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What to do with all that space.

After years of unarrested development, suburban markets are finding themselves in the same situation as inner cities - just plain have too much space.

The contraction of the work force has forced companies that own large headquarter buildings to rent out space to other businesses while those situations are leaving the buildings for smaller quarters elsewhere.

Surprisingly, there are still some build-to-suitopportunities from prestige companies with high-tech requirements. Sublease activity is on the rise as well.

Experts cite a lack of growth companies. Some tenants, they say, expanded on the last lease negotiation in the mid-80's, and are now looking to contract to smaller and cheaper space.

While deals are being made in the smaller square foot ranges, those in the 50,000 square foot to 100,000 square foot range and larger are rare.

The competitive edge over New York City has dwindled for Westchester, Fairfield County and Long Island as prices for "A" buildings in Manhattan come into line with quality suburban buildings. Meanwhile, New Jersey is jumping in with bold economic packages to match the aggressive incentives Manhattan is offering tenants who may move across the Hudson. The suburbs, naturally, are capitalizing as much as they can on quality of life issues and amenity packages for tenants, including equity participation.

On the retail side, the economy is sending the public straight to the doors of the off-price buying clubs that are surging into the suburbs. For the first time, low real estate prices, combined with cheap and self-financing, are allowing this market segment to successfully compete in the metropolitan area.

The suburban office market in general has seen vacancy rates jump except for a few pockets where absorption has finally left its mark. According to a Cushman & Wakefield report, Central New Jersey has seen a vacancy rate decrease from 25.3 percent in 1986 to today's third quarter vacancy rate of 20 percent in non-central business district locations. The company cites a pick-up for Long Island as well since the third quarter vacancy rate closed at 18 percent and is down 2 percent from year-end. A Rostenberg-Doern report shows strong gains in absorption for Fairfield County where the vacancy rate is down overall from 26.4 percent to 24.9 percent since the end of 1991.

Westchester County

As Westchester County begins to experience the same overbuilding after-math that has taken its toll elsewhere in the region, the County's central business district vacancies skyrocketed to 27.3 percent at the end of the last quarter.

Major employers such as AT&T and IBM downsized their workforces and John Rostenberg, a principal of Rostenberg Doern Co., sees the major problem as one of a lack of employment.

New Rochelle is trying to keep its office tower proposal viable as it competes with other places in the region for UNICEF's expected move of 1,000 jobs. The county is hosting receptions for U.N. delegates and asking residents for help in talking up the town and county to U.N. neighbors. The city is also exploring the feasibility of turning Main Street, empty stores abound into an outlet center, bolstered by the new Lillian Vernon 35,000-square-foot catalog shop. The city was recently hit with the closing of Macy's, the anchor of the city's only bi-level shopping mall.

White Plains, meanwhile, even while thriving and planning new fashion malls, is looking at one of the largest vacancy rates for an inner city in the entire country, pegged at 31.4 percent for the third quarter by Rostenberg-Doern. Most of the 4 percent rise over the last quarter was due to the failure of two banks and the downsizing of AT&T.

The county's retail market is on the edge of a new mix as half a dozen or more Pace Membership Warehouses, Home Depots, B.J.'s Wholesale Clubs, KMarts and other discount outlets expect to open in all parts of the county within the next year or two.

Rostenberg said commercial leasing activity is steady in both Westchester and Fairfield Counties with more than I million square feet leased in Westchester and 2 million square feet in Fairfield, numbers that Rostenberg calls very traditional long-term activity. On the other hand, he noted, there has not been a sale of land on a market basis for two or three years.

As older buildings have been retrofitted they have been rented and Rostenberg predicts that when the former Schulman buildings come on line with newly renovated space it will do well, too.

Michael J. Ziatyk, senior vice president and managing director for East-Ridge Properties, the company that is now managing 18 of the former Shulman buildings, said leasing efforts, headed by the Edward S. Gordon Company, are on retention with renewals being signed earlier than in the past.

