Real estate activity in suburbs catches second wind in Covid era

Projects that could transform chunks of the tri-state get new lease on life due to density concerns

TRD TRI-STATE /
Apr.April 28, 2020 07:00 AM
(Illustration by Matt Chinworth)

(Illustration by Matt Chinworth)

While the city’s commercial properties slumber through the coronavirus pandemic (much to their owners’ misfortune), chunks of the suburbs are being shaken awake.

As part of a trend that predates the Covid-19 crisis, and is now accelerating because of it, hospitals, private medical groups, banks and a wave of online retailers are snapping up dozens of vacant sites, obsolete offices and empty stores in commuter zones across the tri-state area.

Those businesses — all deemed essential under Gov. Andrew Cuomo’s March executive order — could spark a long-awaited transformation of the commercial real estate markets in swaths of Long Island, Westchester, New Jersey and Connecticut.

“It’s a big deal,” said Matthew Barlow, a vice chairman with the commercial brokerage Savills, who lives in Connecticut. “Will it be a game-changer? Maybe. But it will definitely be a game-shifter.”

To be sure, there will also be some pain from broader economic problems and the increasing lack of public and private funding. This month, Rick Cotton, executive director of the Port Authority of New York and New Jersey, said $37 billion in regional spending plans face reductions if the federal government doesn’t step in.

But with corporations shopping for new space outside the city, double-digit office vacancy rates are expected to drop, while the red-hot industrial sector may catch an even bigger windfall, brokers say.

“There have been a lot of surprises and a lot of sadness, but developers will be very busy over the next two years.”

Guy Leibler, Simone Healthcare Development

Similarly, local housing developers in the suburbs are betting on big shifts as urbanites warm to less-dense areas. With thousands of New Yorkers now sheltering outside the city, and a growing number looking to stick to more remote areas, the pandemic is spurring deep societal changes that could spark new opportunities for the suburban real estate markets.

Guy Leibler, president of Simone Healthcare Development

Guy Leibler, president of Simone Healthcare Development

“Life transitions, for human beings, but also for real estate,” said Guy Leibler, president of Simone Healthcare Development, which has seven planned or underway projects in the suburbs. “There have been a lot of surprises and a lot of sadness, but developers will be very busy over the next two years.”

Healthier options

Much attention is now being focused on the healthcare sectors throughout the tri-state area as New York City struggles with a shortage of protective gear and testing equipment.

George J. Kimmerle, founding president of Kimmerle

George J. Kimmerle, founding president of Kimmerle

The number of suburban outposts of major city hospitals is expected to double in the coming years, said George J. Kimmerle, who’s eponymous design firm is working on a new medical clinic for Hackensack Meridian Health in Nutley, New Jersey. Such clinics include urgent-care centers that will soon be able to provide most medical services outside of intensive care, Kimmerle predicted. “The pandemic has been a wake-up call” for the suburban real estate markets, he added.

The additional square footage is expected to help relieve pressure on city hospitals, which has been glaring during the Covid crisis — and was a problem even before the pandemic in some cases.

Brian Schulz, a managing director at Newmark Knight Frank

Brian Schulz, a managing director at Newmark Knight Frank

“If you can get people out of the hospitals and into urgent-care facilities, it can help with situations like what we’ve been going through,” said commercial broker Brian Schulz, a managing director at Newmark Knight Frank.

A priority for many sponsors of medical properties is repurposing what already exists since retrofits save on construction costs and offer relatively short development time lines, which is vital for hospitals during a pandemic.

Recent expansions in the suburban medical sector include Hackensack signing on for 163,000 square feet across two largely vacant office buildings in Edison, New Jersey, this month. The new lease marks one of the largest New Jersey office deals so far this year.

Increasingly, developers in the medical space have also been targeting struggling retail assets. In Long Island’s Garden City, a 265,000-square-foot Sears store that closed in 2018 will house an outpost of NYU Langone hospital by 2022, a spokeswoman said.

And last year, Simone purchased a 25,000-square-foot former strip mall in Scarsdale that will now be mostly occupied by an affiliate of the city’s Mount Sinai Health System.

Simone is also creating a 118,000-square-foot healthcare center in Westchester for Montefiore Medical Center, a Bronx-based hospital network that’s been expanding outside of the city.

Leibler’s company bought the property, a vacant office building, for $14 million in 2018 and is pouring $61 million into the project, which is expected to bring 250 permanent healthcare jobs to the area. The Montefiore site sits on Westchester’s “Platinum Mile,” an area once thick with office parks and single-tenant commercial buildings.

But a few decades ago, as city living became trendier, those sites were deprived of a workforce, forcing tenants to relocate to urban areas. By 2010, the Mile’s vacancy rate was 30 percent — nearly double that of Westchester as a whole.

In recent years, that vacancy rate has declined, though not always because of new office tenants. Between 2016 and 2018, roughly 1 million square feet of office space in Westchester was taken off the market, in part because of hospital conversions, according to CBRE.

