Narrative Overview | Mansfield Commercial Real Estate

Overview of the Commercial Real Estate Market
in Orange County, NY at Year-End 2020

By Elisabeth Mansfield
Mansfield Commercial Real Estate

The Industrial Market in 2020

Demand for industrial space – particularly warehouse facilities – in Orange County, NY has been growing for several years now, and the COVID-19 global pandemic has only accelerated the shortage of supply. With increased on-line spending, and the virus making apparent the need for domestic sources of goods, local warehouse space has become an even more essential element in the supply chain. And the disruption from the “New York State on PAUSE” imposed in March, coupled with building moratoriums enacted by several municipalities, have delayed the approvals for, and construction of, planned industrial buildings. As a result, Orange County’s vacancy rate for prime industrial facilities fell to its lowest level yet: 0.8% as of year-end 2020.

This demand pressure, and the historically low interest rates that are anticipated to continue, has led developers and users to plan for increased expansion of warehouse facilities in the County. In 2020, there was approximately 350,000 square feet of industrial space constructed in Orange County, an average year’s level of deliveries. But there is nearly 3.6 million square feet of additional industrial space planned to be operational by year-end 2021, and over 6 million square feet by the end of 2022.

Over the last two decades, more than 80% of industrial development in Orange County, NY has been built-to-suit, but in 2020 spec construction was 2.5 times that of build-to-suit. Three spec buildings were completed in 2020, the largest of which was the ±241,800 square foot warehouse constructed by Matrix Development Group in the Town of Wawayanda. Before it was finished, it was fully leased to WineShipping.com. The other two, also quickly leased, were a ±6,000 square foot building in the Town of Wallkill, and a ±3,500 square foot building in New Windsor. Two additional buildings were constructed-to-suit: ±88,760 square feet on Hawkins Drive in the Town of Montgomery for the manufacture and assembly of window components; however, COVID’s impact on the NY City skyscraper market forced the end user to seek a tenant instead. PopCorners, a rapidly growing popped-corn snack food company, leased the entire building shortly after it was listed. And in New Windsor, a ±4,000 square foot maintenance shop for Independent Helicopters was constructed. Finally, ±7,320 square feet was added to the CheckOMatic building on Museum Village Road in Blooming Grove.

With the above new construction, the total inventory of prime industrial space in Orange County, NY, as of year-end 2020 was ±23.5 million square feet. The County’s total inventory of industrial space, including older, less functional buildings, was ±30.8 million square feet, with a vacancy rate of 2.3%.

Nearly 75% of the industrial development slated for completion in 2021 will be constructed-to-suit. Included in this are the two largest warehouses ever to be constructed in Orange County: Medline’s ±1.3 million square foot facility in the Town of Montgomery, and Amazon’s ±1 million square foot distribution center also in the Town of Montgomery. In response to this and other planned large-scale development, three municipalities (the Town of Montgomery, the Village of Montgomery, and the Town of New Windsor) imposed moratoriums on land-use approvals in 2020, and the Town of Cornwall lifted its moratorium after 15 months. While such moratoriums allow municipalities time to address concerns regarding infrastructure, zoning or their comprehensive plan, they also result in a loss of tax revenue from postponed development, compounding the effects of the pandemic on the local economies. Site work is nearly complete on the long-awaited ±369,000 square foot organic vegetarian meal manufacturing facility in the Town of Goshen for Amy’s Kitchen; current plans call for a 2022 opening.

There is over 900,000 square feet of spec construction expected to come on-line in 2021, the largest of which is the ±551,000 square foot Tri-State Logistics Center, currently under construction in the Village of Goshen by Boston-based GFI Partners. In the Town of Wallkill, the Frassetto Companies will construct a ±76,000 square foot facility; and in the Town of Goshen, a ±60,000 square foot building will get its certificate of occupancy, (it is already fully leased), and with the market so strong, this developer also has plans to construct another ±70,000 square feet on the adjacent lot. In total, as of year-end 2020, there was over 3 million square feet under construction in Orange County.

