W E S TC H E S T E R CO U N T Y
Commercial Market Report
Q4-2023
THIS REPORT IS PREPARED BY
Executive Summary
Writer: Teresa Marziano, Real Estate Salesperson
FOURTH QUARTER ��23
Our Best Wishes For 2024! The past year was difficult for real estate investors. They have been faced with escalating financing costs, poor transaction volumes and an opaque valuation environment. On the ground, higher operating costs and rapidly evolving occupier demands created additional challenges. As inflation risks abate and interest rate volatility diminishes, we can hope for a more stable environment and emerging clarity for real estate asset valuations. A change in the prevailing interest rate regime during 2022, and 2023, brought a doubling of new financing costs from the lows of 2020 and uncertainty to many areas of the economy. Inflation is now moderating, and the Federal Reserve has signaled a possible end to what has been a severe tightening cycle. However, the interest rate outlook is still uncertain. While further rate hikes appear unlikely, the market’s expectation for rate cuts starting in Q1 may not materialize. Inflation has not been conquered and complex global events could reignite inflationary forces. Equally important for the long-term outlook of rates is the deterioration of the US government’s fiscal health. At the start of 2024, the national debt surpassed $34 Trillion, and the US is running a budget deficit that is more consistent with a recession than an economic expansion. Two severe economic events in the span of just fifteen years- the Great Financial Crisis (GFC) and Covid lockdowns- have led to high government debt levels in the US and other countries. Governments protected consumers and extended their own balance sheets with no clear plan on how to return to financial health. As a result of elevated debt levels and a fiscal deficit, the US financial system has greater vulnerability to shocks. The US Government and the Private sector may eventually compete for debt funding across maturities and be forced to offer higher interest rates to attract investors. In this scenario, interest rates could remail remain higher for longer. Fortunately, consumer balance sheets appear sound, underpinned by strong employment and the wealth effect of pandemic savings, robust housing, and buoyant stock prices. Upside surprises in employment trends further support consumer spending confidence. Westchester commercial real estate benefits from having healthy employment and an affluent consumer base that helps anchor commercial real estate occupancy and cash flows for well positioned assets. The legacy of low residential housing stock and constrained production capabilities, both an aftermath of the GFC, have combined with high demand from a population cohort that has reached their peak household formation years, to create a supply-demand imbalance in housing. This imbalance has contributed to resilient prices and low inventories throughout most of the country. It has also contributed to high rental demand as many households, unable to find a suitable home to purchase, opt to rent. Residential price resilience has persisted despite considerably higher mortgage rates than just a few years ago. Further, nationwide, 40% of homeowners have no mortgage debt and two thirds of home-owning households have mortgage rates under 4%. The low cost of carrying motivates homeowners to remain in their homes, thus contributing to low turnover and little mobility for households that may want to right-size their dwellings. In addition, seniors are choosing to age in their homes further constraining supply. Provided employment trends continue to be resilient, housing prices can remain robust for the foreseeable future, sustaining consumer wealth, confidence, and the economy at large. In Westchester, residential construction possibilities are limited by land supply constraint. As a result, purchase affordability is low and larger segments of the population become long term renters as compared to other areas of the country. This dynamic is fundamentally
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Executive Summary
FOURTH QUARTER ��23
supportive for multifamily residential projects in Westchester. Trepp’s CMBS statistics give us a window to view the health of commercial real estate nationwide. Surprisingly, Commercial MortgageBacked Security (CMBS) delinquency rates fell modestly in December after increasing throughout the year 2023. Overall US CMBS delinquency fell seven basis points (0.07%) in December 2023 to 4.51%. Covid delinquency high was 10.32% in June 2020, like the high of July 2012 (10.34%) during the GFC. Yer-over-year the overall delinquency rate is up 1.47%, mostly driven by Office and Lodging assets. Retail delinquency trends improved during 2023 and Multifamily and Industrial only experienced modest increases. During December, loans that could not be restructured lost 76% of their value in the disposition sale. This loss is greater than was experienced in prior months but does not yet constitute a trend. The twelve-month moving average loss increased modestly during 2023, from 53% to 56%. Westchester Multifamily – Seasonal Weakness Modestly Dents Occupancy Asking and effective rents for multifamily apartments were 1% higher as compared to Q4 2022. Occupancy fell 0.4% but remained over 95%. The market’s modest decline in occupancy is similar in magnitude to new deliveries, indicating that in a seasonally slow quarter, the market was not able to fully absorb newly built product. Pricing remained stable with little fluctuation over the last four quarters. Westchester’s development pipeline has declined over the last two quarters but continues to be sizable at 7.5% of total stock. As the economy slows, under the weight of high interest rates, rental price gains may stall temporarily until pipeline deliveries fall or the economy re-ignites.
