Q2 2022 Commercial Market Report

Commercial Market Report WESTCHESTER COUNT Y

|

SECOND QUARTER ���2

THIS REPORT IS PREPARED BY

Executive Summary

Writer: Teresa Marziano, Real Estate Salesperson

S E C O N D Q U A R T E R � � 22

Westchester Commercial Real Estate - Quarterly Report The Pandemic, and most recently, the on-going war in Ukraine have dealt multiple shocks to the US and Global economies.

Resulting tensions have released demographic, social and economic forces that continue to destabilize the pre-existing social and economic world order. One of the most alarming manifestations of the current challenges, is the runaway inflation trends we are experiencing. With little in terms of academic constructs to guide their actions, global Central Banks are struggling to tame this ancient woe that, prior to current events, had appeared to be in a long-lasting retreat.

Real estate assets, commercial and residential, have been a bastion of stability for investors throughout the Pandemic and favored by the low interest rate environment. Negative interest rates during the tail end of the acute phases of the Pandemic, drove investors of all stripes to consider investing in real estate assets. Most recently, ramping inflation expectations, boosted investor appetite for this asset class. Going forward, as the Federal Reserve wrestles with inflation within the US, real estate will not be immune to the effects this battle. Higher interest rates and reduced monetary liquidity will motivate investors to focus on fundamentals with a more discerning eye. Commercial real estate’s key attribute, enduring cash flow, constitutes the strongest and most powerful anchor of its value as we head into a changing interest rate regime, and re-alignment of economic fundamentals.

The US Federal Reserve is now utilizing all tools at their disposal to fight inflation. Combining aggressive interest rate increases and a reduction in their balance sheet, the Fed is rapidly withdrawing monetary accommodation present in the financial system. Federal Reserve members also appear united in demonstrating a hawkish tone. It is their hope that a visible firm hand will help reduce inflationary expectations, that until very recently, appeared to be escalating.

The tightening cycle is underway and economic activity is cooling, yet, the labor markets are robust, giving the Federal Reserve room to move further. The global energy markets have been in an upheaval, driven by the removal of Russian supplies and resulting price increases. Energy costs are at the root of global inflationary pressures and not under Central Banks’ control making the environment uniquely difficult to handle. It is now the judgement of the US Fed that economic growth may have to be sacrificed to tame inflation. We must prepare for that.

This sobering economic landscape creates an incentive for real estate owners to focus on market realities and execute changes that will have a real impact on their property cashflows. Perhaps their lease rate expectations have been too ambitious and, it is time to fill vacancies with more realistic aspirations or, a long-postponed façade upgrade has now become critical to attract solid and stable tenancy. Stability and longevity of cash-flows will underpin commercial real estate values as economic uncertainties increase.

Westchester Commercial Real Estate Is Well Positioned To Withstand An Economic Slow-Down Westchester residential apartments’ demand appears unabated as households and individuals need more space of their own, comfort in their “work from home” environment and, prefer to live nearby areas offering open space relaxation. Westchester apartments retain their attractiveness by offering all these attributes plus relative affordability, compared to the NYC. The best office space in Westchester (Class A Buildings) continue to attract tenants who want to motivate employees to come back and stay in “the office”. B and C office space will inevitably languish unless the space is renovated and well-priced.

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Executive Summary

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Retailer’s missteps in restoking inventory goods in recent months may negatively impact retail real estate. However, we are not there yet, and during the last quarter, well located retail real estate in Westchester experienced brisk demand.

As global supply and distribution networks are re-defined, US Industrial real estate is poised to continue reaping the benefits of higher demand. Westchester’s prosperous and digital savvy population demands increasingly shorter fulfillment times.

The right warehouse in the right location is a competitive advantage for tenants and owners. This segment of the real estate market will continue to be robust, even in a weaker economy.

Westchester Multifamily – Households Favor Westchester In Looking For Space Of Their Own Healthy demand continues to drive the positive fundamental backdrop this asset class enjoys in Westchester. New supply, from resumption of under construction deliveries, has not negatively impacted pricing as take-up is strong. Apartment rental pricing increased over 5% year-over-year and 1.8% quarter-over-quarter. Rent concessions remain modest and under 1%.

Developers are optimistic about the future. During the quarter, the pipeline of new projects under construction in lower Westchester jumped to 1000 units (or 8.5% of already constructed units).

Westchester Office – Demand Driven By Full-Service Buildings Supply-demand improved for Westchester offices during the second quarter. Direct leasing was strong, and in contrast, sublet space was returned to landlords. This may indicate that sub-let tenants moved into permanent locations after identifying and customizing space suitable for their workforce. The net result was lower vacancy for the quarter. Rental pricing has weakened slightly mostly driven by lower sub-let rents.

Employers have been under pressure to continue providing flexibility to employees. Most employers have moved away from a 100% work-from-home format and are making adjustments that work for their businesses. However, employees now demand more from their work premises and employers are more open to consider these demands. Office landlords will have to partner with their tenants in addressing the changing needs of the workplace.

Westchester Retail – Improving Trend Resumed During The Second Quarter Demand for retail space rebounded during the second quarter of 2022, after a disappointing beginning of the year. Vacancy declined helped by both, direct and sub-let deals. Pricing was modestly stronger driven by better sub-let rents.

Westchester’s affluent communities have continued to attract retailers – from within the area and outside - who find the riskreward of opening new businesses, or expanding existing operations, favorable. Visibility, exposure, and parking continue to be the key elements for retail space success in Westchester. Limited parking in many in-town locations creates a leasing challenge, even for updated space. Shopping centers with convenient parking, have been able to drive rental rates higher as the parking convenience they typically offer is highly sought after.

