What to do with all that space - evaluation of real estate development in suburban New York, New York areas

Real Estate Weekly, Oct 21, 1992 by Lois Weiss

After years of unarrested development, suburban markets are finding themselves in the same situation as inner cities - just plain have too much space.

The contraction of the work force has forced companies that own large headquarter buildings to rent out space to other businesses while those situations are leaving the buildings for smaller quarters elsewhere.

Surprisingly, there are still some build-to-suitopportunities from prestige companies with high-tech requirements. Sublease activity is on the rise as well.

Experts cite a lack of growth companies. Some tenants, they say, expanded on the last lease negotiation in the mid-80's, and are now looking to contract to smaller and cheaper space.

While deals are being made in the smaller square foot ranges, those in the 50,000 square foot to 100,000 square foot range and larger are rare.

The competitive edge over New York City has dwindled for Westchester, Fairfield County and Long Island as prices for "A" buildings in Manhattan come into line with quality suburban buildings. Meanwhile, New Jersey is jumping in with bold economic packages to match the aggressive incentives Manhattan is offering tenants who may move across the Hudson. The suburbs, naturally, are capitalizing as much as they can on quality of life issues and amenity packages for tenants, including equity participation.

On the retail side, the economy is sending the public straight to the doors of the off-price buying clubs that are surging into the suburbs. For the first time, low real estate prices, combined with cheap and self-financing, are allowing this market segment to successfully compete in the metropolitan area.

The suburban office market in general has seen vacancy rates jump except for a few pockets where absorption has finally left its mark. According to a Cushman & Wakefield report, Central New Jersey has seen a vacancy rate decrease from 25.3 percent in 1986 to today's third quarter vacancy rate of 20 percent in non-central business district locations. The company cites a pick-up for Long Island as well since the third quarter vacancy rate closed at 18 percent and is down 2 percent from year-end. A Rostenberg-Doern report shows strong gains in absorption for Fairfield County where the vacancy rate is down overall from 26.4 percent to 24.9 percent since the end of 1991.

Westchester County

As Westchester County begins to experience the same overbuilding after-math that has taken its toll elsewhere in the region, the County's central business district vacancies skyrocketed to 27.3 percent at the end of the last quarter.

Major employers such as AT&T and IBM downsized their workforces and John Rostenberg, a principal of Rostenberg Doern Co., sees the major problem as one of a lack of employment.

New Rochelle is trying to keep its office tower proposal viable as it competes with other places in the region for UNICEF's expected move of 1,000 jobs. The county is hosting receptions for U.N. delegates and asking residents for help in talking up the town and county to U.N. neighbors. The city is also exploring the feasibility of turning Main Street, empty stores abound into an outlet center, bolstered by the new Lillian Vernon 35,000-square-foot catalog shop. The city was recently hit with the closing of Macy's, the anchor of the city's only bi-level shopping mall.

White Plains, meanwhile, even while thriving and planning new fashion malls, is looking at one of the largest vacancy rates for an inner city in the entire country, pegged at 31.4 percent for the third quarter by Rostenberg-Doern. Most of the 4 percent rise over the last quarter was due to the failure of two banks and the downsizing of AT&T.

The county's retail market is on the edge of a new mix as half a dozen or more Pace Membership Warehouses, Home Depots, B.J.'s Wholesale Clubs, KMarts and other discount outlets expect to open in all parts of the county within the next year or two.

Rostenberg said commercial leasing activity is steady in both Westchester and Fairfield Counties with more than I million square feet leased in Westchester and 2 million square feet in Fairfield, numbers that Rostenberg calls very traditional long-term activity. On the other hand, he noted, there has not been a sale of land on a market basis for two or three years.

As older buildings have been retrofitted they have been rented and Rostenberg predicts that when the former Schulman buildings come on line with newly renovated space it will do well, too.

Michael J. Ziatyk, senior vice president and managing director for East-Ridge Properties, the company that is now managing 18 of the former Shulman buildings, said leasing efforts, headed by the Edward S. Gordon Company, are on retention with renewals being signed earlier than in the past.

To survive in this market, Ziatyk believe the ownership that makes a commitment to make tenant improvements. will be the buildings that capture the tenants.

Rostenberg noted that while some Westchester properties have been retrofitted and done well, some buildings, even along the Platinum Mile of Route 287 running east/west across the county, may never be rented again for the purpose they were intended.