.” It’s not likely that new construction will arise to meet the demand, because of the high price of real estate in the county and reluctance by Westchester municipalities to support industrial use. Consequently, the demand is being satisfied outside the county, in Orange, Putnam, and Dutchess Counties.
Con Ed Threatens County Growth
Retail Market in Transition
Vacant storefronts mar the generally optimistic view of many professionals in the field, but the retail story may not be quite a bleak as it seems. “We aren’t as fatalistic as many people,” says Jones-Maturo. RM Friedland has eight brokers who specialize in retail. “The absorption has been pretty flat, which means as many places are opening as are closing.” A quick look at the 2018 numbers from the firm confirms that, while availabilities climbed during the year and asking rents fell somewhat, the market is not the disaster that national headlines portray. Available space climbed from 5% to 5.9% during the year, while asking rates fell from $35.87 to $33.38.
Traditional Main Street retailers are suffering from the Amazon (and other) effect, according to Andy Kimerling, owner of Westchester Road Runner in White Plains. “The Internet is a huge problem for any retail business,” he says. “One of our biggest problems is that so many of our vendors, whom we considered partners, are now on the Web, trying to steal my customers. If one of my customers writes in with a question, they capture their email address, and they will be inundated with offers from my former partners.”
Retail Market Sags but Doesn't Break
Source: RM Friedland Q4 Market Report 2018
Also, according to Jones-Maturo, “Well-located centers with strong anchors continue to do well.” Up-to-date tenants and visitor entertainment experiences have proven successful for Cross County Shopping Center, for example. Otherwise, she says, “demand is driven by the five ‘Fs’: food, fitness, fun, family, and fashion discounters.” It’s worth noting that these categories have significant “shopping as entertainment” components and are relatively immune to online competition.
Several big box retailers contributed greatly to the segment’s vacancy rate. Toys R Us closed three stores in the county, Walmart vacated 200,000 square feet in White Plains, AI Friedman left its space in Port Chester, and Shoprite closed in Cortlandt Manor. Theses six closures account for basically the entire increase in available retail space in the county last year.
“You see a lot of vacant stores, but there is good demand for restaurants, health clubs, and experiential retail,” observes David Richman, CEO, Rakow Commercial Realty Group. He expects the market for retail space to strengthen as the new multifamily construction is occupied because retailers follow people. “Looking forward,” he says, “with the residential building boom, the population will increase, and these people will have needs for retail, for services, and for medical care.”
Will Port Chester be the county's next development hotspot?
Photo by Stefan Radtke
What Else to Watch For
The Westchester Bioscience and Technology Center, aka the North 60, took another step forward earlier this year when developer John Fareri signed a 99-year lease for 60 acres of county land at the Grassland Reservation in Valhalla. Fareri intends to add 20 acres of his own land adjacent to the site and build a $1.2 billion biotech center that will complement nearby Westchester Medical Center and New York Medical College. The development will include lab and research space, medical offices, a children’s living center, retail space, and a 100-room hotel. It’s slated to have 3 million square feet and estimated to generate 8,000 permanent jobs. The first phase of the project could start in 2020, following approvals from the town of Mount Pleasant. It is expected to take about 10 years to complete.
Leasing in the healthcare market paused a bit in 2018, according to Cushman & Wakefield data, but Simone Development continues to acquire and repurpose office buildings to meet anticipated demand. The company bought the Tarrytown headquarters of Hitachi America, Ltd., earlier this year and expects to convert it to medical use. Simone also acquired 104 Corporate Park Drive in Harrison, which it plans to repurpose into a four-level healthcare complex for Montefiore. Construction by White Plains Hospital and Phelps Hospital in Sleepy Hollow is proceeding apace, and Westchester Medical Center plans to unveil its $230 million Ambulatory Care Pavilion in May.
In a somewhat related market, Richman reports, “There is a lot of interest in assisted living and senior residential.” Among several projects in the approvals and financing stages are the $320 million Broadview project, to be built on 40 acres of the Purchase College campus. The first phase of the project has received revenue bond support from the county LDC and will include up to 46 villas and two four-story buildings with 174 independent-living units and assisted-living and memory-care facilities. In Ossining, Glenco Group has applied for zoning changes to build a 188-unit rental building for independent seniors on an 18-acre site. National Development, owner of the 6.7-acre property at 120 Bloomingdale Road in White Plains, is ditching its already-approved plan for retail development and asking for city approval of a five-story building with 132 apartments for independent seniors. Casper Development has proposed a nine-story building with 220 assisted- and independent-living apartments near the Mount Vernon East station.
Port Chester could be the county’s next development hotspot, according to Jones-Maturo: “People are very excited about Port Chester right now,” she says. “It has some great infrastructure, retail, restaurants, and the Capitol Theatre. The village is becoming more pro-development-friendly. We have been approached by several investors looking for property there.” The single biggest opportunity in Port Chester is the former United Hospital site on Boston Post Road. Current owner Starwood Capital Group secured zoning changes to develop the site, but then announced it planned to sell it instead.
The first development phase of the $1 billion Westchester Bioscience and Technology Center could start in 2020.
One of the possible drivers of Port Chester development could be the Opportunity Zone program created by 2017 federal tax legislation. Port Chester, Yonkers, Valhalla, Peekskill, Cortlandt, New Rochelle, White Plains, and Mount Vernon have census tracts designated as Opportunity Zones under the new law. Tax advantages are significant, according to NYS Empire State Development, although rules are still being hammered out at the federal level. Taxpayers can temporarily defer the inclusion in gross income of capital gains that are reinvested in a qualified opportunity fund designed to invest in the zones. Taxpayers can also permanently exclude capital gains from the sale or exchange of an investment in a qualified opportunity fund held for more than 10 years.
Unemployment is at near-record lows. Additional rental housing promises to attract new residents. Employers are likely to follow them, as are retailers. Is a perfect storm brewing? Says Andrew Weisz: “This is a very unique time for Westchester. We’re in an exciting place.”
Long-time 914INC. contributor Dave Donelson lives and writes in West Harrison and frequently covers the commercial real estate market.