Westchester County's Commercial Real Estate Market: Buying vs. Leasing Office Space

A look at that perennial dilemma in Westchester’s commercial real estate market



Illustration by Morgan Schweitzer

To buy, or not to buy (your own office space)? That is the question.

And the answer? It’s (sorry, reader) complicated. The decision to lease or buy your space cannot be made by glancing at a spreadsheet with instructions on what to do in a certain situation, like a football coach who consults his two-point conversion chart to decide whether he will send the kicker out for an extra point. “If I was in an environment where I knew thirty years from now a building would have at least the same value, I would definitely own it,” says Dr. Simeon Schwartz, president of WestMed Medical Group, which has offices in White Plains, Bronxville, Purchase, Rye, Scarsdale, and Yonkers. WestMed, which was founded in 1996 and employs more than 200 physicians, leases its spaces from several different real estate companies, and occupies 80,000 square feet of professional space at each of its three largest facilities.

In general, Dr. Schwartz says, “In the short run, it’s almost always cheaper to lease,” but when the company was getting set to occupy its first location, on Theall Road in Rye, Dr. Schwartz let the employees themselves decide what the best course of action would be. “With the facility in Rye, some wanted to lease the space and some wanted to buy the space.”

Ultimately, WestMed decided to lease the building, but the developer that owned the building offered each employee of WestMed the chance to purchase a small part of the ownership stake in the building. “About forty percent of the building was ultimately owned by the physicians,” Schwartz says. “Even though the company decided to lease, some thought personally that owning was a good investment decision.”

It’s a tough call, but John McCarthy, owner/president of White Plains-based McCarthy Associates, an independent commercial broker, says that when the economy is unstable, more companies tend to lease than buy. “Current market conditions are such that it doesn’t behoove a company to use capital to buy property when it can lease and get a very, very attractive deal. Leasing allows for a lot more flexibility. And leasing gives you a lot more security.” In fact, McCarthy notes, many large companies are looking to get out of the real estate business. They want to focus their time and money on their core business functions and not the upkeep and maintenance of a commercial property. A logical exception: small, professional services firms, such as law firms and financial services outfits, with a limited amount of employees. For such businesses, which don’t need much space—and thus their offices would not require a lot of maintenance—it sometimes makes sense to own, he says.

Experts say the days of a company coming into Westchester and buying a large building for its corporate HQ may be forever behind us. In fact, many large buildings that used to house one company were sold and reconfigured as multi-tenant facilities, reports Frank Tomasulo, SVP at CB Richard Ellis. “The IBMs of the world have sold millions of square feet of their properties across the country, not the least of which have been here in Westchester County,” he says. That is because most businesses are no longer interested in being landlords, says Jim Fagan, a senior managing director at real estate services firm Cushman & Wakefield. “Before you buy a building, you have to go through a lot of due diligence,” Fagan says. “You have to think about financing, and if the roof will leak, and you have to make sure the building won’t fall down. A few years ago, people were more cavalier toward buying a building. Some just kind of fell in love with the idea of owning a building. Now they are more cautious, and ask, ‘Are there better places we can deploy this capital?’”

Climate more amenable to leasing in 2011

In the second quarter of 2011, rents for Class A office space in downtown White Plains—that is, space in the most prestigious buildings with rents above average for the area—averaged $33.55 per square foot, according to Cushman & Wakefield. In the noncentral business district of White Plains, that figure was $31.24 per square foot, and the overall Westchester average was $30.20 per square foot. Those numbers are virtually the same as in the second quarter of 2010.

With rents flat or even going down in some parts of the county—not to mention higher vacancy rates (currently at 18.7 percent in the second quarter of 2011, which is up from 17.2 percent during the second quarter in 2010)—businesses have even less incentive to buy commercial property. Plus, lease terms nowadays are very favorable. Carl Austin, owner of Austin Corporate Properties in Rye Brook, has been in the commercial real estate business in Westchester for 40 years, and says tenants are getting deals they simply would not have gotten five or 10 years ago. Landlords, he says, are agreeing to reduce rents on a new lease just to get that lease signed.

Developers still purchasing buildings

Robert P. Weisz, chairman and CEO of RPW group, however, is the exception to the rule: he continues to purchase commercial space. Based in Rye Brook, RPW owns and operates about two million square feet of commercial property. Weisz says there has been “a reversal that has occurred in the last fifteen to twenty years” in the county’s commercial real estate industry. “The vast majority of commercial real estate now is owned by publicly-traded real estate companies,” Weisz says. One reason for that: companies want the amenities, e.g., restaurants, health clubs, etc., in multi-tenant buildings. Weisz admits that his company has increased some of its free rent offers and has been more flexible in the duration of its leases: “In this market, it helps to listen to your tenants and work with them if you can.”