If you are only interested in the short term, the forecast for the commercial real estate sector and the Westchester economy is gloomy for 2009. However, if you believe 12 months is not that long a period to endure, be heartened by the fact that area commercial real estate professionals predict a recovery will come in 2010 and could perhaps begin as early as late 2009.
Westchester Commerce attended three recent events where commercial brokers and investors prophesized on how the economy will fare in the near and long term. All were in lockstep that the real estate sector (both housing and commercial) faces some serious challenges this year. However, all were bullish that Westchester will see improvement in the not too distant future. Despite the economic downturn in the short term, there is some good news for the business sector since it can expect lower office rents for quality space in the county, they predict.
The most upbeat of the prognosticators was developer Robert Weisz of the RPW Group of White Plains. Weisz, who has made a living redeveloping former single-tenant buildings into multi-tenant properties in Westchester and Fairfield (CT) counties, said that he believes the bust will be followed by a boom market in Westchester. The recovery, he said, could begin by the end of this year.
“Westchester is going to weather this storm better than New York City, New Jersey and Fairfield County,” Weisz said. The developer was the guest speaker at the Westchester County Board of Realtors Commercial Investment Division’s Jan. 22 meeting. He based his argument on the fact that Westchester is not heavily dependent on the now struggling financial services sector as are New York City, New Jersey and Fairfield County. In fact, Greenwich, which has become a haven for hedge funds, is expected to take a major hit and should see a significant amount of space turn dark.
He predicted that the credit markets would improve in the next few months although lending standards will continue to be conservative. Another reason he cited for his upbeat view of the markets is the sense of optimism he felt when he attended the inauguration ceremonies for President Barack Obama. He believes the public’s perception that the administration will “do the right thing” for the economy will lead to a much-needed boost in consumer confidence.
“I think we have a lot of positive things happening, but we are not going to see the results for the next few months,” Weisz said. “We might see some good news at the end of the year and we think that we might be surprised in 2010. But certainly by 2011 we will be talking about a completely different environment. An environment of growth, an environment where companies are hiring, and an environment where banks are not an issue anymore, they will be solid.”
While the commercial real estate market has been rather stagnant of late, RPW Group and its brokerage firm Cushman & Wakefield reported in January that Wachovia Securities, which is now merged with Wells Fargo & Co., signed a more than 10-year lease for 25,982 square feet at 1133 Westchester Ave. in White Plains. Recently, RPW Group completed a multi-million upgrade of the former IBM building. Wachovia Securities will consolidate two locations in downtown White Plains (10 Bank St. and 360 Hamilton Ave.) and move to its new location in May.
Weisz is moving forward with plans to build a new 160-room long-term stay hotel and a 300,000-square-foot office building on property adjacent to 1133 Westchester Ave. He told the gathering that he hopes to begin construction on the two projects by the end of 2009 or in 2010 depending on market conditions. He estimated the hotel project would cost $30 million to $35 million to complete, while the office building would run in the $80-million to $90-million range to complete.
At a press briefing in January, brokerage firm Cushman & Wakefield reported that new office leasing activity for Class-A space in Westchester County totaled approximately 1.2 million square feet in 2008, down from 1.67 million square feet leased in 2007, the lowest number since 2001.
Leasing activity fell sharply in the fourth quarter, with just 122,078 square feet in Class-A space secured, a drop from the 354,007 square feet leased during the third quarter, and down significantly from 457,216 square feet leased in the fourth quarter of 2007.
Overall Class-A vacancy rates countywide in the fourth quarter registered 18.3 percent, on par with the previous quarter, but higher than the 16.6 percent reported in the fourth quarter of 2007. The market has shifted from one with a lack of supply to a lack of demand. As with most markets, employment softness in 2008 and 2009 is expected to lead to increases in vacancy, but due to limits in new supply the number is projected to head down later in the year, the brokerage firm reported.
“Despite turbulence in the economy, the office leasing market in Westchester County remained steady overall in 2008,” said Jim Fagan, senior managing director, and head of Cushman & Wakefield’s Fairfield and Westchester County region. “Unlike some markets in the tri-state region that are home to a large number of companies in the financial services sector, Westchester County will weather the current economic environment and prosper due to the assorted mix of businesses based here.”
