The Real Deal New York

‘Homeland’ adds office security

Federal agency helps boost Manhattan office market

September 01, 2013
By Adam Pincus

commercial market reportIn what might signal a strong start to the fall leasing season, the U.S. Department of Homeland Security is eyeing a renewal at the 2.3-million-square-foot Starrett-Lehigh Building in Chelsea. The renewal would be one of the largest leasing deals of the year, and would further underscore tenants’ attraction to large floorplate loft buildings.

“Tenants are still looking for buildings with character,” said William Elder, executive vice president at RXR Realty, which owns the 19-story building.

Overall, the Manhattan office leasing market was mixed last month, with the availability rate — measuring space vacant now or available in roughly the next 12 months — dropping by 0.3 points to 11.8 percent from July, according to figures from commercial firm Colliers International. But at the same time, the average office asking rent fell by 19 cents last month, to $56.66 per foot from $56.85 per foot in July, the company reported in preliminary statistics.

The Department of Homeland Security — along with its investigative division, Immigration and Customs Enforcement — currently occupies 199,327 square feet at the Starrett-Lehigh Building through a lease that expires at the end of this year.

“The federal government is still reviewing [its] space requirement beyond that date … and will extend the current lease as necessary,” noted Renee Miscione, a spokesperson for the U.S. General Services Administration, which handles real estate for federal agencies.

Miscione said DHS pays nearly $11.4 million per year in rent for the seventh floor of the building, which is located at 601 West 26th Street between 11th and 12th avenues. That comes to just over $57 per square foot.

That rate is consistent with RXR’s asking rent for the building, which a company source said is in the “$50s and $60s” per square foot.

Midtown

The popular executive suite industry — which leases office space and provides business services to entrepreneurs and professionals — continues to shake up the Midtown office leasing market. The market leader Regus has more than 30 locations in Manhattan, and the industry competes with traditional tenants to lock up space.

Juda Srour, president of executive suite firm Jay Suites, said he has to pay a premium over competing tenants — such as law firms — in part because landlords do not like the extra foot traffic that results from the high number of different companies in the building. But, he said, renting to the company also provides the landlord with advantages.

“We do our own build-out. The landlords find that very attractive,” said Srour, who added that the firm is close to signing a lease for a fifth office location in Midtown (it also has a location in Lower Manhattan).

A competing executive suite firm, Executive Offices New York City, headed by David Shavolian, signed a 15-year deal last month for about 35,000 square feet of office space on floors seven and 12 at 469 Seventh Avenue, at 36th Street. The move will relocate the firm to a smaller space in the building it’s currently in, but on more desirable higher floors. It was done to make way for a larger office tenant at the base of the building.

Shavolian said he poured nearly $1.3 million into preparing the space with marble floors and new air-conditioning for his own tenants. They include an attorney who works with South African businesses, a local mortgage company, a China-based fabric showroom, and a local TV casting company, he said.

“It’s mostly young professionals, or startups, and they stay with us for a year or two, and then they grow out,” he said.

Shavolian declined to comment on the rent, but in May, a full-floor in the building was leased with an asking rent of $47 per foot.

That’s far below the average asking rent in Midtown, which rose by 17 cents to $67.05 per foot from $66.88 per foot. The availability rate declined by a modest 0.2 points to 12 percent in July, the Colliers numbers revealed.

Midtown South

While the Department of Homeland Security lease should boost leasing volume in Midtown South, it won’t do much to impact the availability rate because it’s a renewal.

But there are some spaces in the Midtown South market, currently the tightest market in Manhattan, coming online. One is the entire 19th floor at 315 Park Avenue South, a building that Spear Street Capital purchased from BCN Development for $234 million in May, city records show.

And the newly listed space is not the only available space in the building. There’s also an 84,370-square-foot block on the second through the eighth floors that was listed in the second quarter of this year, but has yet to be spoken for, according to data from CoStar. Credit Suisse occupied that space, but moved out after budget cuts. The bank first put the space on the sublease market in 2011, CoStar data shows, but Spear is now offering it directly.

Meanwhile, the 19th floor was home to a trading company called Phoenix Partners Group. The firm was struck a heavy blow when the Lower Manhattan–based financial firm GFI Group (not affiliated with the real estate firm GFI Capital Resources) poached its CEO and other top dealmakers in May. Phoenix could not be reached, but insiders said the firm no longer occupies the space.

Average asking rents in Midtown South fell by 48 cents per foot last month to $51.54 per foot, down from $52.02 per foot in July, the Colliers statistics revealed. At the same time, the availability rate was flat at 9.2 percent.

Downtown

The continuing trend to convert Lower Manhattan office buildings into residential apartment towers took a big bite out of office space in the market last month. For example, Class B buildings like the 370,000-square-foot 346 Broadway and the 141,311-square-foot 350 Broadway are both being converted to residential.

Indeed, the availability rate fell by 0.8 percent, to 15.1 percent from 15.9 percent in July, according to Colliers. At the same time the average asking rent rose by 9 cents to $46.98 per foot.

The former AIG building at 74 Wall Street contributed to that large drop in availability, Colliers Chief Economist Peter Kozel told TRD, noting that 300,000 square feet of office space at the 19-story tower was taken off the market. The space, he said, will likely be converted to another use such as residential or hotel.

The building, which fronts Pearl and Pine streets, is currently divided into two commercial condominium units. One covers the space below the fourth floor in addition to parts of the sixth, seventh and eighth floors. The other covers the rest of the tower.

In 2011, Chinese real estate and home furnishings firm SouFun Holdings paid $46 million for the upper condo unit, which it will likely redevelop.

SouFun did not respond to a request for comment, but Kozel said, “It has been known that SouFun Holdings has the intention of developing the property for some other use than office space.”

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