Suburban Office Owners Prepping For 'The Next Great Migration' Out Of Cities
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New York City's northern suburbs were once some of the hottest office markets in the country. In the decades since, the markets have declined and companies have left, following young talent to the cities. As millennials age and start families, the owners of suburban office product are gearing up to capture any reversal of fortune.
Millennials, generally defined as people born between 1980 and 1999, have driven much of the office market since the Great Recession, driving their employers to seek out coworking spaces, amenities, natural light and, above all, urban environments. The generation is now the largest in the U.S. workforce, but is not getting any younger.
"We missed the first migration here because we don’t have any really big university in this part of the suburbs," Cushman & Wakefield Westchester and Fairfield Market Leader Jim Fagan said this week at Bisnow's Westchester and Fairfield State of the Market event. "So all of the millennials went into New York, and that’s where all the companies went. But you’re about to see another great migration.
"That migration is the millennials who have kids, and can’t afford to live in New York, so they’re going to be forced to move into the suburbs. Our goal will be to create the best place possible for them to live, and once they move from New York to the suburbs, hopefully our suburbs, the employers will follow in their quest to make their talent happy."
RPW Group CEO Robert Weisz has been building in Westchester for four decades, and he said he is already starting to see an uptick. While the county's vacancy rate is still high — around 22%, as is Fairfield's — someone with as long a view of the market as he has can see it has started to better position itself in recent years.
"For the first time in 30 years, we have buildings that are 100% leased, and we have tenants that want to expand, and they are taking additional space in other buildings," he said.
Fagan said effective office rents in downtown White Plains, for instance, where there is access to transit and new multifamily development, have increased 25% in the last three years.
Fagan and Weisz spoke on the office panel at the event, along with Mag Mile Capital Vice President Matt Weilgus, who referred to himself as "the resident millennial" on the panel. He said the migration is afoot as he watches friends consider where to move for when their children grow up and grow out of city life.
"The things they’re looking for are towns with good public schools, reasonable commutes and ideally, if there are companies that can absorb this great migration, that are well-located, near transit and make those commutes reasonable, you’re going to see that big wave," Weilgus said.
Not all offices in Westchester and Fairfield counties are poised to benefit from the wave of incoming population. Many buildings remain stubbornly obsolete, and they are more viable as conversions to uses like senior housing or healthcare.
Not every suburb is open to that. Many municipalities are hostile, either openly or indirectly through their local land-use policies, to new development or conversions. If they are hoping for demand to return to the office buildings oriented around surface parking and highway off-ramps, they will be disappointed, Weilgus said.
"The leasing brokers here know, there’s certain office space here in the market that tenants are just not going to," he said. "The market here isn’t strong enough to force tenants to go into space they don’t want to be in. The municipalities that encourage conversions of obsolete space into something that’s productive and adds to the economy are going to be the ones that win."
The office buildings that figure to succeed are the ones close to trains, more newly constructed or renovated and those with a hefty supply of amenities.
A fitness center, community lounge and outdoor space are merely "table stakes," Harbor Point Chief Operating Office Ted Ferrarone said. No package is seen as too extravagant in the battle for the coveted suburban office tenant.
"In today’s environment, amenities are expected and there is no limit to the amenities that you can have," RPW's Weisz said. "Frankly, as landlords, one of our main jobs is to discover all the new amenities that people will be looking for, because that’s really what’s driving the market."
The biggest office disrupter of this cycle has been coworking, and it is an area where the suburbs are lagging far behind. WeWork doesn't have a single location in Westchester or Fairfield, despite being the largest private office tenant in New York City.
If millennials do make their way up Metro North to live and work, they will likely want to work in the same environments they have demanded in the city, and for many companies large and small, that means space with a coworking or flexible office provider. If office owners wait for WeWork to come to the suburbs, they might miss the train.
"You don’t really see the emergence of a dominant player yet in the suburbs," Weilgus said. "I think you’ll see a lot more landlords in the suburbs, brokerage firms in the suburbs launch their own coworking platforms to serve those needs of millennials as they move to the suburbs."
Empire State Realty Trust CEO Tony Malkin has been unabashed in his criticism of coworking, and ESRT Senior Vice President Jeffrey Newman said at the event there is "a mismatch of maturities" between the long-term leases the operators sign and the short-term deals they offer their members.
But Newman, who runs the firm's suburban operations, said traditional landlords can still take lessons from coworking companies and apply them to their own properties.
"Are there services that can be rendered, be it maybe economies of scale from the buying power we have for moving, for IT, things that are a distraction to tenants that are not in the real estate business that landlords can provide?" he asked. "We’re looking at some of those things and are trying to see how we can up our game to give tenants and their employees some of the things that coworking offers."
No matter what draws millennials to the office, the promise of cheaper living figures to draw many of them to the suburbs. And just like the convenience of having the office close to the CEO once drew businesses out of the city, the same could happen for the larger employee base. That is what developers are banking on, anyway.
"The new four-letter word for millennials is commute. Talent is driving it, and buildings are following it," Weisz said. "There are two sides of the story, and particularly in Westchester County, we are looking at this to be the best market we’ve seen in 30 or 40 years."