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Deals & Dealmakers Headline

A suburban withdrawal

By Konrad Putzier

400 Atlantic Avenue, Samford
400 Atlantic Avenue, Stamford

Stamford and Manhattan are only a few miles apart, but as far as commercial real estate goes, they might as well be on different continents. 

A day before brokerage CBRE announced that Manhattan’s net office absorption in the third quarter exceeded one million s/f, news broke that the 527,424 s/f office building 400 Atlantic Street in Stamford would lose its three largest tenants by 2018.

These two examples are symptomatic of a larger rift. While New York City’s commercial real estate market is booming, Fairfield County, Long Island and Westchester are, at best, stagnating. In order to turn their fate around, suburban office centers will have to reinvent themselves on a scale not seen in decades.

Real Capital Analytics data shows that commercial property prices in Manhattan and the boroughs have almost doubled since 2010, while commercial property prices in the suburbs have essentially stagnated and even fallen behind the already lackluster national average.

A comparison of average office prices and vacancy rates between Manhattan and different suburban sub-markets highlights the extent of the rift.

Between the second quarter of 2013 and the second quarter of 2014, average asking rents per s/f in Fairfield County and Long Island fell by 1.0 percent to $37.20 and by 3.1 percent to $30.01, respectively, according to Cushman & Wakefield.

During the same period the average office rent for Manhattan rose by 4.86 percent to $64.82 per s/f. Manhattan’s current vacancy rate of 10.2% is well below Fairfield County’s 20.5 percent, Long Island’s 17.3 percent and Northern New Jersey’s 20.3 percent.

According to brokers and analysts, the reasons for suburban weakness and urban strength are closely intertwined. “I think it’s mostly a function of the larger trend of people wanting to be in more urban areas,” said Ben Thypin, director of market analysis at research firm Real Capital Analytics. “Companies are moving into the city at the expense of the suburbs.”

The suburban office market grew during the golden age of urban sprawl, offering employees a shorter commute to work and an escape from the crime and dirt of the city. But the urban renewal of the past two decades has reversed that advantage.

For millenials living in Manhattan or Brooklyn, working in Stamford or Jersey City means a long commute to dreary neighborhoods. Unsurprisingly, many prefer to work in Soho or Flatiron — despite the higher rents.

To compete in this changing office market, brokers say, the suburbs need to become more like Manhattan and Brooklyn.

AL GUTIERREZ
AL GUTIERREZ

“I think there’s more of a need for mixed-use neighborhoods in suburban markets, which New York City has readily available,” said Al Gutierrez, executive managing director at Colliers International’s Stamford office.

Gutierrez recalled working around Wall Street in the early 1990s, when Lower Manhattan was virtually deserted by 6:30 p.m. every day. Nowadays Downtown is popular with companies because it has transformed into a 24-hour neighborhood with plenty of residential towers, restaurants and bars. Cities like Stamford need to make a similar transformation in order to keep up, he said.

The suburban office markets that have done best are those that offer mixed-use neighborhoods similar to New York City — particularly in New Jersey.

Hudson County, which encompasses Hoboken and Jersey City, has recently seen a growth in residential development and offers a thriving nightlife. In the third quarter, its average office rent grew by 6.6 percent to $34.35 per s/f, according to Cushman & Wakefield, bucking the suburban decline.

RICHARD MIRLISS
RICHARD MIRLISS

“The reason why those submarkets are hot is because they have transportation infrastructure, surrounding amenities and proximity to Manhattan,” said Richard Mirliss, executive managing director at Colliers International in New Jersey. “(Office) migration in New Jersey is turning east, and the main issue is attraction and retention of millennial workers.”

He explained that employers are moving away from traditional suburban campuses because young workers don’t want to work “in the middle of nowhere”.

Most other suburban office centers are lagging far behind in the quest to become more livable, but there are encouraging signs that it is starting to change.

The Harbor Point mixed-use development will bring 4,000 apartments to Stamford’s South End, while RXR Realty is working on a major mixed-use project in Hempstead, Long Island. In Rokonkoma, Long Island, Tritec Real Estate is planning a major mixed-use project that could include 1,450 apartments and 545,000 s/f of office and retail space. As restaurants and bars tend to follow residential development, these projects are bound to make their neighborhoods more attractive to young workers.

While the suburban commercial market is still weak overall, industrial and healthcare buildings are already doing well in virtually all areas.

“There is major growth in pricing for industrial buildings, with demand from firms moving out of Queens and Brooklyn,” said Philip Heilpern, a senior vice president at CBRE’s Long Island office.

PHIL HEILPERN
PHIL HEILPERN

Rising rents in the city have pushed manufacturing firms into the suburbs, driving up the value of scarce industrial land. Suburban brokers and developers are hoping the office market will one day follow a similar trajectory. And if lower rents and mixed-use development fail to attract tenants to the suburbs, there’s always tax breaks.

Yesterday (Tuesday), New Jersey’s state senate was set to vote to expand the state’s already generous tax incentives program for corporations.

“One of the reasons for growth in urban areas in New Jersey is a tax incentive for leasing within half a mile from a train station,” said Jon Williams, a director at Cushman & Wakefield in New Jersey. “A lot of tenants are trying to take advantage of that right now.”

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