To survive in this market, Ziatyk believe the ownership that makes a commitment to make tenant improvements. will be the buildings that capture the tenants.

Rostenberg noted that while some Westchester properties have been retrofitted and done well, some buildings, even along the Platinum Mile of Route 287 running east/west across the county, may never be rented again for the purpose they were intended.

Ziatyk said the office leasing market is primarily made up of renewals, with a few deals that come from within the marketplace. There are also a limited amount of small and medium companies coming from New York City.

Most of the deals are in the 5,000 to 15,000 square foot range, he said. Lease terms are running from five to ten years and the price per square foot is ranging from $17 to $19 per square foot plus electric.

Fairfield County

Rostenberg said Fairfield County has pockets that are active and is doing much better than Westchester as it adjusts to major corporate respacing.

The office market is mixed and absorption is on a decent track and is better than before, said Barry R. Brown, senior vice president, senior managing officer of CB Commercial Real Estate Group, Inc.

Looking to Stamford as the trend-setter, Brown explained that vacancies have leveled out to a reasonable degree and people have adjusted to the difficult times. There are new companies going through the downsizing every day, however, and will continue to put space in the market. The banks still have properties to dispose of, as well, he added.

Sublease space has been available for five years in Fairfield and accounts for 20 percent of availabilities. With just 10 percent of Westchester's available space made up of subleases, Rostenberg said it doesn't have the impact.

The Connecticut retail market is active with chain users. The price clubs have been making deals throughout the area, Brown said, and there are higher end but smaller supermarkets coming in. "The right parcels are difficult to find and there is competition for the sites," he said.

Industrial usage is steady and the vacancy is not as high as that in the office market. "We're seeing some build to suit but often the inventory is not available for the industrial market when they need it," Brown explained.

Connecticut has recently announced a marketing campaign to entice manufacturers with a research and development component. Risk financing and loan and loan guarantee programs were also announced.

In Norwalk, the A.D. Phelps, Inc. Merritt 7 Corporate Park is 97 percent leased with new leases and 85,000 square feet of releasing in the last six months alone. With 3.2 million square feet, there are always tenants shifting around within the five buildings comprising the park.

Long Island

Alan H. Rosenberg, president of Sutton & Edwards on Long Island, said the market has matured since 10 years ago when everything was new. Now, the newer buildings are spectacular, he said, and are forcing some of the older "A" buildings into the "B" category.

Joseph A. Lagano, managing director of Cushman and Wakefield on Long Island, said the 2 percent drop in vacancies since year end means the space is being absorbed because there is virtually no new construction, Lagano explained.

The tenants are coming from within the area, he said, and are moving from the lower quality buildings to the B's and A's. "They can almost get as good a deal as in the less desirable space because landiords are willing to negotiate," Lagano said.

Sticker shock in reverse has finally touched owners who have been resisting the falling prices observed Bill E. Greiner, president of Greiner Maltz of Long Island. "Now we meet the bottom fisher," he said, "whose attitude is that this is the bottom of the market and financing is at low rates and we're in the driver's seat."

People are still buying in the industrial marketplace, Rosenberg said. One-story industrial buildings that used to sell for $55 to $60 a square foot are now down to the $35 to $38 range, Greiner said, and those with the "cube" look and 22 foot and higher ceilings are in demand for modern material handling.

As elsewhere, the Long Island office market for new construction has basically stopped but there are isolated situations including Swiss Air building a new headquarters and Nikon taking over a spec building for its own use, both in Melville.

Nikon's competitor, Olympus, is in the process of having a new building designed and built.

The Route 110 corridor that stretches North/South from Huntington to Amityville, has several vacant buildings due to the downsizing of Grummond, which is phasing out 1 million square feet as leases expire.

Rents that were asking $22 are now down to $18 a foot plus concessions, he added.

There are many local and state incentives, Rosenberg noted, but a lot of them are masked and overlap.

