Pandemic-Era Exodus To Suburbs Still Paying Dividends For Tri-State CRE

While New York City commercial real estate is dealing with a sales and leasing deep freeze, the suburban markets are experiencing slightly different conditions that are clearly resonating with investors.

From an investment perspective, both Fairfield and Westchester counties performed well last year, with Fairfield experiencing transaction volume of $2.4B, essentially doubling 2019’s total, according to JLL data. In Westchester, there was $2.75B in transactional volume, below 2019’s level of $3.3B but still the strongest year since before the pandemic.

Office assets were among the top sellers, particularly remarkable considering ongoing questions about how people will use offices long-term and how much certain office buildings' values have been affected by interest rate hikes.

“Counterintuitively for many of us, the office sector at $625M in transactional volume for 2022 was a 22% increase from pre-Covid levels,” Marion Jones, a managing director in JLL’s Stamford, Connecticut, office, said at Bisnow's Westchester and Fairfield State of the Market event this month. “Office showed an uptick — now granted, that was mostly in Greenwich. Traditional offices still have investor appetite in the best locations.”

The start of the year wasn’t so rosy, however. The first quarter of the year, overall transactional volume in Fairfield was down to $60M from $1B a year ago. In Westchester, multifamily sales “offset” falling office volume in Q1, per JLL, with sales in that asset class hitting $1.1B, a 41% jump over 2019.

“Those of you who are on the buy side will see distressed opportunities, but it's probably not going to look like 2010. It's going to be a little different,” Jones said.

Panelists at the event, held at the Merritt 7 Corporate Park in Norwalk, pointed to strong performance of buildings that benefited from the changes wrought by the coronavirus. Baywater Properties founder David Genovese, whose company is developing a new building in Darien, Connecticut, with 100K SF of office space, said a major financial institution has already done a handshake deal for 25K SF, and with other deals in the works, the property will be 50% pre-leased before the summer.

“We have literally not put a shovel in the ground yet," Genovese said. "So that kind of tenant demand is sort of mind-boggling to me.”

He added that the pandemic actually pushed the planned property to perform better than it would have ordinarily because certain types of tenants that had been concentrated in urban centers started pushing into the suburbs.

“There were retail tenants that we were chasing for 10 years [like] Chopt, Sweet Green. … They would not talk to us because they wanted to focus on urban core markets where they could have a $10M store,” he said. “When all of their customers moved out to the burbs, they just followed.”

The worst of the pandemic precipitated a mass exodus from New York City, and many of the expats wound up in Connecticut and didn't go back, including Jones. Around 50,000 people who moved to the state during the crisis have put down permanent roots, Gov. Ned Lamont told Bloomberg last year, citing U.S. Postal Service data. 

Building and Land Technology co-president Ted Ferrarone, whose company developed the 8.4M SF mixed-use property Harbor Point, said apartment demand from ex-New Yorkers was far higher than normal during Covid-19, and it has reshaped the community.

“I think we brought on 1,000 apartments during Covid in Stamford and Norwalk, and historically we would have leased about 15% of the apartments to people coming out of the city. We leased more like 30% to people coming out of the city,” he said. “The interesting thing was … the majority of them stayed.”

Many of them work in the area and don't commute into the city, he said, adding that General Electric’s announcement that it would move its headquarters from the state to Boston was a learning moment for the firm.

“When GE said they were leaving, why did they leave? It was because they didn't have the ecosystem to retain their talent,” Ferrarone said. “We were GE’s biggest landlord in Connecticut, so we took that to heart and we've built thousands and thousands of apartments around our office … because the reality is if we didn't build the apartments here, the tenants couldn't have the teams here and these buildings would all be empty in 10 years.”

A growing presence in the suburbs is certainly impacting the business of real estate. Fast-casual restaurant chains like Dig and Starbucks have made plans to expand in places like Westchester and Long Island. Earlier this year, New York real estate stalwart The Durst Organization signed up with firm Serendipity Labs to provide access for its NYC tenants to the flex office provider’s 35 locations globally. Serendipity has locations in the Financial District, Ridgewood, White Plains, Rye, Stamford and Westport.

Despite fresh interest in the suburbs since the pandemic began, these areas still face many of the same challenges much of the commercial real estate industry is grappling with now, such as inflation, interest rates, recession threats, cost of materials and the nationwide push among tenants to shrink their office space.

“We are outperforming our pro forma on the taking rent, but free rent is still significant, [tenant improvement allowances] are still significant,” said Margaret Egan, a senior vice president of asset management at Clarion Partners, which owns Merritt 7 Corporate Park, the six-building, 1.4M SF office park in Norwalk that hosted the event.

“It’s difficult to embrace a five-year deal or a seven-year deal with a five-year out," she said. "Everybody wants an out, but we're doing what we have to do. You have to be flexible." 

But just as the office challenges of the nation impact the suburbs, so, too, do the green shoots. In the last few weeks, major firms have begun to bring workers back to the office. JPMorgan Chase now requires managing directors to be in the office five days a week.

Baywater's Genovese said other CEOs are taking a similar approach — just not saying it publicly yet. A new survey released by CBRE this week found that 65% of office-using companies now require multiple days of in-person work a week.

“I had a meeting with the CEO of a major financial institution not long ago … [who said], ‘We can monitor productivity, and it's not falling off a cliff. They're maintaining productivity. So we actually have confidence that they're doing what they need to do. But we're losing mentorship, we're losing culture,'” he said. “I'm hearing the same message from CEOs every day. I just don't know that they're saying that publicly yet or to their people yet, that they want people back to the office and they're going to start pushing.”