With most of the County’s choice lots spoken for, several developers and users have had to get creative. RDM Group, an active developer in the County, will be repurposing a portion of the former Playtogs retail center in the City of Middletown to create ±170,000 square feet of spec warehouse space. The former Orange Hollow Racquet and Fitness Club recently sold to a user after getting approval from the Town of Goshen to convert it to a warehouse. And in New Windsor, a former bowling alley and a former retail auto dealership are also being adapted for industrial use.

Absorption of industrial space was on average for the County, with ±1.1 million square feet in transactions. Approximately 87% of this activity was in prime buildings. Notable transactions include the lease of ±227,000 square feet in New Windsor by Amazon for its last mile facility; the lease of ±60,000 square feet by NFI Industries, a leading third party logistics provider, on Corporate Boulevard in the Town of Newburgh; innovative office furniture company, Autonomous, leased ±46,000 square feet on Commercial Avenue in the Town of Wallkill; LaserShip, a last mile delivery company, leased ±41,000 square feet, and Superior Pack Group, a contract packaging firm, leased ±35,000 square feet filling the building on Commerce Drive South in Harriman; and Pearl River Pastry expanded by ±32,000 square feet at their facility on Turner Drive in the Town of Wallkill. Leasing activity made up approximately 90% of total absorption in prime buildings in Orange County in 2020; however, the consensus of active commercial brokers in the market was that there were considerably more buyers than tenants, but the dearth of available product limited the number of sale transactions. Those that were able to find a suitable acquisition included wholesale tile company CeraTile which purchased a ±72,800 square foot former manufacturing building on Smith Road in the Town of Wallkill; and New Castle Building Products, a supplier of residential and commercial building materials, which bought a ±16,000 square foot building on Route 17M in the Town of Wawayanda. Absorption in non-prime industrial buildings included the lease of ±31,500 square feet by Black Quarry Millwork on North Montgomery Street in the Town of Newburgh; and the purchase of a ±28,000 square foot building on Sprague Avenue in the City of Middletown to Setton Company, a wholesaler of home décor accessories.

Strong demand for warehouse space, scarcity of available product, and the high cost of new construction have all put upward pressure on rental rates for prime industrial space. For leases of quality space under 100,000 square feet, triple net warehouse rents below $7.00 per square foot are increasingly rare. Users will continue to compete with investors for industrial acquisitions, especially now that other sectors such as office, retail and hospitality have lost some of their luster due to the pandemic. Developers flocking to the County are in expansion mode, planning another ±6 million square feet of industrial space for 2023 and beyond. Whether they will be able to find tenants for all that space, or whether the inventory will be one of oversupply, remains to be seen.

The Office Market in 2020

The Orange County, NY office market has remained relatively unscathed from the COVID-19 global pandemic – thus far. The County’s office inventory is not reliant on crowded elevators for access, and commuting is generally done in automobiles rather than mass transit, so there has not been any significant migration away from office buildings as has been the case in New York City. But that is not to say that the office market is thriving by any measure. It continues to be sluggish with little new construction, low absorption and little to no rental rate growth.

There were only three minor additions to inventory totaling ±20,500 square feet in 2020 and so the inventory of Class A office space at year-end remained unchanged at 4.8 million square feet. In the Town of Monroe, a ±9,000 square foot three-story multi-tenanted office building was constructed on Nininger Road, and is now fully occupied. In the Town of Wallkill a ±4,500 square foot spec office building was constructed on East Main Street and is now half occupied. In the Town of Warwick at the Former Mid-Orange Correctional Facility, now known as the Warwick Valley Office and Technology Corporate Park, a ±7,000 square foot addition to an existing building was constructed for Kaycha Labs NY. This new state-of-the-art ±10,000 square foot medical marijuana and hemp testing facility will enable growers and manufacturers to measure the effectiveness of their products locally and thus faster. Along with the Town of Warwick, the Orange County IDA’s Accelerator, a certified New York State business incubator that supports small and start-up manufacturing-based businesses, has been instrumental in creating a cannabis cluster in Warwick. Now, with the potential for legalization of recreational marijuana for adults, the Mid-Hudson will be poised to seize the economic benefits of this growth industry.