Commercial conversions

Even before the pandemic, office leasing in the suburbs around New York City was lagging, with tens of thousands of empty square feet in some markets. In addition to big corporations moving from the suburbs to the five boroughs, the rise of co-working had also dealt a blow to areas like Stamford.

The vacancy rate in Connecticut’s Fairfield County was 23 percent in 2020’s first quarter, with Hudson County, Westchester County and Suffolk County not far behind, according to Savills.

But the pendulum may start to swing back towards a healthier office market, as some companies look for satellite space in the suburbs. Schulz noted that a similar sentiment after the terrorist attacks of Sept. 11 led some banks to set up backup trading floors in Jersey City.

“Nobody wants to work entirely at home, so there will be a search for space for strategic executives,” he said. “We will see the type of hub-and-spoke model you see in industrial.”

Already, in late April, New York banks and other companies were seeking out 100,000- to 200,000-square-foot berths in the suburbs, which could be transformative in places like Stamford, said Barlow of Savills.

And though Covid-19 may be a nail in the coffin for struggling brick-and-mortar retailers, larger properties could be retrofitted as distribution hubs, where online retailers store packages until FedEx and other carriers pick them up. More than ever, those deliveries include groceries.

Even before the coronavirus, e-commerce companies that sell food and other essential items helped fuel a growth spurt for some owners, investors and commercial brokers who specialize in logistics and warehousing.

In Long Island’s Westbury, a 192,000-square-foot building from the 1960s that now houses a Century 21 department store, is being made over as a distribution center. When the store’s lease expires next year, owner Sanders Equities plans to remove a full floor to create a 32-foot clearance and add loading docks, said Paul Leone, a CBRE broker marketing the project.

Meanwhile, Amazon — which recently announced 175,000 new hires, including both full-time and temporary workers — signed a 15-year lease this winter for a former Waldbaum’s grocery store in nearby Carle Place that closed in 2015. Bethpage has a pair of similar offerings: a 161,000-square-foot former Goya Foods warehouse and a 140,000-square-foot Cablevision facility, now both distribution centers.

Jeff Milanaik, a partner at Bridge Development Partners

Jeff Milanaik, a partner at Bridge Development Partners

Industrial real estate was already buzzing with activity in some parts of New Jersey, with a regional vacancy rate in the 3 percent range. And it’s expected to go gangbusters once the crisis fades, said Jeff Milanaik, a partner at Bridge Development Partners, which builds warehouses near major cities and has about 4 million square feet under development.

Milanaik said this month he leased 419,000 square feet at a spec industrial site his company is developing in Phillipsburg, New Jersey, to Mark Anthony Brands International, which makes White Claw hard seltzer. New Jersey considers liquor stores essential businesses.

“I am even more bullish than before,” Milanaik said.

New housing frontiers

As social distancing and work-from-home orders push residents out of the city, some developers, investors and brokers are banking on a mini housing boom in the suburbs.

Andrew Weisz, a principal at RPW Group

Andrew Weisz, a principal at RPW Group

If the current trend holds, areas once considered remote for city dwellers should enjoy a bump in rental and sales activity, said Andrew Weisz, a principal at RPW Group, a Westchester-based developer primarily known for building and leasing office properties.

But RPW is now working on a $95 million, 303-unit mixed-income rental complex in White Plains. The Flats at Westchester project, which offers one- to three-bedroom apartments, a pool and walking trails, is being developed in a rezoned portion of an office park where buildings are separated by wide lawns and cars are a necessity.

“Most cities thrive on density, but Covid also thrives on density,” Weisz noted, “so I think people will at least consider moving to places that are less dense.”

“Most cities thrive on density, but Covid also thrives on density.”

Andrew Weisz, RPW Group

Developers may also be encouraged to look outside of the city by the Opportunity Zone program, created under 2017’s federal tax overhaul to spur long-term investment in impoverished neighborhoods, in exchange for capital gains tax breaks, brokers say.

Another off-the-beaten-path address that could see upsides is New Jersey’s former Fort Monmouth military base, a 1,127-acre property spanning three towns near the Jersey Shore. Since the base closed in 2011, developers have repurposed its barracks and research buildings for houses, offices and medical facilities and three shopping districts as part of a $2 billion redevelopment plan.

Among the investors there is RPM Development Group, which is turning dozens of Georgian-style buildings into 68 for-sale homes with prices averaging $400 per square foot. Other buildings are being converted by RPM into rentals, including a 48-unit project with below-market rate rents for about half its units. The market-rate apartments start at $2,700 a month.

Not long before the pandemic hit, RPM vice president Michael Hong acknowledged that a new neighborhood created from scratch can be a tough sell. One sticking point: The closest New Jersey Transit train station is a long walk away.

But since March, his company’s sales team has been getting more inquiries from potential buyers in New York, in part because of the coronavirus, Hong told TRD in a follow-up interview this month.

Increasingly, he said, people “don’t like the prospect of being confined to a small apartment.”


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