Westchester Industrial – Large Departure Impacts Occupancy Industrial space demand remains strong with no perceivable decline in the horizon. However, during the quarter, Costar

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Executive Summary

S E C O N D Q U A R T E R � � 22

data captured what may have been a large tenant departure or an owner occupier relocating from the area. Given the typical long lease terms that industrial enjoys, such events lead to a refurbishment and re-lease of the vacated space. In the current market, refurbishment may take longer but the lease-up times may be shorter.

Industrial warehouse pricing continues to trend upwards. Better pricing for last mile warehouse and distribution space favors lower Westchester industrial owners.

Investment Transactions Remain Subdued Investment sales volume improved slightly during the quarter and pricing remained stable. Well priced offerings were scarce, and investors are increasingly more selective as the economic landscape becomes uncertain. The appeal of income producing commercial real estate is still strong, however, higher interest rates change the underwriting formulas. Financing partners – banks and other capital providers- have also become more demanding, scrutinizing sponsors and their track record with a more stringent approach. It is likely that, in the coming months, many owners will choose to sell their buildings as refinancing may require additional equity that some will not be willing or able to deploy.

Houlihan Lawrence Commercial Team In a rapidly changing economic environment, there are numerous market risks that add to the complexities of acquiring commercial real estate. There are also opportunities, created by the current tensions in the market. Understanding the market forces that are shaping the fundamentals for each property, requires a deep understanding 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 dynamic Westchester commercial real estate market.

Written By: Teresa Marziano Houlihan Lawrence Commercial Rye Brook, New York

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Unemployment Rate in Westchester Better than pre- Pandemic Levels WESTCHESTER COUNTY UNEMPLOYMENT STATISTICS

Westchester’s rate of unemployment has declined significantly, consistent with the rest of the Country.

Unemployment Rate in Westchester County, NY

17.5

PERCENT

15.0 12.5 10.0 7.5 5.0 2.5

Jul 2017

Jan 2018

Jul 2018

Jan 2019

Jul 2019

Jan 2020

Jul 2020

Jan 2021

Jul 2021

Jan 2022

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; July 2022 .

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Multifamily Projects Continue to Enjoy Persistently Strong Demand WESTCHESTER, SOUTH OF I-���

Demand trends continue to be resilient and new apartment deliveries are meeting healthy demand.

Westchester offers an attractive lifestyle and value proposition for apartment dwellers, compared to NYC.

E F F E C T I V E R E N T G R O W T H O V E R 5 % I N 2022

Effectice Rent Per Unit

Occupancy Percentage

97.5

2150

97.0

2100

96.5

2050

96.0

2000

1950

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

DELIVERIES REBOUND AS COVID DISRUPTIONS EASE

Q3 2021

Q4 2021

Q1 2022

Under Construction Units

Q2 2022

95.5

OCCUPANCYY PERCENTAGE

EFFECTIVE RENT PER UNIT

98.0 2200

Deliveries Units

700

7000

600

6000

500

5000

400

4000

300

3000

200

2000

100

1000 0

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

DELIVERIES UNITS

UNDER CONSTRUCTION UNITS

800

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; July 2022.

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Westchester Office and Retail – Office and Retail Stabilize SOUTH OF I-���

Office leasing trends were modestly stronger during the quarter. Class A buildings are enjoying sustained demand while B and C office space face challenges The retail segment of Westchester property experience a better quarter with more favorable supply-demand fundamentals

Office Gross Rent Overall

30.5 30.0

VACANCY PERCENTAGE

12

29.5

10

29.0 28.5

8

28.0

6

27.5

4

27.0 26.5

2 0

26.0 25.5 Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

WESTCHESTER RETAIL IS TRENDING TOWARD STABILITY

Q4 2021

Q1 2022

Vacancy Percentage

Q2 2022

All Service Type Rent Overall

32 VACANCY PERCENTAGE

5.0

31

4.5

30

4.0 3.5

29

3.0

28

2.5 2.0

27

1.5

26

1.0

25

0.5 0.0

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

OFFICE GROSS RENT OVERALL

Vacancy Percentage

Q2 2022

24

ALL SERVICE TYPE RENT OVERALL

OFFICE ASSETS STILL WAITING FOR THE RETURN OF OFFICE WORKERS

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; July 2022.

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Industrial Properties – On-the-ground Strength and Pricing Gains SOUTH OF I-���

Industrial Space data suggests that supply-demand fundamentals are stable and very favorable . Pricing power for industrial assets is strong and rent gains continue.

Vacancy Percentage

All Service Type Rent Overall

15.5 VACANCY PERCENTAGE

6 15.0

5

14.5

4

14.0

3 2

13.5

1

13.0

0

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

12.5

ALL SERVICE TYPE RENT OVERALL

WESTCHESTER INDUSTRIAL CONTINUES TO SHOW ROBUST FUNDAMENTALS

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; July 2022.

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Subdued Investment Activity SOUTH OF I-���

Investment sales improved modestly during the quarter and price PSF sold remained stable. Going forward, there will be headwinds from higher financing rates and a slowing economy.

$600,000

$500,000 $400,000

$300,000

$200,000 $100,000 Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

MEDIAN PRICE PER BUILDING SF

TRANSACTION VOLUME SETTLES CLOSER TO A LONG TERM AVERAGE

Q3 2021

Q4 2021

Q1 2022

Dollar Volume (in Thousands)

Q2 2022

Median Price Per Building SF

8 300

7

250

6

200

5 4

150

3

100

2

50 0

1 Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

0

MEDIAN ACTUAL CAP RATE

DOLLAR VOLUME (IN THOUSANDS)

TRANSACTION VOLUME SETTLES CLOSER TO A LONG TERM AVERAGE

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; July 2022.

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