Hl Commercial Report Q1 Westchester County

Executive Summary

As the first quarter of 2024 comes to a close, a robust economy, plentiful employment, and moderating inflation, continue to support the consumer’s ability and inclination to spend, creating a virtuous cycle that further contributes to economic growth and financial market confidence. Yet, profound uncertainty persists, an outcome of the pandemic period and present-day geopolitical tensions.

Underneath relatively calm markets cross currents meet. Volatility in long dated US Treasury yields has not subsided. Many observers expect a recession as a response to the sharp nominal interest rate increases and persistence of high real rates. Others assert that a higher for longer interest rate regime and a pronounced economic slowdown are the only way to break the stubborn inflationary cycle. Yet, high nominal and real interest rates have not deterred consumers from bidding up house prices, or corporates from boosting investment budgets to access AI’s intriguing potential. In parallel, the US government continues ahead with expansionary programs such as infrastructure spending and the Chips Act, contributing to economic growth and, yes, inflation. The Bloomberg reported on April 8th that the US is planning to award TSMC $6.6 billion in grants and possibly $5 billion in loans to help the world’s top chipmaker build factories in Arizona. This potential investment exemplifies the role of public spending in boosting current economic activity.

Consumers and industry look to the Federal Reserve searching for guidance regarding interest rates and the path of the economy. Sticking with a data dependent philosophy, the Fed is mostly looking backwards, as they try to move forward. Inevitably, we are all part of a unique economic experiment. As a result, economic surprises, positive and negative, are now part of our daily landscape and a reminder that global economies are still trying to address and adapt to profound disruptions rooted in the pandemic years.

The geopolitical environment we face today escalates the uncertainty that our economy may encounter down the road. Globally traded commodity prices such as oil, metals and food, and shipping rates, are all directly exposed to supply risks that stem from ongoing wars in two regions of the world. The impact of geopolitical factors on US domestic inflation may derail the virtuous cycle of growth that the economy has been enjoying over the last few months.

Robust consumer spending trends and healthy employment have benefited commercial real estate occupancy and leasing rates for retail, industrial, residential, and lodging assets. In an environment of higher inflation, tenants have been more accepting of higher rental rates. This has allowed landlords to recover, at least partially, operating cost increases. In contrast, important segments of the office markets still languish under the weight of large vacancies and fixed costs. In this unique cycle, high employment has not benefited office landlords as dynamics of remote work are still evolving, with little visibility ahead as to how to achieve a balance.

Despite interest rates remaining at the highest levels of the last several years, financial markets appear to be providing enough liquidity for the real economy, Commercial real estate has benefited from this, and transaction activity has started to thaw. The CMBS (commercial mortgage-backed securities) market has begun to see fresh issuance suggesting financial liquidity is trickling into commercial real estate. Investors will be watching CMBS delinquencies closely to assess the evolving risk of commercial real estate. According to Trepp, in March, loans transferred to special servicing increased to 7.31% from 5.55% a year ago. Office loans sent to special servicing increased to 10.30% of outstanding CMBS balances, driving the increase in overall transfers. This is a 26 basis points versus the prior month and a meaningful increase compared to 4.77% a year ago.

Westchester Multifamily in a Privileged Position

Boasting a vacancy rate in the low 4% and uninterrupted positive trends in rental rates, fundamentals for Westchester multifamily are strong. Deliveries of new units have slowed markedly, compared to the last few quarters, further tightening supply-demand.

Under construction pipeline has declined to 8.4% of inventory from a high of 12.4% a couple of years ago. Deliveries were 0.2% of inventory during the first quarter, a modest amount compared to deliveries of 1.5-2% of inventory that took place during 2022. This moderating supply

Executive Summary

of new units contributed to re-accelerating multifamily rent growth during Q1 2024.

Westchester Retail Appears to Improve

Consistent with better demand and occupancy improvements taking place in Manhattan retail, Westchester enjoyed positive retail space absorption and improved leasing activity during the quarter. Both direct leasing and sub-let spaces experienced increased demand. Businesses are feeling more confident that consumer demand will hold up and are actively committing to new leases.

Westchester has experienced increased demand from successful NYC businesses that are following their clients who have moved north to Westchester. Limited inventory of retail in Westchester has translated on firm pricing for retail assets and low availability rates for quality space.

