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Spotty Suburban Recovery Driving Investment Decisions in Markets with Exposure to Weak Job Growth

Office Owners Facing Tough Choices for Suburban New York City, Washington DC Properties as Urban Cores Continue to Dominate
March 2, 2016
Reckson New York Property Trust (RNY), the first Australian-listed property trust focused on investing in office properties in the suburban New York tri-state area, this week announced its decision sell down its office and flex assets in an “orderly and strategic manner” over the next 12 to 24 months.

RNY is not alone. Other office REITs with exposure to suburban office markets in the New York, New Jersey and Washington DC regions have recently announced similar strategies. Lexington Realty Trust, Washington Real Estate Investment Trust and Vornado Realty Trust are exploring options for divesting or repositioning certain of their suburban assets.

However, the trend appears to be isolated to specific markets and not a symptom of a larger issue among all suburban office markets, said Walter Page, director of U.S. office research for CoStar Group.

"I would say that we generally do not see an urban vs. suburban issue in terms of office demand. Rather, we see a base industry and demographic problem affecting office demand that is concentrated to both Northern New Jersey and Stamford, [CT]," Page noted.

"Certain areas of Northern New Jersey, for example, are lagging due to drug patent expirations and softness in the pharmacuetical business. And Stamford is lagging due to GE’s relocation and other business relocations. On top of this, both Northern New Jersey and Stamford suffer from some of the worst demographics in the country for working-age population growth."

As a result, office vacancy rates are above 15% in certain Northern New Jersey submarkets and Fairfield County, CT.

In contrast, Nordby points out that suburban areas of faster-growing metros, such as in Dallas, Atlanta, Austin, Nashville and Charlotte, are not suffering from high vacancy rates.

RNY Selling Off Portfolios in Individual Submarkets


In its financial results for 2015 released this past week, Sydney-based RNY noted that the expected recovery, based on historical trends, has not materialized in its submarkets this cycle. It cited what it called an "unprecedented structural shift" in suburban leasing markets, with demographic migration towards urban areas and a flight to quality from Class B to Class A buildings.

Also, the firm noted that the majority of office-using jobs have been created elsewhere, with little new demand emerging in its suburban office markets.

Cushman & Wakefield, which the REIT hired to perform valuations on its office properties for its year-end report, found the average per square foot value for RNY's portfolio had decreased, dropping from $139 per square foot at year-end 2014 to $118 per square foot a year later.

The REIT said it believes the reduced property values more accurately reflects the current investment environment and would give it greater flexibility to sell assets.

In January of this year, the REIT obtained $81.7 million in financing from ACORE Capital to repay a maturing debt. RNY said the refinancing process was extremely challenging, with few lenders interested in its suburban office properties.

RNY said its asset sales plan was to “meet the market” on pricing to attract investor interest. It has immediately begun to market several of its buildings for-sale, including: 710 Bridgeport Ave. in Shelton, CT; 300 Motor Parkway in Hauppauge, NY; and 200 Broadhollow Road in Melville, NY.

It plans to package other properties together by geography or office park (for example, Tarrytown, NY; Elmsford, NY; Syosset, NY; and West Orange, NJ) where it makes sense, the REIT said.

REITs Down on Washington DC Suburbs


In its fourth quarter earnings conference call this week, Washington Real Estate Investment Trust president and CEO Paul McDermott said exiting its suburban office holdings will be among the final steps towards transforming the REIT from a suburban office investment to an urban infill REIT focused on transit oriented, amenity rich properties in the Washington Metro region.

Vornado Realty Trust is also in the process of making decisions about its holdings in the nation’s capital region. For Vornado, Washington, DC, is a tale of slow recovery being dragged down by its Skyline properties (eight buildings totaling 2.64 million square feet) in a Northern Virginia suburban submarket.

The Skyline properties are at about 50% occupancy, the REIT said this week, bringing its overall office portfolio to 82% occupied. Without the Skyline properties, overall occupancy would be 90%.

“Skyline is in a challenged position today,” said Mitchell Shear, president of the Washington, DC Division of Vornado at this week’s earnings conference call. “I think that Skyline is going to take some time to recover the vacancy is going to drop another 500 basis points or so this year.”

Steven Roth, Vornado’s chairman, said, “we are in deep consideration of doing something appropriate with Washington.” One of those possibilities is spinning off its DC assets into a separate company.

“If you do that then what we have left is a grand New York business, pound for pound just a marvelous business with marvelous assets, both on the retail side and the office building side,” Roth said.

Lexington Realty Trust Doubling Annual Dispositions


Lexington Realty Trust last quarter sold $265 million in property and put a large suburban office portfolio up for sale. The REIT's disposition target this year is between $600 million to $700 million.

Lexington’s CEO Wilson Eglin said the REIT's strategic objectives are to reduce exposure to suburban office properties in certain markets, monetize multi-tenant properties upon stabilization and selling vacant properties.

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