Stirrings in the Burbs: Beyond City Limits, Green Shoots Here and There
Matt Chaban May 10, 2011, 2:37 p.m.
In recent years, the outer office markets of the tri-state area–Long Island, northern New Jersey, Westchester County and Connecticut’s Fairfield County–have provided refuge for companies looking to flee Manhattan, whether because of 9/11 or prohibitively high rents. But for the first time in recent memory, the suburbs are competing directly with the city as Manhattan recovers its footing.
Some financial-services firms, in particular, said Robert Sammons, vice president of research services at Cassidy Turley, are finding “there’s a cultural and collaborative need to have your base in Manhattan.” There’s also ready access to the young talent many of these companies crave. Among the most tremulous of rumors is one that has UBS moving its massive Stamford operations, including a 103,000-square-foot trading floor, back into the city.
Nevertheless, the outer markets are plotting their own steady if slow recovery. Many suburban tenants are starting to see modest growth in their businesses, and realizing, not uncoincidentally, that they can’t expect to get office space for next to nothing. Rents are up, even as some vacancy rates stagnate.
“Overall, it’s an improving marketplace, with some healthy evidence of recovery through the region,” said Ed Tonnessen, an executive managing director in Jones Lang Lasalle’s Stamford office. “But the activity is not raising all boats with that tide.”
“The market is starting to pick up,” said Michael Aievoli, a principal in Newmark Knight Frank’s Long Island office. “Landlords are lowering the asking rents from three years ago.” The problem last year, Mr. Aievoli said, was that tenants “thought there was a fire sale.”
Now both sides are coming to terms more often. It doesn’t hurt that Long Island’s unemployment rate dropped to 7.8 percent in the first quarter of 2011; a year earlier, it was at 8.3 percent.
Most of the leasing action is in Melville and Garden City, with the growth of the collections industry–always flush in times of economic turmoil–cited as a key driver. Education and health services companies are also adding more jobs, with business services and transportation playing a role, too. Cassidy Turley’s Mr. Sammons said the Long Island market has been “the most stable of the suburban areas,” due to very little new construction in Nassau and Suffolk counties, though Nassau has “government debt issues” that may curb future development.
The vacancy rate in Nassau and Suffolk combined was 10.3 percent as of the end of the first quarter, according to CoStar. This is a slight improvement over the fourth quarter of 2010, and a clear sign of a stabilizing market.
Still, major office deals of the first quarter weren’t so major. One of the biggest was MBS Insight’s 31,561-square-foot sublease at 265 Broadhollow Road in Melville. Two under-30,000-square-foot deals of note were Guardian Life Insurance’s 26,000-foot deal at 250 Crossways Park Drive in Woodbury and Winthrop University Hospital’s 13,000-foot lease at 1000 Franklin Avenue in Garden City.
Most of the movement is from companies already in the area. Suffolk is “typically less expensive than Nassau,” Mr. Aievoli said. As a result, some tenants in Class B space in Nassau are trading up to Class A space in Suffolk. Chuck Tabone, managing principal of Newmark Knight Frank’s Long Island office, adds that space in Nassau County is “relatively tight” since “no one’s building new buildings.”
Northern New Jersey
Northern Jersey actually consists of two distinct office markets: the Hudson waterfront and everything else. The Hudson Waterfront area “acts as a relief valve for New York City,” Mr. Sammons said, particularly for the financial services and insurance industries. That market, he said, has “tightened up over the last few quarters.” The rest of the area, in contrast, is “relatively stable,” he added, with tenants “moving around but not shrinking or expanding.”
For northern New Jersey–including Bergen, Essex, Hudson, Middlesex, Morris, Passaic and Union counties–the average office rent rose to $24.25 per square foot in the first quarter, the highest in five quarters, according to CoStar.
The Hudson Waterfront submarket had an availability rate of 9.2 percent for the first quarter of 2011, according to Newmark Knight Frank; as compared with a 13.5 percent vacancy rate for Northern New Jersey as a whole, per CoStar data.
One interesting development has been the conversion of some Hudson Waterfront office space to residential developments, a function of the slack commercial market in recent years.