Westchester Office Market Remains Depressed

Westchester offices had a difficult quarter with reduced leasing activity and a net supply demand imbalance driven by tenants giving back space to landlords. Despite poor fundamental demand, lease pricing held stable. As businesses reconfigure their approach to offices, we are likely to continue experiencing office footprint reductions for a prolonged period of time. Unfortunately, office to residential conversions have proven to be much more costly and difficult than originally expected, creating hurdles for an adaptive reuse of obsolete office assets.

Westchester Industrial Supported by Consumer Trends

Industrial space in Southern Westchester is scarce. Zoning changes have reduced the amount of available industrial space for rent and development possibilities are hard to find and costly. At the same time, increased consumption of goods and services has created a collateral demand for industrial assets. During the quarter, a large lease turnover led to a modest increase in industrial vacancies while pricing continued an upwards ascent. According to Costar, during the first quarter, average industrial space leasing rates increased 8% year-overyear and 2.4% versus the prior quarter.

Transaction Volume Increases Modestly

The volume of investment sale transactions in Southern Westchester increased 40% versus the prior quarter and it doubled versus Q3, 2023. Motivated buyers and sellers are finding ways to strike a deal and these transactions will help the price discovery process. Interest rates continue to be elevated and deals require hard work and persistence on both sides.

Median prices per square foot have remained firm indicating that sellers are not deeply discounting assets because interested buyers have access to liquidity, have a clear plan for the assets acquired and are ready to transact.

About this Commercial Real Estate Report

This report was researched and written by Teresa Marziano. Please contact Teresa (914- 441-2254) or (TMarziano@HoulihanLawrence.com) for questions, comments or feedback about the contents of this report.

HOULIHAN LAWRENCE COMMERCIAL TEAM

Commercial real estate has entered a challenging period as low interest rate maturities start to come due. Interesting commercial real estate investment opportunities are likely to become available. Liquidity is only available for strong sponsors and poorly capitalized owners will seek to sell. However, there are numerous market and economic risks that will add to the complexities of acquiring commercial real estate. Understanding the market forces that are shaping the fundamentals for each property requires a deep knowledge of the property, local and regional insights, and close contacts with the right financial partners. Our Team is highly skilled in all these areas.

Reach out to HOULIHAN LAWRENCE COMMERCIAL for a complementary assessment of your real estate, an evaluation of a purchase target, and to receive an in-depth perspective on the ever-changing Westchester commercial real estate market.

Unemployment Rate in Westchester – Remains below Pre-Pandemic levels

Westchester’s unemployment rate remains close to multi-year lows.

Nationwide job openings are still plentiful. Participation rate is increasing as wages and salaries become attractive enough to entice individuals not currently in the labor force. Increased employment bides well for economic growth.

Westchester County Unemployment Statistics - Not Seasonally Adjusted

Sources: COSTAR, Trepp, US. Bureau of Labor Statistics, Unemployment Westchester County (Not Seasonally Adjusted) , NY. Real Estate Employees

Data is Seasonally Adjusted. All data retrieved from FRED, Federal Reserve Bank of St. Louis; April 2024

Multifamily Projects Show Strong Metrics as Economic

Activity Continues to be Healthy

WESTCHESTER, SOUTH OF I- ���

Multifamily rent growth has re-accelerated as new deliveries slow down significantly.

Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2024 HOULIHANLAWRENCE.COM/COMMERCIAL

Westchester Office and Retail – Office Departures

Continue but Prices Hold, Retail Fundamentals Stabilize

WESTCHESTER, SOUTH OF I- ���

Office rental pricing has been stable despite sluggish demand as leasing transactions are concentrated in more costly, Class A offices. Also, higher costs for new Tenant Improvements (TI’s) encourage landlords to be disciplined in price.

Retail shop fundamentals improve modestly. Vacancies decline modestly while pricing holds.

Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2024

Industrial Properties – Lease Price gains continue

SOUTH OF I- ���

Industrial space data suggests that supply-demand fundamentals -occupancy and asking rents- will continue to be favorable.

Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2024

Investment Activity Begins to Rebound — Price Discovery Starts

SOUTH OF I- ���

Investment sales rebound but volume remains at weak levels underscoring valuation and financing concerns. Price discovery under a new paradigm of higher interest rates has started.

Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2024