First quarter Westchester office market 'sluggish'.

Cushman & Wakefield has released first-quarter 2004 statistics for Westchester that indicate the county's office market generally mirrored the sluggish nature of the national office market.

The economy's continued inability to add jobs on a consistent basis has hampered the office market from a leasing standpoint, despite the fact that the U.S. economy expanded at a 4.1% annual rate and corporations increased profitability by 7.2% during the 4th quarter of 2003.

Aside from the lackluster job growth over the last year, Westchester County has experienced a departure from the norm in terms of lease size and the tenants in the market that may signal future improvements. Several large leases were executed in 2003, and currently there are large corporations looking to lease space in the 50,000 to 100,000 square foot (sf) range. Despite Westchester's relatively slow start, there is strong potential for improvement this year.

"An outstanding business climate exists in Westchester County," said Jim Fagan, senior managing director and head of Cushman & Wakefield's Westchester/Fairfield County region. "With a number of large tenants in the market for space and several other tenants on the cusp of completing transactions, we expect to be on a leasing upswing for the remainder of the year."

Leasing activity during the first quarter of 2004 reached 324,965 sf, which is average for the quarter. The Central submarket had the greatest total with 154,040 sf leased. Several large transactions highlighted the quarter, including Kraft's lease of 78,000 sf at 120 White Plains Road in Tarrytown and 30,000 sf leased by Fremont Advisors at 555 Taxter Road in Elmsford.

The leasing environment in Westchester County, however, translated into negative absorption and an increase in vacancy rates. For the county, vacancy rates rose from the previous quarter, jumping from 15.0% to 15.6% for overall vacancy and from 11.7% to 12.5% in direct vacancy. The increased vacancy rates were caused primarily by negative absorption in the Central submarket and White Plains CBD, which added 72,049 sf and 65,206 sf to the market, respectively. In the sublease market, the flat activity during the first quarter has essentially matched the flat activity of 2003. The amount of sublease space hitting the market virtually slowed to a halt, with absorption slightly positive in the first quarter at 9,818 sf.

Direct Class-A office rental rates remained stable during the first quarter, increasing slightly to $28.27 from $27.97 at year-end. In comparison with the same time last year, rental rates decreased from $29.05. The Central submarket has seen the most dramatic change in Class-A rental rates, decreasing close to 6% from $28.56 to $26.92 over the last year.

Investment activity in Westchester County was fairly quiet in the first quarter.

The only transaction that occurred was Ivy Equities' sale of 399 Knollwood Road in White Plains to the RPW Group. The 143,815 sf Class A building for sold for $24,700,000, or $171.75/sf. Despite the lack of product available for sale, demand from institutional investors remains strong in Westchester County for quality office buildings.

OFFICE MARKET STATISTICS BREAKDOWN--Overall CLASS A & B

Westchester County      1Q'04     4Q'03     1Q'03
Overall Vacancy         15.6%     15.0%     18.4%

White Plains CBD        1Q'04     4Q'03     1Q'03
Overall Vacancy         19.7%     18.7%     21.8%

White Plains NON-CBD    1Q'04     4Q'03     1Q'03
Overall Vacancy         17.5%     17.1%     22.9%

Northern                1Q'04     4Q'03     1Q'03
Overall Vacancy         16.4%     13.6%     15.3%

Central                 1Q'04     4Q'03     1Q'03
Overall Vacancy         13.8%     13.2%     20.8%

Eastern                 1Q'04     4Q'03     1Q'03
Overall Vacancy         13.9%     14.2%     14.3%

Southern                1Q'04     4Q'03     1Q'03
Overall Vacancy          9.0%      9.3%      9.6%