Rising Manhattan office rents and a short supply of large blocks of space are making New York’s suburban markets more attractive to corporate tenants — but some suburban markets have done better than others.
Markets north of the city have outperformed New Jersey and Long Island for the most part in the past year.
Fairfield County has perhaps fared best of the suburban markets. While the rest of the Connecticut county is more affordable, Class A space in posh Greenwich has actually seen average rents rise even higher than in Manhattan.
Westchester has also seen sustained interest — total leasing activity rose 38 percent from a year earlier.
Long Island and northern New Jersey, meanwhile, have fared worse, with both areas seeing a rise in vacancy rates and slower leasing activity.
Meanwhile, Manhattan’s Class A average asking rent has continued to climb, reaching a record of more than $71 per square foot at the end of February — up 4 percent for the year to date and an impressive 34 percent higher than a year ago, according to Colliers ABR. Some prime space is going for more than $165 a square foot.
Leasing activity healthy in Westchester County
Despite the re-entry of large blocks of space vacated by IBM and Ameriquest Capital (470,600 square feet and 531,800 square feet, respectively), much of Westchester experienced healthy leasing activity in 2006. That’s expected to improve as Manhattan rents continue to rise.
Loews Corp., for instance, recently announced that it would expand from Manhattan, signing a long-term, 15,770-square-foot lease for Class A office space at Westchester One, an 852,000-square-foot office building in White Plains. It’s being leased out by Cushman & Wakefield.
By the end of 2006, Westchester leasing activity increased 38.7 percent to 2.86 million square feet, according to CB Richard Ellis. But the return of space to the market from IBM, Ameriquest and other companies including BAE Systems, SBC Communications and Lillian Vernon resulted in 86,600 square feet of negative net absorption, leading to a vacancy rate increase for the year, to 14.7 percent from 14.5 percent in 2005.
Still, more vibrant leasing activity allowed landlords to push the envelope in Westchester’s central business districts. For the first time, asking rents reached $40 a square foot at prime buildings, including W & M Properties’ 10 Bank Street, which is adjacent to the White Plains train station.
Countywide, average asking rents rose $1.12 per square foot to $27.20. It’s White Plains, though, that’s seen the biggest changes as a commercial market.
“It’s not a sleepy suburb anymore,” said Jeffrey Newman, executive vice president at W & M Properties. “It’s really a city in its own right.”
The biggest transaction last year was Alliance Bernstein’s lease of 210,750 square feet at 1 North Lexington Avenue in White Plains. Other big news was Regeneron Pharmaceuticals Inc.’s plan to build 194,000 square feet of space to accommodate 450 employees in Tarrytown.
Fairfield County courts financial services companies
The Fairfield market has been the healthiest of the suburban commercial markets as financial services companies such as Legg Mason and RBS Greenwich Capital signed new leases last year.
Stamford claimed four of the top 10 lease transactions in the county in 2006, including Legg Mason’s deal to lease 150,874 square feet at 100 First Stamford Place. Other major transactions in Stamford included UST’s lease of 137,994 square feet, RBS’ lease of 86,000 square feet and Stamford Hospital’s lease for 57,442 square feet, according to a report by CB Richard Ellis.
Other large transactions included GE Real Estate’s lease of 150,000 square feet in Norwalk and Sikorsky Aircraft Corp.’s lease of more than 109,000 square feet in Stratford.
“You’re sort of seeing Fairfield and part of Stamford emerge as a financial services mecca. You have both UBS and RBS expanding in these markets and those are two world-class financial institutions growing their businesses,” said Robert Caruso, senior managing director at CBRE.
In the first months of 2007, deals included Xerox’s lease of 109,000 square feet in Norwalk, Marc Fisher Footwear’s lease of 37,200 square feet at Greenwich Office Park in Greenwich and Lifecare’s lease of 39,000 square feet at 100 Nyala Farms Road in Westport, according to CBRE.
Asking rents for Class A office space in the Greenwich central business district ended the year at a record $72 per square foot on average, with rents on some offices reaching $90 a square foot, according to CBRE.
While those rents continue to be comfortable to firms such as hedge funds, some non-financial firms have opted for Stamford. Though rents are rising there, they are considerably less expensive than in Greenwich.