Westchester Offices – First Time in Seven Quarters that Office Demand Exceeds Supply Improved demand for office space, led by Class A projects, helped establish a better supply-demand for offices in the last quarter of 2023. In fact, Q4 marked the first quarter in seven when demand for direct leased and subleased office space exceeded departures. Office vacancies improved 0.3%, leasing activity was modestly better, and this more benign environment allowed pricing to preserve the stability reached over the last few quarters. Nationwide, office building occupancy in major metropolitan areas continues to decline, according to Moody’s analytics. Corporate managements are adapting to hybrid work and reducing footprints when practical. Resizing corporate footprints, sharing of workspace and common work areas are all conducive to smaller office sizes. In addition, office landlords face higher tenant improvement costs (TI’s) to retain viable tenants, making the environment even more challenging for office landlords. Westchester Retail – Demand for High-Visibility Space Supports Pricing Westchester’s retail space was in surplus during the last quarter of 2023. Occupancy decreased 0.8% during the year and 0.2% in Q4. The new lease activity was predominantly clustered in higher-end projects supporting reported rental price statistics. After a rebound in occupancy in 2021, following reopening activity post Pandemic, retail projects have struggled again. Store consolidation or bankruptcy of struggling large footprint retailers has been a persistent headwind faced by Westchester retail landlords. Continued landlord discipline has been a key driver for pricing resilience. Landlords are resisting marking down rents and, in the other side, new retail concepts, and retailers wishing to expand into Westchester are facing higher operating and customization costs, therefore, appear unable to stretch for rent. Westchester Industrial – Strength Continues Industrial assets in Westchester, south of I-287 experienced renewed strength in the second half of 2023. According to Costar data, both
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Executive Summary
FOURTH QUARTER ��23
occupancy and pricing have increased, over the last two quarters of the year, from already strong levels. Average rents ended the year at over $16 PSF/YR and occupancy close to 96%. Demand from an affluent consumer and steep competition from retailers to provide just-intime delivery service are favorable long-term trends driving the industrial market. Westchester industrial projects- South of I-287, enjoy a very constrained supply environment due to zoning and land use limitations that further support fundamentals. Westchester Transactions – Deal Volume at Depressed Levels Investment transaction volume remains depressed as the current economic and interest rate environment continue to be uncertain and clarity has not yet emerged as to real estate asset valuations. We expect that commercial real estate transaction activity during 2024 will be concentrated in distressed assets and re-capitalizations. Savvy investors will differentiate between assets that cannot longer perform in their current shape and assets that can be managed to perform. Recent FDIC liquidations of portfolios acquired during bank interventions of early 2023 are unlikely to shed light on valuation because transactions priced entire portfolios, not single assets. However, the new owners of these assets will likely sell single assets that do not fit in with their strategies and in doing so, will likely create fresh new pricing marks in the relevant markets. HOULIHAN LAWRENCE COMMERCIAL TEAM Commercial real estate is entering a challenging period as low interest rate maturities start to come due. Interesting commercial real estate investment opportunities will likely become available in short order. Liquidity is restrictive 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.
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Unemployment Rate in Westchester – Below Pre-Pandemic levels Westchester’s unemployment rate remains close to multiyear lows. Nationwide job openings have declined bur are still meaningfully higher than prior to the Pandemic, supporting a tight labor market despite a slowdown in the economy.
Westchester County Unemployment Statistics - Not Seasonally Adjusted 17.5
PERCENT
15.0 12.5 10.0 7.5 5.0 2.5 0.0
Jan 2019
Jul 2019
Jan 2020
Jul 2020
Jan 2021
Jul 2021
Jan 2022
Jul 2022
Jan 2023
Jul 2023
YEAR
LEVEL IN THOUSANDS
Job Openings - Total Nonfarm 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000
Jan 2019
Jul 2019
Jan 2020
Jul 2020
Jan 2021
Jul 2021
Jan 2022
Jul 2022
Jan 2023
Jul 2023
YEAR
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; January 2024
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Multifamily Projects Show Stable Metrics as Economic Activity Moderates WESTCHESTER, SOUTH OF I-���
Asking multifamily rents have moderated slightly but overall fundamentals are strong. Under-construction unit count continues to decline as developers are facing meaningful increases in construction and financing costs.
