Office availability in Westchester has increased modestly but steadily through 2022. It is now at an all-time high, 26.2%. The rental speed was lower than in the past. There is an increasing amount of space offered for subletting, most of which is still in the statistics market with little or no deal activity.
Uptake during the third quarter of 2022 is negative 341,000 square feet, according to Newmark Market Statistics. This means that we continue to rent less office space than what is being brought back into the market through tenant evictions or downsizing. We will likely have significantly less than 2 million square feet of annual rental in typical Westchester in 2022.
Hybrid working is here to stay, with most employees now working in the office two to three days a week, and at home the other days. Even nicely rented buildings have no more than 50% effective occupancy during the middle of the workweek, with Friday being a very popular work from home. Many businesses and professional firms continue to make most of their employees work entirely remotely. Whether it’s hybrid or remote, worker productivity hasn’t been hurt during the pandemic.
Employers accept hybrid work, even though it creates a lack of training and collaboration. Many companies need more employees, and those who insist that their employees come to the office even a few days a week are having a very difficult time competing in the employment market. Employees want to work remotely to avoid commuting time and expense, to have at least some flexibility in working hours and to spend more time with their families.
Declining demand for office space is putting pressure on landlords to keep rents low, making it more difficult for them to make deals that make economic sense. Building operating costs and property taxes continue to increase, further eroding owner margins. Tenant space construction costs have increased significantly in the past three years, and there are still some supply chain issues delaying construction.
There are already a number of building owners who do not have the funds available to build a space, which greatly limits their ability to increase occupancy. Their buildings would continue to lose tenants, which would exacerbate financing problems, eventually causing them to default with their lenders.
While we’ve reallocated about 6 to 7 million square feet of office space for other uses in the past decade or so, it’s difficult to remove old space from the market fast enough to keep up with the decline in tenant demand.
Touring activity has slowed dramatically for all acreage sizes, and the province has entered another cyclical period when we have a large number of vacant lots, which will likely keep vacancy statistics well into 2023. One reason for this can be seen in what happened with Transamerica . The company’s space utilization shrank from about 117,000 square feet to about 27,000 square feet when it renewed the lease at 440 Mamaroneck Ave. in Harrison. Our average lease is typically around 5,000 square feet, so re-renting that one block of empty space can take years and it will take years to get done.
Tenants are now at the point where they are willing to make long-term lease commitments, as opposed to their tendency to only extend for a year or two early in the pandemic. The dilemma for all tenants is how to estimate how much space they will need in the future, based not only on the number of their current employees, but how the future of hybrid and remote work will affect their need for office space.
It looks like 2023 is going to be a tough year for the Westchester office market. The vast majority of office buildings were developed in the 1980s, so now they are almost 40 years old. Almost all of our office rentals are intra-county deals, with an existing tenant moving from building to building, with almost no positive uptake from businesses moving into Westchester from other areas.
Howard E. Greenberg is the President of Howard Properties Ltd. , which is located in Valhalla. He has been active as a commercial real estate broker since 1986.