Westchester County office market takes pause in 1Q.

After a recession-defying performance in 2002, Westchester County's office market seemed to pause in the first quarter of 2003, as economic and geo-political forces clouded the path toward a full-blown recovery for businesses in all industries.

Slower leasing failed to offset space returns, causing negative absorption and higher availability in the county compared to the same period of last year. Interest from Manhattan, however -- a prime driver in last year's spectacular results -- persisted, and has clearly become a real trend, as companies continued to look for ways to disperse their operations following the Sept. 11 attacks.

The continuation of these relocations, according to Dean Shapiro, executive director of Insignia/ESG's Westchester-Connecticut office, is one example of why the first quarter's outcome is just a momentary blip in Westchester's forward march, not the beginning of a permanent turnaround.

"The fundamental motivators behind the county's tremendous output last year are still in effect. In addition to further interest from the disaster-recovery/redundant facility crowd, established locals continue to expand within the area. Much of the space returned to the market thus far this year is located in buildings that have traditionally been centers of business for the county, and therefore should lease-up relatively quickly-like 44 South Broadway did in 2002. Additionally, while 2003's leasing may seem to have slowed from the first quarter of 2002, it actually surpasses last year's total by 6% if Morgan Stanley's 605,000 SF acquisition is removed from the 2002 numbers."

In total, first quarter leasing velocity dropped 55% from last March to 467,840 SF and absorption declined to negative 169,850 SF. Available space, as a result, increased 2% to 5.1 million SF and the availability rate rose less than half a point to 15.5%. Average asking rents, responding to the growth in available Class A space, increased 16 cents per SF from last year to $25.82 per SF.

Though activity from established Westchester companies continued to drive the market in 2002, relocations of major corporations also played a key role in the county's ability to withstand the economic downturn that humbled most significant office markets throughout the country. In the first quarter of 2003, this winning combination continued to push Westchester ahead -- three of the five largest transactions were relocations into the county, while the other two, Ameriquest Mortgage Co.'s 118,000 SF at 333 Westchester Ave., White Plains and USI Insurance's 31,540 SF at 555 Pleasantville Road, Briarcliff, the two largest of the year, were internal expansions. In total, relocations accounted for 18% of Westchester's leasing and expansions, 38%.

Chief among tenants' choices for these expansions or relocations was 333 Westchester Ave. in White Plains -- Kraft's former headquarters building and Westchester's sole remaining block of available space larger than 400,000 SF. In addition to Ameriquest's commitment, this property saw two other deals -- Endurance Reinsurance Corp. of America's 21,630 SF -- the county's third largest transaction of the year -- and Stone, Russo & Lassaro's 2,030 SF. As a result of these and several other significant transactions at 1311 Mamaroneck Ave. in White Plains, the Eastern submarket once again came out Westchester's most active segment with 233,840 SF of leasing, or 50% of the county's total thus far this year. The CBD, however, boasted the county's most notable increase in velocity from the first quarter of 2002, as last year's darlings, 44 South Broadway and 360 Hamilton Ave., continued to attract even more attention. The two buildings saw four of Westchester's ten largest transactions of the year. In total, leasing i n the White Plains CBD grew 39% from last March to 135,960 SF of space or 29% of the county's total from 9% in the first three months of last year.

Due to the on-going economic downturn and the lack of a Morgan Stanley-like mega-transaction, however, completed expansions, relocations and all other transactions were smaller than those of last year. The average transaction size, in fact, fell 52% from last March to 6,322 SF.

In an ideal office market, large corporate occupancies are balanced by an army of smaller, local companies, thereby ensuring stability in the market, even in difficult economic times. Over the past few years, Westchester has made significant progress toward this ideal -- moving away from a high concentration of space in too few large corporate occupancies in favor of a diverse population whose fortunes are less likely to have a catastrophic impact on the market. In the first quarter of 2002, Westchester continued to move along this evolutionary path. Several large organizations including MCI, Teachers Insurance & Annuity Association, Chrysler Financial and Philips Electronics returned space to the market, while leasing by smaller, local companies continued. Because of the difference in the size of the returned and leased blocks, however, the county saw a sum total negative absorption of 169,850 SF for the quarter.

With the exception of the North, where fewer space returns and the withdrawl of 500 Columbus Ave. in Thomwood from the market led to 30,810 SF of positive absorption, every submarket in the county experienced negative absorption in the first quarter. Foremost among those was the White Plains CBD, where almost 80,000 SF of space returned at 1 North Lexington Ave. contributed to nearly 105,360 SF of negative absorption thus far this year. Altogether, net absorption in the CBD amounted to 62% of the county's total negative absorption.

Despite this recent uptick in space returns and overall negative absorption, sublease space actually declined 7% countywide over the past year to 937,570 SF, as aggressive sublandlords made commitments in some sublease offerings almost irresistible for tenants.