Adaptive Reuse the Key to Office Market Recovery
BY: John Jordan
WHITE PLAINS -- For the commercial office market, adaptive reuse of some tired office properties in 2012 could cut into the county’s bloated office vacancy rate, especially along the I-287 corridor. Meanwhile, the impact of the Ridge Hill shopping center in Yonkers will be felt across the county, but particularly along the prime Central Avenue corridor this year.
Those prognostications were just some of the forward-thinking observations made during a broker’s roundtable program presented by the Westchester Putnam Association of Realters’ Commercial Investment Division on December 15 at Graziella’s Restaurant in White Plains.
The CID Broker Roundtable featured: William Cuddy, executive vice president, CB Richard Ellis; Glenn Walsh, senior director at Cushman & Wakefield; Paul Adler, vice president, Rand Commercial Services; William Hesse, president, Aries, Deitch & Endelson; John Barrett, vice president of sales, Admiral Real Estate Services; and the moderator was Edward Kulikowski, owner, Benchmark Real Estate.
Hesse related that the retail market has seen the “resurgence of Mom and Pop stores deals” throughout Westchester County. He said he is “cautiously optimistic” about the prospects for the retail sector in the region in 2012.
“2011 was I think a pretty good year for us and for retailing,” Hesse said. “Notwithstanding the terrible economy, but in this county we saw more of a resurgence of small retailers coming back to the marketand the Mom and Pops, which are the bread and butter of our industry, which had totally disappeared until the beginning of this year. So that was very helpful and I am much more bullish (on the prospects for 2012) based on that.”
Hesse said that in 2011 the retail market has seen a continued absorption of vacant space, especially in prime markets such as Central Avenue.
“If you go down Central Avenue now, you will notice the vacancies that are left are really more tuned to problems of a particular center or particular building than to the fact that we are going through a recession,” he added.
Hesse said that part of the increased demand was due to the fact that rents in Westchester County have dropped 20%-25% in the past three years. “There comes a point where supply is meeting demand and we reached that point this year,” he noted. Hesse believes that retail rents will stabilize in 2012.
A relatively new player in the retail market in 2011 was the 1.25-millionsquare- foot Ridge Hill Shopping Center in Yonkers.
“I think it (Ridge Hill) is going to be a game-changer and will wake up a lot of landlords that will have to compete against it.”
Office Market Will Continue to Struggle
Cuddy and Walsh were brokers in two of the largest deals in Westchester County in 2011, which both closed during the month of December – the Histogenics purchase of 104 Corporate Park Drive in White Plains (Cuddy) and the law firm Wilson Elser Moskowitz Edelman & Dicker LLP’s a 15-year, 125,000-square-foot lease at RPW Group’s 1133 Westchester Avenue (Walsh).
Both brokers said that a good portion of the county’s office market has become old and antiquated. Cuddy related that the sector has “underperformed” the past few years and has suffered negative absorption for the past four years. He related that of the 33 million square feet of office space in the county, 75% was built between 1970 to 1990.
“What we are really dealing with is in that pool of 33 million square feet of space, a good chunk of it is now and over the next few years, will be rolling as obsolete, dysfunctional real estate,” Cuddy said.
Walsh noted that irrespective of the Histogenics and Wilson Elser deals, he described the market as “shuffling the deck chairs around,” noting that there are very few new companies or relocations coming into Westchester.
Cuddy related that the county’s estimated 1.2 million square feet of leasing velocity in 2011 is about 50% of the 10-year leasing velocity average pre-2008.
An exciting trend for the office market has been some adaptive reuse or repurposing of some office properties along I-287, the most recent being the planned redevelopment of the Journal News property at 1 Gannett Drive in Harrison by Life- Time Fitness.
Adler shared that Rand Commercial recently brokered the $3.9-million sale of an 80,000-square-foot former warehouse building on Elm Street in Ardsley that will be repurposed into a recreational/leisure complex.
He described the 2011 office market as “a real new reality” for brokers with “back to basics” investment deals and a “cathartic” period that saw “a great many pretenders in the industry leave the industry because it really came down to not putting a for-sale sign out in front. You really needed to know what you were doing and you needed to know how to attract the investors.”
Adler added that in 2011 pricing was huge and he expects that will continue in 2012.
Walsh said that 2012 will mirror 2011 in many ways with some repurposing of office properties as well as some New York City tenants “putting their toes in the water” studying the Westchester office market for possible relocation deals. Both Cuddy and Walsh believe the market will improve but has a long way to go before it is fully recovered.
Barrett said that in the investment sales market, the multifamily sector remains the strongest sector, along with well-located retail properties near train stations.
He added that he expects sales velocity to increase in 2012 as more banks put more properties on the market. He said cap rates will move with interest rates with top well-located properties fetching cap rates in the 6% to 7% range.