The vacancy rate for Class A office space rose slightly to 10.5% by year-end 2020. Over the last decade, the vacancy rate has averaged around 10%, another indication of the office market’s stagnation. The County’s rate is still substantially lower than that of most other markets around the country, with the national average reportedly between 16% and 20% as per Integra Realty Resources in 2020.

On the horizon, there are some large mixed-use complexes planned. In the Town of Monroe, the ±400,000 square foot Monroe Commons, to be comprised of office space, retail stores and hotel rooms, is currently making its way through the Planning Board process. To be located along Nininger Road beside the large condominium complex currently under construction, this project should add over 100,000 square feet of office space to the inventory for the growing community of Palm Tree, formerly known as Kiryas Joel. Also in the planning stages is the South Blooming Grove Business Park, which will add ±200,000 square feet of office and retail space near the intersection of Museum Village Road and NY Route 208. Neither of these projects is expected to be completed for another few years.

As of year-end 2020, there was one notable build-to-suit office project ongoing in the City of Newburgh: the redevelopment of a former industrial building at 639 Broadway by Newburgh Commercial Development Corp. Formerly a textile mill, this 19^th century two-story complex on the west end of Broadway will become the new headquarters of Catania, Mahon & Rider, PLLC Attorneys at Law in early 2021. In New Windsor, plans for new office product by Simone Development Companies were derailed due to the building moratorium imposed by the Town in early 2020.

Only ±100,000 square feet of office space was absorbed in 2020, a level that is about 45% lower than the average absorption rate over the last ten years. Over 60% of this activity was in Class A buildings, with leasing and sale transactions split 65% / 35% respectively. On the sale side, Middletown Medical, a growing multi-specialty physicians’ group, purchased a ±10,000 square foot office building on Route 302 in the Town of Wallkill, to be used for both clinical and administrative purposes; the ±9,000 square foot building at 674 East Main Street, also in the Town of Wallkill, was sold to a dental practice; and in the Village of Goshen, United Hospice of Rockland County purchased a ±4,900 square foot building on Park Place. On the leasing side, Garnet Health, formerly Orange Regional Medical Center, took ±9,000 square feet at the Westage Pavilion at 75 Crystal Run Road in the Town of Wallkill for non-clinical purposes; Abilities First, a not-for-profit providing support to children and adults with developmental needs, leased ±6,800 square feet on Executive Drive in New Windsor; and in the City of Middletown, North American Family Institute leased ±5,000 square feet at the former Times Herald-Record office building on Mulberry Street. Although the building sold to an investor in 2020, the Record news and advertising staff still occupies a portion of the building, with plans to repurpose the balance into warehouse, manufacturing or R&D space.

The total inventory of both Class A and non-Class A office space at year-end 2020 stood at 6.3 million square feet, with a vacancy rate of 10.8%, up from 10.0% in 2019. With office rents somewhat depressed, many tenants have upgraded to higher quality space over the last decade.

The healthcare industry accounts for the majority of occupied office space in the County, and with an aging population, it will likely continue to be the most active user in this and most other markets. Although much of the general office population transitioned to working-from-home, the essential nature of the medical industry required that their offices remain open throughout the pandemic, and the industry had to adapt. With patients hesitant to come in for office visits, telehealth appointments became more popular. Pop-up COVID testing sites necessitated the addition of space for some providers, many of them utilizing the parking lots of their medical office buildings. And certainly one positive impact of the new protocols has been the more efficient scheduling adopted by many medical professionals as they were forced to implement a no-wait check-in process for appointments. Perhaps this change will become permanent and obviate the need for such large waiting rooms.

Beyond some temporary adjustments to leases when the first wave of infection hit, overall there have not been any significant cancellations or early terminations of office leases in the County as a result of the pandemic. While some office users transitioned to working-from-home, before the end of the year most had returned to their office buildings after implementing safety protocols, although many in-person meetings and business travel have been replaced by Zoom events. While the nature of office work will continue to evolve, it appears that the cost benefits of working from home and the time savings of not commuting are not enough when compared to the job satisfaction, teamwork, and social interaction that office-using employment provides.

It is unclear whether the Orange County, NY office market will have other long-term effects from the COVID-19 pandemic. On a positive note, perhaps the ongoing migration of urban residents to the Hudson Valley region will translate to more office job creation here.