REGIONAL MARKETS: NORTHEAST & MID-ATLANTIC

APARTMENT FINANCE TODAY • MARCH 2008

Westchester County’s Strong, Steady Demand

A trickle of new apartments are leasing fast as vacancies drop in the towns just north of New York City.

By Bendix Anderson

New Rochelle, N.Y.—More than 40 new tenants a month are moving into Avalon on the Sound East, a new apartment tower rising in the heart of this reviving city.

There’s a mini building boom going on in Westchester County, N.Y., as developers struggle to claim sites in cities like New Rochelle, Yonkers, and White Plains. These downtowns, once known for empty storefronts and urban decay, now benefit from their proximity to the booming apartment market in New York City and the network of trains and highways that connect Westchester to the Big Apple.

“It’s paradise from a transportation point of view,” said Fred Harris, senior vice president of AvalonBay Communities, Inc. Nearly everything the real estate investment trust has built here, from Avalon on the Sound to its existing projects in White Plains, has been within a few hundred yards of a commuter rail station.

Westchester’s only other big rental project now under construction is also next to the train. Collins Enterprises, LLC, of Stamford, Conn., is squeezing 300 apartments in between the MetroNorth station in Yonkers and the Hudson River at Hudson Park North, opening this April.

These new apartments won’t have a lot of competition, especially as the rising cost of construction, which has doubled in the area around New York City in recent years, makes building here increasingly difficult and as apartment rents grow steadily but slowly.

High cost of land

The cost of land is also putting the squeeze on developers. Sellers recently offered sites at prices up to $100 per square foot, or about $100,000 per apartment, that could be built on the land, said Harris.

“It’s hard for high-rise rentals to be viable at those prices,” he said. “We are looking for land at half that.” For example, by the time construction will finish in May, Sound East will cost $185 million to develop, or about $315,000 per unit. However, the monthly rents at the 24-story tower average in the mid-$2 per square foot range. That’s about half the rents that AvalonBay earns at its Manhattan projects.

To make the numbers work, developers will need to partner with local officials. For example, AvalonBay is leasing the land under Sound East from the city of New Rochelle instead of buying it up front.

Likewise, Cleveland-based developer Forest City Residential hopes to start construction by 2010 on 700 units of housing and retail space planned for the New Rochelle waterfront, using land and subsidies for environmental cleanup from the state and city.

Other developers have turned to condominium construction. Louis R. Capelli, based in White Plains and dubbed the “super developer” in the local press, is just finishing 181 condominiums at The Residences at The Ritz-Carlton in White Plains.

It might sound like a lot of new construction, but for a county with a population of nearly a million, it’s barely a trickle. The 38,000-unit apartment stock in Westchester actually shrank by a few hundred units in 2007, according to Reis, Inc., a research firm based in New York City. The most recent information from the U.S. Census counted building permits for just 837 units of housing in 2006.

Among Westchester’s existing apartments, the new units really stand out. More than half of the apartments in Westchester’s inventory were built before 1979, according to Reis.

With so little new rental construction, the percentage of vacant apartments here dropped to 2.7 percent by the end of 2007, down from 2.9 percent at the beginning of the year, according to Reis. As vacancies dropped, landlords pushed average effective rents up 3.5 percent to reach $1,706 a month by the end of the year, according to Reis. In contrast, a few of the new condominiums that have joined the rental market ask as much as $6,000 a month for a high-rise two-bedroom.

With such solid demand, no wonder so few owners are willing to part with their buildings, said Harry Delany, associate director and a broker for Marcus & Millichap.

“You can wait years to find something in a really good submarket,” said Delany. “No one wants to sell.”

Most of the apartment buildings available for sale are turnaround opportunities in Westchester’s few tough neighborhoods and come with at least a few building violations, said Delany. Capitalization rates range from 6.5 percent to 8.5 percent.

These typical cap rates have gone up 50 basis points since the capital crisis made financing more difficult, said Delany.

However, condominium converters still made 6 percent of all purchases in 2007, according to a report by Real Capital Analytics, a research firm based in New York City. Converters were willing to pay much higher prices, with cap rates as low as 5 percent.