Insurance industry driving leasing activity in suburban markets. (Insiders Outlook).

Since Sept. 11, 2001, the insurance industry has driven a significant quantity of the leasing activity taking place in the commercial real estate markets in Westchester County, N.Y., and Fairfield County, Conn. Insurance and reinsurance companies have been hiring and expanding throughout suburban New York to keep up with a surge in new business.

Julien J. Studley Inc. has represented four insurance companies in suburban New York leasing transactions in the past six months, including Arthur J. Gallagher & Co., XL Capital Ltd., Liberty Mutual Insurance Co. and Navigators Insurance Co., and there are more such deals on the way. The growth in activity within the suburban New York markets has been largely caused by two major factors. Nearly everyone, corporations and individuals alike, has been scrutinizing their policies since Sept. 11, reviewing their insurance needs a bit more closely. Building owners and tenants are not only concerned about terrorism insurance, they are taking out more insurance or adjusting existing policies to ensure they have the right coverage.

The second factor is that the insurance industry is cyclical, and in 2001, for the first time in about seven years, insurers began to see their premiums increase. The combination of these two trends alone has caused insurance and reinsurance companies to hire more employees and expand into markets not previously covered.

While Manhattan-based tenants have failed to leave New York City in droves as some predicted following the events of Sept. 11, 2001, there has been some noteworthy activity. Morgan Stanley Dean Witter & Co. was one of the few companies to choose to relocate to the suburban New York markets from Manhattan. The company will occupy Texaco Inc.'s former headquarters building at 2000 Westchester Ave. in Harrison, N.Y. Morgan Stanley purchased the 725,000-SF property for about $42 million. There will be some ripple effects from the transaction, with smaller companies that need to do business with the company expected to take space nearby, however, there has yet to be any follow through.

Other New York companies are rumored to be acquiring suburban space, including The Bank of New York Co. Inc.; Lehman Brothers Inc.; The New York Stock Exchange; law firm Skadden, Arps, Slate, Meagher & Flom; among others.

Aside from Morgan Stanley's purchase, Westchester County claimed one other large transaction recently, although the space user is relocating from one Westchester site to another. Fuji Photo Film U.S.A. Inc., the American arm of Fuji Photo Film Co. Ltd. of Tokyo, leased approximately 164,000 SF at Reckson Summit, 200 Summit Lake Drive, in Valhalla, N.Y., from Reckson Associates Realty Corp. Fuji Photo Film U.S.A. is relocating from 106,000 SF at its current headquarters location in the Taxter Corporate Park in Elmsford, N.Y.

Space users have not fled New York City because it became clear immediately after the terrorist attacks that Manhattan had plenty of office space. Once tenants began to examine what they actually occupied and how the used their offices, many of them discovered they had too much space. Much of that office product has come back on the market in the form of possible sublease space.

The Westchester and Fairfield commercial real estate markets are very dependent upon New York City. When Manhattan office space is scarce and rents are high, as was the situation at the high point of the market several years ago, tenants turn to the suburbs to locate the space they need or to find less expensive alternatives. At this time, however, the large quantity of available direct and sublease office space in New York City continues to push down rental rates in the Downtown and Midtown submarkets. Space users have little financial incentive to consider a suburban New York location when they can obtain lower-cost space in New York City.

Westchester and Fairfield counties are healthy markets despite the weak demand. They continue to profit from the leases signed in the past five years, when many businesses relocated to the suburban markets during the boom years of the mid- to late-1990s, bolstering the region with a solid base of tenants. Those transactions pushed up rents and ate up empty office space throughout suburban New York.

So far this year, however, Westchester and Fairfield have seen little growth in rental rates and almost no absorption of available office space. While asking rents remain virtually unchanged, actual rents in both suburban markets are substantially less than they were 18 months ago. Westchester rents have fallen approximately 10% and Fairfield rents have dropped about 10% to 15%.

Given the close ties that Westchester and Fairfield counties have to the New York City commercial real estate market, little change is expected soon. Although the suburban markets remain soft, with no clear end to the weak market in sight, they region's economy remains strong and is fueled by a diverse tenant base. Once the Manhattan real estate market turns around, Westchester and Fairfield are poised to lure cost-conscious tenants away from New York City.