For Outer Office Markets, Now What?
Roland Li April 27, 2010, 11:03 a.m.
Beyond Manhattan’s gilded skyscrapers are the tristate region’s outer office markets: Long Island, northern New Jersey, Westchester County and Fairfield County in Connecticut. Rents are still down and vacancies are still high, but tenants are no longer paralyzed by the downturn and jump at a good deal, especially when a property is close to public transportation. Activity, while far from the peak’s frenzy, is picking up, and the outer market’s overall health seems to be improving, so long as the job market sustains itself.
In other words, life on the outside remains precarious, something to watch.
“The overall market is starting to see real activity. It’s starting to see more and more people looking at space,” said Cory Gubner, president and CEO of RHYS, a commercial real estate services firm in Stamford, Conn. “That’s a big change from three to six months ago. We always say when there’s smoke, there’s fire. There’s a lot of smoke right now.”
“In Long Island, vacancies have been stable since the beginning of 2009; rents have only fallen 5.5 percent from the peak,” said Aaron Jodka, senior real estate economist at research giant CoStar Group. “The availability rate has also stabilized. That has to do with an overall stronger economy. It didn’t fall as hard.”
Long Island has a strong presence of education and health care companies, which have weathered the downturn better than industries that are more dependent on the stock market. These “slow-and-steady” tenants have led to a more stable leasing market, said Mr. Jodka.
Major leases in the first quarter of 2010 included JPMorgan Chase’s 15,199-square-foot lease at Atria West in Nassau County and Hub Insurance’s deal for 7,015 square feet at 1393 Veterans Memorial Highway in Suffolk County.
The vacancy rate is just under 10 percent in Suffolk and Nassau counties, among the lowest in the tristate region. Asking rents are generally more expensive than in New Jersey, but less than in Westchester and Fairfield counties.
And in perhaps a sign of the region’s viability, Jones Lang LaSalle opened a new office in Melville, in Nassau County, at the end of February.
Northern New Jersey, particularly along the Hudson River, has long been known as Manhattan’s back office. The area’s access to public transportation, including the PATH train and Amtrak, have been an asset, and tax incentives led to an office boom in the 1990s.
But now, the nearly 93 million square feet of Class A and B office space throughout Northern Jersey have a vacancy rate of over 22 percent, due to a lack of jobs, according to Paul Giannone, managing director at Jones Lang LaSalle. The state’s major industries include pharmaceutical, telecommunications and financial services companies, none of which have been hiring extensively since the downturn.
New Jersey as a whole has long teetered as California East, and that should continue through 2010.
The state’s northern part has a 13.5 percent vacancy rate overall, according to CoStar. And while that number has stabilized, the availability rate is increasing.
“It’s a very weak climate for office space,” Mr. Giannone said. “It will be a tenant’s market for the foreseeable future.”
Activity has increased, but 80 percent of deals that Mr. Giannone has seen are lease renewals, often with tenants consolidating space and moving into spaces that are 10 to 20 percent smaller than existing buildings. Cheaper rents, averaging about $24 per square foot, have allowed some tenants to “trade up” to Class A space, but these rates are not enough to support significant new development, which has stalled in this decade. Seventy-five percent of the office buildings in northern New Jersey are 15 to 20 years old, but developers and investors have renovated older office buildings to attract new tenants.
One exception is 111 Wood Avenue, a 250,000-square-foot new development in the Metropark office complex in Iselin. The developers broke ground on the project at the start of the downturn, but decided to continue building. There has been some interest in the building, but no leases completed, said Mr. Giannone, who is involved in the project. It is expected to be completed in September.
By then, the market probably still won’t have fully recovered, but any progress is highly dependent on job creation. Godspeed, Governor Christie.
The vacancy rate in Westchester rose to 17.6 percent at the end of the first quarter, up from 15.9 percent in the fourth quarter of 2009, according to Cushman & Wakefield. Part of this change was the availability of more than 80,000 square feet at 113 King Street in Armonk. The property is being marketed as a corporate headquarters building by Cushman & Wakefield.
Leasing activity is definitely up. Major deals in the fourth quarter included Allen System Corp.’s leasing 26,394 square feet at 287 Bowman Avenue in Port Chester and Avon Products’ leasing 21,670 square feet at 44 South Broadway in White Plains.
Westchester is comparable to its neighbor, Fairfield, in terms of unemployment, with 5.7 percent fewer jobs compared to the peak. Rents are slightly lower overall.
The county is home to many law firms and diverse professional services, which aren’t as vulnerable to stock market swings. “They can be more resilient, depending on business models,” said Mr. Jodka of CoStar.
“We’ve done a couple hundred thousand square feet of deals in the last four months,” said Jeff Newman, an executive vice president at Malkin Properties. “I think companies with expiring leases are seeing this is the last opportunity to lock in value.”
Malkin Properties has seen the law firm Eckert Seamans expand twice at 10 Bank Street in White Plains, and Fifth Street Capital and Pearson Education have also recently signed leases. The building is near the Metro North train station, and again, convenient access to transit-particularly into New York City-is a major asset to outer-market properties.
The office market in Fairfield County centers on Stamford, a nexus of financial services and home to the headquarters of the Royal Bank of Scotland, as well as to the capital markets division of UBS AG. It was hard hit by the recession, and the leasing market is still the weakest compared to nearby areas, with a vacancy rate of 26 percent, said Mr. Jodka of CoStar.
But there are signs of life, with a “surge” in leasing in the last two quarters that included tenants outside of the financial industry. Nestle Waters moved from Greenwich to 165,000 square feet at 900 Long Ridge Road in Stamford. Priceline.com also took 69,822 square feet at 800 Connecticut Avenue in Norwalk, and Knight Capital subleased 66,485 feet at 33 Benedict Place in Greenwich, according to Cushman & Wakefield.
Another major lease came last week at High Ridge Park in Stamford, with computer security companies Protegrity Corporation and McAfee signing leases there. But 148,000 square feet are still vacant. The on-site amenities, including a cafe, reasonable operating costs and proximity to affordable housing in nearby towns were all cited as reasons for the lease.
“A suburban location like High Ridge Park is attractive to someone who’s commuting from Danbury, Trumbull or Shelton,” said Steve Baker, a senior director at Cushman & Wakefield, the broker for the property.
Activity has even spilled over to the construction industry.
“Two thousand ten has been a nice rebound,” said Thomas Durels, CEO of Malkin Construction. “We’re seeing a very nice pickup. We have some projects that were diverted in 2009, and are moving forward in 2010; 2009 was an anomaly. My expectation is that 2010 reflects a more sustainable level of activity.” The company has two schools under construction, along with a multifamily unit called Metro Green in the south end of Stamford.
In the same area is Harbor Point, a major new development that will include two office towers totaling around 500,000 square feet and apartment units, with three residential buildings slated to open next month. But developer Building and Land Technology has yet to secure any commercial tenants, and the two office towers’ fate is uncertain. (The company did not respond to requests for comment.)
BY ALL APPEARANCES, the outer office leasing market has escaped the abyss in 2010. But for those looking for peak levels anytime soon, don’t hold your breath.
“I don’t know what normal is anymore,” said Mr. Gubner of RHYS. “The market has been so weird. Two thousand seven couldn’t be normal; 2009 can’t be normal because it was horrible. I think we’ve hit bottom and started the upturn.”