Short-term subleases, vacancies could hamper any potential sale of Time & Life Building

Time Inc. is in the process of selling off the bulk of its magazine portfolio to the Meredith Corp., prompting real estate insiders to speculate on the fate of the media behemoth’s office space, in particular at the iconic Time & Life Building in Midtown. But the volume of small, short-term subleases at the property coupled with the fact that some spaces remain vacant may put a spanner in any potential plans to sell the building. 

The 48-story, 1.96 million-square-foot building, built in 1959 and located at 1271 Avenue of the Americas, has 1.76 million square feet of office space and roughly 122,000 square feet of retail space, according to PropertyShark. The building houses Time Inc.’s flagship magazine brand Time, as well as People, Fortune, Sports Illustrated, InStyle and several other brands.

Time Inc. and Meredith are in talks for a spinoff deal which would see Meredith create a new company to hold the majority of Time Inc.’s portfolio, including People, InStyle and Real Simple. Time Inc. would retain ownership of Time, as well as Sports Illustrated and Fortune.

But what this deal means for the Time & Life Building is still unclear.

In 1987, Time Inc. sold its 45 percent interest in the building to the Rockefeller Group, which is controlled by Japanese developer Mitsubishi Estate. Upon the sale, Time Inc. signed a lease renewal for the majority of the space up to 2017. It has since subleased several floors to companies including Lehman Brothers and Hearst Corp., which in turn have leased space to other tenants.

Earlier this month, the Clinton Global Initiative signed a sublease with Hearst for 30,000 square feet on the 42nd floor, sources told The Real Deal. Cushman & Wakefield’s Robert Gastel, who brokered the deal along with Louis D’Avanzo, Peter Berti and Ross Eisenberg, said that Hearst was looking for a single tenant to lease both the remaining 10,000 square feet on the 42nd floor and the entire 41st floor.

“We’ve been showing it for certain, but we don’t have any active leases on it,” Gastel said, declining to comment on the specifics of the deal. He stressed that Hearst was still occupying the space.

In contrast, the 16th floor is a “ghost town,” a source told The Real Deal, with 40,000 square feet of space lying unused for about 18 months.

Time Inc. is in talks with hedge fund HedgeServ to occupy another vacant 41,000-square-foot space on the 39th floor, the source added, and is also close to closing a deal with Mark Ecko-owned lifestyle magazine Complex to take roughly 40,000 square feet of space on the 35th floor.

Adelaide Polsinelli, an investment sales broker at Eastern Consolidated, believes that the building would be “highly desirable for most institutional investors.” The market’s rise to “exuberant levels,” she said, made it a good time to be a seller.

But office rents at the Time & Life Building are low compared to other buildings in the area, according to Noam Shahar, research director at commercial leasing data provider CompStak.

For example, media company Sandow pays $41 per square foot for its 38,800-square-foot 17th floor space; law firm Cahill Gordon & Reindel pays $48 per square foot for its 80,200 square feet on the 35th and 38th floors; and broadcaster CBS pays $58 per square foot for its 61,000 square feet on the 44th and 46th floors, according to Compstak data.

In contrast, rates on recent deals in comparable buildings, such as 1290 Avenue of the Americas and 1285 Avenue of the Americas, went from the mid $60s to the high $70s, Shahar added.

Most recent deals in the building appear to be subleases from Time Inc., with the exception of CBS’s 46th floor space, which was leased from Lehman Brothers. The majority of the leases are set to expire in 2017, which is when Time Inc.’s lease runs out.

The relatively low leasing rates are due to such a large portion of the property being subleased — and that too for a relatively short term, said Dirk Hrobsky, co-managing director of the New York office of property management giant DTZ, which currently subleases its office space on the 43rd floor from Hearst.

As a result, the Meredith deal is unlikely to lead to a significant turnover at the property, Hrobsky said, in contrast to other recent deals in the media industry, such as Comcast’s acquisition of NBC, which came with a chunk of 30 Rockefeller Plaza.

“There’s a finite end in 2017, which makes long term deals impossible to do,” he said of the Time Inc. deal.

But Time Inc. and Meredith would certainly have factored the soon-to-expire leases into the terms of the transaction, he added.

“When it comes to deals like these,” he said, “sometimes the building is seen as an asset, sometimes as a liability. With that short a time period on the lease, it’s definitely not an asset.”

Representatives from the Rockefeller Group declined to comment. Peter Shimkin, a broker at Newmark Grubb Knight Frank, who represents Time Inc., could not be reached for comment.