Spec Success: Office Bet in Industrial Park Pays Off for This Developer

Developer Craig Padover knew he had found a great location for development near an exit off the Long Island Expressway in Hauppauge, New York.

The building on the site, however, was another story.

“The fire marshal came to me and said, ‘I can’t believe you bought that building. Please tell me you’re going to knock it down,’” Padover, president of Hauppauge-based Aresco Management, told LoopNet.

Padover did just that, razing the more-than-50-year-old warehouse at 410 Motor Parkway to the ground. He planned to replace it with a new loft-style office building that would attract millennial workers and fast-casual restaurants.

That was in 2019, before the office market changed. Fast forward to today, and the 35,000-square-foot property is 90% leased despite being built speculatively during the pandemic. In a rare office development success story during a challenging market, Padover completed the project despite the massive shift in office demand, material shortages, his own “moments of doubt” and other challenges. The project received a CoStar Impact Award for Long Island Redevelopment of the Year.

The building site is in the Hauppauge Industrial Park, where Padover has been building mostly industrial properties for 40 years. But he had wanted to add office properties to his portfolio. He was surprised when the old warehouse on Motor Parkway, which serves as a gateway into the industrial park off the Long Island Expressway, went up for sale.

“I always look at it as an opportunity when a particular sector is down in the dumps. If you're patient, you can normally find some great properties that can be bought very reasonably,” Padover said. “So I can buy a property that's out of favor and be willing to wait five to 10 years for it to turn around. As long as you have your plan in place and know what you're going to do, you can wait it out.”

The warehouse was in bad shape, but two recent turns of events made it more palatable for Padover to build a new office on the site. First, authorities in Suffolk County approved an “overlay district” for the area which, among other things, nearly doubled the height limit on new construction from 35 feet to 62 feet. Second, a new sewage treatment plant in the park relaxed restrictions for groundwater flow, allowing for more heavy water users like restaurants that Padover wanted to bring into his project.

“With these two new attributes in place, it sort of injected steroids into the plans, which enabled me to do much more than we could have done in the past,” he said.

The plan: first-floor quick-service restaurants with loft-style office space on the upper floors.

“There was nothing comparable to it,” Padover said of his plan. “It required a higher rent that I can justify merely by the fact that that's what [tenants] want. Even if they could save money going elsewhere, they're never going get this type of product.”

For example, the industrial park’s zoning did not allow for fast-casual restaurants. Padover had to show initial sketches to authorities to proceed as planned.

“They said, ‘You’re the first guy who came in who kind of understood what the overlay district was about and how to take advantage of it,’” Padover said. “They said, ‘the second thing is, we get a lot of complaints that we’re not doing anything with the park that would attract businesses that would hire millennials.’”

Suffolk County authorities approved Padover’s plans, and construction on the spec office began in 2019. Then the pandemic hit.

Like other developments during that time, work became more problematic during and after pandemic shutdowns.

Trades called out sick, slowing down the project. Then the supply chain issues and shortages for insulation, thermal insulation clips and other building materials came.

“We started to stockpile things just to have them, and in that case, you start to buy too much because you don’t want to be short, Padover said. “So that became the challenge, in terms of getting the building built.”

Some materials had to be derived from alternative sources. The building’s thermal clips, for instance, were sourced from Canada out of necessity.

Another surprise was a lack of radio reception in the building’s basement. The local fire marshal came by again to share that Padover would have to install a radio repeater system to allow for radio reception between emergency responders throughout the building, adding an expense of about $60,000.

The result, though, was satisfying.

The building opened to tenants last year and features loft office spaces with high ceilings and tall windows. Those windows are made with dynamic glass, which automates the level of shade based on sunlight exposure.

“From my office, I can see the side of the building and that side is clear because the sun has already passed. [To the] south the glass is a little darker. There's also a phone app where you can override the automation of it. But by doing so, you void the need for window treatments,” Padover said. “It gets a little complicated. Every pane of glass in the building has its own IP address.”

Other amenities include a rooftop terrace and two ground-floor restaurants: Jersey Mike’s and MÓGŪ, an upstart fast-casual Chinese chain out of Long Island.

The office tenants include BusPatrol, a Virginia-based company that outfits school buses with stop-arm cameras and recently picked up a contract in Suffolk County. Two others, Hanover Bank and National Life Insurance Company, are building out their office spaces and preparing to move in soon.

“This is what [BusPatrol] wanted and couldn't find it anywhere else,” Padover said. “The [tenants] that were shopping [based on] price weren't coming here.”

The building is asking about $45 per square foot in rent, according to CoStar. That’s a premium compared to the average of $35 per square foot charged by four-and-five-star office buildings in Long Island.

The building is now about 90% leased, with one 3,500-square-foot retail space remaining. Padover said he is negotiating a final lease for the vacant space.

The success of 410 Motor Parkway arrives at a moment of sustained weakness for Long Island’s office market, which reported negative absorption of 1.4 million square feet over the past 12 months, according to a May 10 report from CoStar. Vacancy rates were already beginning to rise before the pandemic and remain elevated at 8.8%.

However, four-and-five-star office buildings along the Long Island Expressway, like Padover’s, continue outperforming the rest of the local market.

“I had moments of doubt. But I can look back, and except for the pain of having to pay for it, I'm proud that I created something interesting and very unique with an impact on the market.”