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Entrepreneurs keep tertiary vacancies low.

Your lease is up and you need 5,000 square-feet for the company you started four years ago. Looking throughout the 1-297 corridor for potential space, you evaluate your requirements: You want a kitchen, you need offices built and a substantial concession in order to offset your initial moving and relocation costs. If you can't find a sublease or a space you can move into on a modified "as-is" basis, hold onto your hat because this is 1993 Real Estate and you're negotiating with the "institutions." They are going to price your work, scrutinize your financials, most likely require a substantial security deposit, present you with a lease that you will send to your attorney without even endeavoring to read it... and then the negotiation begins.

But take a drive to Armonk, Hawthorne, Elmsford, Rye, Greystone/ Yonkers, Mount Kisco, Tarrytown's Route 119 marketplace, Pleasantville and the Mount Pleasant corridor and sit down with an owner or an owner's agent and you can conceivably be in a new space. in just a few weeks. The peculiarity is that all the aforementioned marketshare maintaining an occupancy of over 90 percent. These are probably the same owners who started with you when you were a 1,500 square-foot tenant. They understand that lost rent is lost rent and if you are 5,000 square-feet in today's market, you will probably be 7,500 square-feet in tomorrow's. The institutional owner requires to know the NPV (Net Present Value) of a proposed transaction, in addition to the cash on cash return and pay back period of their proposed investment.

The tertiary owners or peripheral space owners are more concerned that the rent will come in and the tenant's business is secure. It is only where we have seen a dominant presence of receivers or institutional owners who have foreclosed or recaptured properties, do we see the higher vacancies, i.e. The Platinum Mile & Downtown White Plains central business district. In many cases the peripheral or tertiary markets maintain product that is more contemporary and lends itself to smaller tenancies due to the smaller and more flexible floor plans.

The likelihood of moving to these secondary locations has essentially reduced the tenant's rent by 15 to 20 percent on the average, put them in a more service-oriented area, positioned them closer to their home or their employees' homes and required less upfront expenditures going into the transaction.

It is even more interesting that certain urban markets such as Peekskill and New Rochelle, who have seen a tremendous erosion in their occupancy levels over the past few years, are beginning to slowly rebuild their tenant base.

One of the two hardest hit sectors of the Westchester marketplace that were previously enumerated have come from the vacating of both single user buildings by companies such as Transamerica, Nestles, IBM and AT&T. Additionally, due to the escalating office vacancies in the downtown White Plains central business district, the supporting service and retailing sector have been adversely affected.

Presently, the 1-287 corridor and its environs requires in excess of eight (8) 90,000 to 200,000 square-foot tenants looking for headquarter buildings to relocate from outside the county. These headquarters or single user tenants are necessary in order to backfill buildings such as the 120,000 square-foot 1 and 4 Corporate Park Drive buildings, the 105,000 square-foot building at 4 Gannett Drive, the 116,000 square-feet available at the 711 Westchester Avenue building that Transamerica vacated recently, One North Lexington Avenue's 250,000 square-foot AT&T sublease, 95,000 square-feet at the 2900 Westchester Avenue Building and 380,000 square-feet at the 360 Hamilton Avenue property that IBM had vacated, among others. The other multi-tenanted buildings that have significant vacancies along the corridor can be more expeditiously leased if there was an aggressive leasing posture enacted.

While we have seen institutional owners, such as The Principal Financial Group and the GM Pension Trusts, put substantial capital investments into their lobbies, landscaping, amenities and signage systems, this alone will not help the overall county-wide absorption rate.

What will help is the understanding by the institutions that many of their existing demised spaces are tired and have little existing value. They must realize that a greater capital investment and a higher tenant improvement allowance is required for today's tenant at a more competitive rental rate. This will enable them to compete against the second tier or sublease market, the tertiary marketplace and alternatives such as renewing in New York City or moving to Connecticut. Westchester maintains one of the finest corporate cultures, highway networks, mass transit access and corporate support service companies throughout the region. But with lower electric costs, availability of affordable housing and incentive packages that our neighboring counties of Fairfield, Rockland and Orange offer, we are not competitive enough. Our county's Institutional owners must enact an aggressive rental posture coupled with a local governmental and utility incentive program in order to adequately compete. There is no doubt that over the short term the institutions will see little to no return on their investments. What they will see, in time, is their occupancy levels increasing, tenant base expanding and a slow but gradual increase in their effectuated renewal rates and overall increase in their rental rates.

(Benson Commercial Realty, Inc. is a full service commercial real estate firm specializing in commercial & industrial sales, leasing and consulting throughout the New York suburban marketplace.)
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Title Annotation:Suburban Markets
Author:Benson, Scott H.
Publication:Real Estate Weekly
Article Type:Column
Date:Oct 20, 1993
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