Due to the economy, even in the higher-income areas, Greiner noted, the buying clubs are moving in and taking business away from the small downtown retailer or strip center.

"The Home Depot has come into the area with a better mousetrap," he said. "Their stores are fabulous. It has to make everyone more competitive and doing a better job."

The Galleria Mall in Westbury received its approvals and a Price Club is to adjoin them. A discount outlet mall in Bayport is also doing well, Lagano reported.

New Jersey

Jaime Weiss, president of Newmark of New Jersey said he is optimistic and sees the market picking up. In the office and the industrial segments, the tenants are taking advantage of the low rates, he said, recognizing that the market may have bottomed out.

Weiss said this is good news for both tenants and owners. In the past, owners were holding space, he said, waiting for the market to get better. Now the tenants are leasing at less than cost but the owners are realizing that even while renting at less than cost they are recouping costs. One must maintain your current tenancy no matter what explained Donald P. Eisen, managing director of Cushman & Wakefield is branch manager in New Jersey. "If you are an owner, you want to have a quality building in a quality location," he said. "It's your best chance of success."

The Jersey office market story, these experts say, remains a movement from B and C property to A property at competitive prices. While the numbers are positive in the amount of space taken, the drop in inventory is only in the A space.

Rents for the A buildings range from $22 to $29. A quality space in Lower Manhattan is a little more, said Peter E. Sabesan, a vice president with Helmsley Spear, but the Jersey City buildings are physically nicer because they are brand new or renovated. Tenants can also go to the aggressive Newport Financial Center and have spectacular views, he added.

Weiss, who is primarily a tenant's representative, said rents in triple A buildings can be negotiated to less than $18 a square foot, even for 25,000 square feet.

Rents in the better buildings are remaining steady and are starting to firm but in the B and C buildings, Eisen said, he is hearing $8 and $9 dollar gross rentals all the time. "And when you are talking $5 and $6 to run the buildings it doesn't leave much cash flow."

If these buildings are not well located and have been superseded by better buildings they will die, warned Eisen. "Although some will languish for many years, each building will be a different story and will be torn down, redeveloped, and reconverted," he added.

Attractive sites include the New Jersey waterfront as companies continue their drift from New York City as well as Bergen County parts of Morris County and the Route 78 portion of Somerset.

Sabesan said while Lower Manhattan can now compete on rents, Jersey has a lot to offer. There is no occupancy tax and electric is cheaper while in urban enterprise zones the State offers a tax abatement program for moving into certain buildings so that any equipment purchased except automobiles is tax free. That incentive was originally issued for 15 years so the Gold Coast buildings have some time left.

Weiss said there is only competition with New York City "for the mega deals where you could save millions of dollars." For most companies, he said, moving to Jersey City is like moving across town.

Along the Hudson River in Jersey City a 34-acre site is slated for a mixed development by the Linpro Company. The newly constructed 42-story 101 Hudson with 1.2 million square feet has asking rents of approximately $28 a square foot.

Merrill Lynch is the primary tenant with 600,000 square feet but is a part equity investor in the property. Only one other 30,000-square-foot tenant is in place.

On the retail scene, the fashion apparel chains are finding space in New Jersey for their offices and local warehouses. Weiss said he has closed 800,000 square feet of fashion apparel recently with companies such as Tahari, Strawberry's, Chuckels, Kmart, Chaus, Barney's and Escada.

The Escada deal was for 45,000-square-feet of office in Hasbrouck Heights plus a 140,000 square foot warehouse connected by an overpass.

This is the time to make deals, Weiss stressed. He said a renegotiation with the landlord can result in upgraded space and an opportunity for landlords to lock in longer terms.
COPYRIGHT 1992 Hagedorn Publication
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:evaluation of real estate development in suburban New York, New York areas
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Oct 21, 1992
Previous Article:Swiss Bank Tower declares 100% occupancy in 2 years.
Next Article:Improving performance of off-price strips.

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