A glance at commercial real estate in 2013 reveals two prominent themes: sluggish office leasing and a booming investment sales market. Each come with their own concerns for real estate pros: on the one hand, landlords are offering costlier incentives to lure office tenants, while in the sales market, buyers compete with hundreds of rivals, many of them from overseas, for scarce inventory. Both subjects were the focus of a panel discussion held earlier today.
The REIT-Fund-Family Commercial Office Panel, presented today by the Real Estate Strategies Alliance at the Bloomberg LP headquarters at 731 Lexington Avenue, gathered together Bill Elder, a president at RXR Realty; Ron Lo Russo, vice president of leasing at Vornado Realty Trust and Alex Bernstein, director of acquisitions at Bernstein Real Estate.
With office space sitting on the market in Midtown and Downtown, Midtown South continues to flourish. Indeed, even hedge funds — which have historically chosen strictly trophy Midtown spaces as headquarters — are now looking to lease at the Starrett-Lehigh building, in Chelsea, according to Elder of RXR, which owns the building.
“Once they go down there, they aren’t coming back up [town],” Elder said.
Lo Russo added that Facebook is currently seeking space in Midtown South to accommodate 2,000 to 3,000 workers, but he did not say which buildings were under consideration.
However, while interest in Midtown South is high, the cost of getting quality tenants to rent remains prohibitive. In some cases, landlords are paying three years of rent in tenant incentives — including build-out costs and free rent — just to “close a deal,” said William Montana, a managing director at Studley, who moderated the panel.
“I would rather get a few bucks more in rent,” and pay out initially in significant tenant incentives, or T.I.s, Lo Russo said.
A typical office T.I. package remains upwards of $60 per square foot in many cases—considerably higher than the pre-recession rate of around $45 per square foot, executives at the panel confirmed.
“We want good quality tenants, and we’ll pay,” Bernstein agreed. “Even in this market.”
Tenants also continue to cram ever larger number of employees into smaller and smaller office spaces, Elder said.
“It’s a fundamental difference in how companies use space [now], but I think we are approaching maximization,” he said.
On the investment sales side, in contrast, brokers have an opposite struggle: too much money for too few deals. The problem is so extreme that many New York City real estate players are being pushed out of deals, as foreign entities and other non-traditional buyers push families and REITs out of the market, executives said.
“Wall Street is just … forcing money in,” Bernstein said. “I find it almost impossible [to buy a building].” Deals where there would previously have been a handful of “natural buyers,” are now seeing between 300 and 400 interested parties, he said.
Still, Bernstein said his firm was reticent to buy in secondary markets, because the risk is too high.
“It’s a struggle for us to find opportunities,” he added.