There was more than 3.8 million square-feet worth of leasing activity in Fairfield by the end of 2006, down from 4.1 million square feet in 2005, but a rebound from 3 million square feet in 2004, according to CBRE. The availability rate declined to 15.2 percent from 15.9 percent. Average asking rents rose 5 percent in 2006 to $29.61 per square foot.
Companies are choosing to lease space in the market because it’s near the homes of executives, has easy access to the trains to the city, and provides cost savings.
“Manhattan is great, and people want to be in Manhattan, but there is recognition that if there are $100–a-square-foot rents in Manhattan, why do you need to have all of your people there?” Newman said.
Long Island lags a little
Long Island saw mixed results in 2006, though a relatively large deal early in 2007 shows things might improve this year.
Payroll processing company Automatic Data Processing Inc.’s financial brokerage unit recently took 70,000 square feet of space and will move operations to Lake Success from Manhattan. The company will relocate about 300 workers, according to published reports.
ADP’s recent news comes off of what appeared to be a lackluster year on Long Island, as smaller transactions and multiple renewals led to slow leasing activity.
By the end of 2006, Long Island’s vacancy rate was up 0.6 percent from the previous year, reaching 11.8 percent, according to CBRE. Leasing activity for the year was 1.9 million square feet, matching 2005 levels.
In the fourth quarter, availability rates were highest in central Suffolk County, at 17 percent compared to 16.7 percent at the end of 2005. Suffolk County had an availability rate of 14.7 percent, a slight decline from 15 percent a year ago. Nassau County’s availability rate rose to 12.2 percent from 11.6 percent.
But about 2 million square feet of new space coming onto the market in 2006 may have skewed the numbers, said CBRE senior vice president Raymond Ruiz.
“What would have seemed like a very static year statistically was actually a very active year,” maintained Ruiz, who added that a handful of tenants are looking for large blocks of space in the area.
Landlords did manage to get healthy rent increases by the end of last year. The average asking rent rose 6 percent to $27.08 a square foot. Landlords benefited in part from increasing rents in Brooklyn and Queens that pushed some tenants to look on Long Island for space.
Long Island is somewhat insulated from economic downturns, said Brian Lee, executive managing director at Newmark Knight Frank.
“We don’t have huge operations and back-office space for large corporations. When there is a significant recessionary environment where you have loss of jobs on a large scale in corporate America, corporations will sell or sublease excess space, which will drive down rents,” he said. “But we don’t have that as much on the Island.”
The top transactions on Long Island included Honeywell International’s lease of 133,000 square feet and HIP’s renewal of almost 80,000 square feet of space in Melville. Mortgage Zone leased 60,000 square feet in Hauppauge and AIG leased 46,588 square feet in Hicksville.
Northern and Central New Jersey look to 2007
The high rents and lack of large blocks of space in Manhattan could bode well for New Jersey office space in 2007, said Gil Medina, executive managing director at Cushman & Wakefield.
Already in 2007, French bank BNP Paribas has signed a 15-year lease for nearly 76,000 square feet of office space at Newport Tower in Jersey City.
“It’s two issues: affordability and supply. Large blocks of space in Manhattan are scare, so it’s not just an issue of cost, but availability,” Medina said.
The Northern and Central New Jersey office market ended 2006 with decreased leasing, negative net absorption and a higher availability rate, but like the other suburbs of New York, the region enjoyed an increase — albeit a small one — in rents.
Leasing activity was 7.9 million square feet for the year, according to CBRE. The Garden State Parkway corridor, Morristown and the New Jersey waterfront were the most active leasing markets.
Average asking rents rose 3.2 percent to $25.43 a square foot, compared to $24.63 per square foot at the end of 2005.
Part of the reason for the lag in New Jersey is that areas of the state economy where there has been job growth — including the service and hospitality sectors — generally don’t spur demand for office space, Medina said.
“The biggest challenge is the economic performance of the state,” Medina said. “That still continues to be a concern. However, we have seen some indications that the economy may be performing a little better than in the past couple of years.”
Top transactions in Northern New Jersey in 2006 included Merrill Lynch & Co.’s lease of 236,350 square feet at 101 Hudson Street in Jersey City, Louis Berger Group’s lease of 109,000 square feet in Morris Township and E*Trade Financial Corp.’s lease of 106,573 square feet in Jersey City.