The biggest first-quarter deal in the Garden State was the leasing of 127,865 square feet at 95 Columbus Circle Drive in Jersey City to Quality Technology Services. But the most talked-about move of the moment is that by electronics giant Panasonic, which announced on April 19 that it will relocate its North American headquarters from Secaucus to a yet-to-be-constructed building on Raymond Boulevard in Newark. The state’s Economic Development Authority provided a $102 million transit hub tax credit to keep the global corporation from moving out of state, perhaps to Brooklyn.
Meanwhile, the company’s current landlord, Hartz Mountain Industries, has filed an appeal to halt the move. While Newark Mayor Cory Booker called the deal “historic,” the town of Secaucus has raised objections, claiming the tax credit was unfair to towns hurt by the transfer.
With its aging office parks, many built in the 1980s and 1990s, Westchester County offers limited options for tenants seeking Class A space. On the other hand, its highway system is “unparalleled,” according to John Goodkind, a managing principal at Newmark Knight Frank. In particular, the corridor along I-287 has shown significant leasing action. However, Westchester County’s overall vacancy rate rose slightly to 11 percent during the first quarter, as compared to 10.9 percent in the fourth quarter of 2010, according to CoStar.
“Downtown White Plains has had a pretty good run in the last year,” said Ed Tonnessen, an executive managing director at Jones Lang Lasalle, “with real rent growth, stability and recovery.” The average rent rose slightly to $24.95 per square foot, per CoStar. But Mr. Tonnessen added that the rest of Westchester remains a “tenant-favorable marketplace.”
Nonetheless, northern Westchester accounted for much of the quarter’s leasing activity. Easily the biggest deal of the quarter was Pepsi Bottling’s renewal and expansion at 1 Pepsi Way in Somers. Connecticut had attempted to lure the headquarters of the bottling division to Danbury in late 2010. Instead, it is taking over the entire 540,000-square-foot building where it’s now located. In other news, My Publisher is leasing 31,594 square feet at 400 Columbus Avenue in Valhalla.
In lower Westchester, Guggenheim Partners rented 31,142 square feet at 4 Manhattanville Road in Purchase.
On the negative side, Starwood Hotels & Resorts is moving 800 employees and relocating its headquarters from Westchester Avenue in White Plains to Stamford. “It’s not a dynamic market by any means,” Mr. Goodkind said. “It just sort of keeps percolating.”
Southwestern Connecticut’s office market easily supports the Gold Coast moniker often applied to the area as a whole. Fairfield County, for whatever reason, still holds some cache, particularly for high-end financial-services clients drawn to Greenwich and Stamford. Easy access to Metro-North makes downtown locations closest to the railroad the most desirable.
While rents remain high, as much as $40 to $42 per square feet coming out of the recession, the vacancy rate continued to rise to 12.8 percent, according to CoStar. In a “disturbing” trend, said Mr. Goodkind of Newmark Knight Frank, leasing by hedge funds has “slowed up” in recent quarters.
The first quarter’s big deals included cosmetics company Beiersdorf, which leased 46,125 feet at 45 Danbury Road in Wilton. New York City-based Chelsea Piers rented 41,700 feet in Stamford, with plans for a sports and entertainment complex. The aforementioned Starwood Hotels & Resorts’ move from Westchester to 17,316 feet at 333 Ludlow Street in Stamford was spured in part by more than $90 million in tax incentives offered by the state. Most surprising, perhaps, is Design Within Reach’s cross-continental move of its corporate headquarters from San Francisco to Stamford. The contemporary-style furniture merchant is renting 28,000 feet in the former Yale & Towne lock factory building being renovated as part of the Harbor Point redevelopment project.
“Quality is in demand with quality rents,” said Mr. Tonnessen of Jones Lang Lasalle. “It’s not startups” but rather “companies that have weathered the storm” that are improving Fairfield’s prospects.
Indeed, “stability” is the watchword of the outer-office leasing market in 2011 so far. While leasing numbers are off market bottoms, there are some markets that are farther from the bottom than others.
“Not everybody went out of business a year ago,” said Newmark Knight Frank’s Mr. Aeivoli. “You’re still seeing renewals, but you want to see more expansions.”