M U LT I FA M I LY B U I L D I N G S - M O D E S T LY LO W E R OCCUPANCY AND ASKING PRICE
Asking Rent Per Unit
Vacancy Percentage 5%
$2,400
3%
$2,350 2%
$2,300
1%
$2,250 $2,200 Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
UNDER CONSTRUCTION UNITS
UNDER CONSTRUCTION PIPELINE DECLINES FOR THE THIRD MONTH
Q1 2023
Q2 2023
Q3 2023
Vacancy Percents
Q4 2023
VAC A N C Y P E R C E N T
4%
$2,450
0
Deliveries Units 2.5%
12% 10%
2.0%
8%
1.5%
6% 1.0% 4% 0.5%
2% 0
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
DELIVERIES UNITS
ASKING RENT PER UNIT
$2,500
0.0
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; January 2024
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Westchester Office and Retail – Office Departures Continue but Prices Hold, Retail Fundamentals Sluggish WESTCHESTER, SOUTH OF I-���
Office rental pricing has been stable despite sluggish demand. This is explained by leasing transactions showing a concentration in Class A. Also, costly TI’s for new tenants incentivize landlords to be disciplined in price. Retail shops continue to face a challenging retail environment. Landlords are maintaining price discipline, in particular for highly visible retail assets. Office Gross Rent Overall
40 35
90.0%
30
89.5%
25
89.0%
20
88.5%
15
88.0%
10
87.5%
5 0
87.0% Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
RETAIL PRICING GAINS DESPITE OCCUPANCY LOSS
Q2 2023
Q3 2023
Q4 2023
Vacancy Percentage total
All service type rent overall
VACANCY PERCENTAGE
$33.5 95.5%
$33.0
95.0%
$32.5
94.5%
$32.0
94.0%
$31.5
93.5%
$31.0
93.0%
$30.5
92.5% 92.0%
$30.0
91.5%
$29.5
91.0%
$29.0
90.5%
$28.5
90.0%
$28.0 Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
ALL SERVICE TYPE RENT OVERALL
OCCUPANCY PERCENT
90.5%
OFFICE GROSS RENT OVERALL
Occupancy Percentage
WESTCHESTER OFFICE -CHALLENGED OCCUPANCY BUT STABLE RENTS
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; January 2024
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Industrial Properties – Price and Occupancy gains SOUTH OF I-���
Industrial space data suggests that supply-demand fundamentals -occupancy and asking rents- will continue to be favorable.
Vacancy Percentage
All Service Type Rent Overall
$17.0 VACANCY PERCENTAGE
95.8% $16.5
95.6% 95.4%
$16.0
95.2%
$15.5
95.0%
$15.0
94.8% 94.6%
$14.5
94.4% $14.0
94.2% 94.0%
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
$13.5
ALL SERVICE TYPE RENT OVERALL
INDUSTRIAL ASSETS EXHIBIT STRONG OCCUPANCY AND RENTS
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; January 2024
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Investment Activity Weakens Further Price Discovery Becomes Increasingly Difficult SOUTH OF I-���
Investment sales remain very weak underscoring valuation and financing concerns. Transactions have been concentrated in larger buildings suggesting institutions and large investors have dry powder for opportunistic acquisitions.
Dollar Volume (in Thousands)
MEDIAN PRICE PER BLDG SF
$350
$800,000
$300
$700,000 $600,000
$250
$500,000
$200
$400,000
$150
$300,000 $200,000
$100
$100,000
$50
0
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
DEPRESSED TRATRANSACTIONS DOMINATED BY LARGER BUILDINGS - CAP RATES TREND HIGHER
SALES VOLUME IN THOUSANDS
Median Price Per Building SF
Q2 2023
Q3 2023
Dollar Volume (in Thousands)
Q4 2023
0
Median Price Per Building SF 12%
50,000
10% 40,000
8%
30,000
6%
20,000
4%
10,000 0
2%
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
0
MEDIAN PRICE PER BLDG SF
SALES VOLUME IN THOUSANDS
DEPRESSED TRANSACTION VOLUME
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; January 2024
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