Overall asking rents for Class-A space countywide at the close of the fourth quarter averaged $31.77 per square foot, level with the $31.79 per-square-foot average at year-end 2007. Although asking rents have increased slightly overall, achievable rents have gone down and concessions, such as free rent and tenant-improvement allowance, have become more generous, resulting in much lower net effective rents for tenants, C&W officials stated.
Fagan said, “The good news is that the region’s fundamentals will remain relatively sound due to the long-term contractual nature of leases and tenants with pending lease expirations, combined with the fact that very little new product has been constructed in Westchester County over the past two decades.”
He later noted that “real estate lending has become arduous at best and, as a result, investment sales activity plummeted significantly over the past year. While investing will not be for the faint-of-heart, there is real opportunity for owner-occupiers as well as investors looking to deploy fresh capital to purchase assets at historically low prices.”
Brokers who participated in a Westchester County Board of Realtors-sponsored roundtable discussion on the commercial markets in December also predicted tough times this year and a recovery to begin in 2010.
They noted that the national recession weighed heavy on the commercial real estate market in 2008 and caused activity locally to slow down considerably the second half the year. The Dec. 18 event featured panelists: John Barrett director of sales, Massey Knakal Realty; William Cuddy, executive vice president, CB Richard Ellis; Bill Hesse, president, Aries Deitch & Endelson, Inc.; Patricia Valenti, principal, Newmark Knight Frank and Glenn Walsh, senior director, Cushman & Wakefield. 2008 CID President Edward Kulikowski was the moderator for the program.
Hesse termed 2008 as a “challenging year” for his firm and the retail industry, although the first six months was quite profitable due to its work with retailers: TJX, Marshalls, HomeGoods, Panera Bread, Wachovia, Bank of America and Key Bank.
Heading into 2009, Hesse related, “No question about it, the ‘Mom and Pop’ retailer, that was our bread and butter, has quietly gone to sleep. Hopefully one day it will re-emerge.”
He said that industries, such as furniture retailers, that support the struggling housing market suffered in 2008 and will likely continue to suffer in 2009. He cited statistics from the International Council of Shopping Centers that indicated a total of 148,000 stores will have closed by the end of 2008 and another 73,000 stores are expected to close during the first six months of 2009.
Barrett said that total transactional volume (buildings traded) was down approximately 30% in 2008 from the previous year at Massey Knakal, which specializes in the sale of commercial properties from $2 million to $20 million. However, he said that despite lower demand, pricing has held steady in some areas.
“If you have a very good location and you got a good building in White Plains, Rye, Hartsdale, Scarsdale and Bronxville, we have seen cap rates move up from last year somewhere between 50 to 75 basis points on those buildings in those locations,” he said.
In the areas like Stamford, Peekskill, Port Chester, Mount Vernon, cap rates have risen between 225 to 350 basis points. “What is further complicating matters there is that there is more product coming on line,” he said.
Walsh agreed with his colleagues that the local market was not impacted that much in early 2008 but saw activity wane after June. “It was a long year but it was not an awful year for us,” he said. “We think the tough period is still in front of us.” He said the market will likely see tenants do a lot of short-term deals “because it doesn’t make sense to do long-term deals in a bad market.” Walsh added that he is hopeful that the market will show some growth in the second half of 2009.
Cuddy said that despite the slowdown in the latter part of 2008, the Westchester office market would produce about two million square feet of leasing velocity, which was just under the 10-year average of 2.2 million square feet per year.
He said average rental rates have flattened and there is continued downward pressure on rents. Cuddy said some areas of growth in what will be a troubled market in 2009 are the medical, educational and government sectors.
All agreed that while times are expected to be difficult, the commercial market in Westchester is not in crisis. “It’s not traumatic. People are still doing business,” Valenti said. She predicted the market would likely be flat in 2009 with little activity from firms in Manhattan looking to relocate to Westchester County, although Amalgamated Life announced in September it had signed a 133,000-square-foot lease at 333 Westchester Ave. and would relocate to White Plains from Manhattan. Valenti also said the market is already beginning to see business from new companies formed by executives let go by some former giants of Wall Street.
Caption: Developer Robert Weisz points to his plan to add a hotel and an office building to property adjacent to his existing 1133 Westchester Ave. complex.