The Real Deal New York

Office developers pick up pace

More than half a dozen projects take first steps as rents climb

January 01, 2007
By Marc Ferris

Developers spent the end of 2006 rushing to fill Manhattan’s office construction void, as a half-dozen projects in Midtown and Midtown South took major steps toward completion and plans for a new office tower were announced in Harlem.

Low vacancy rates and high rents are accelerating the pace of commercial development in the borough, where only a few large towers have been built in the past several years.

In December, the Moinian Group reportedly sought to buy a co-op building at 417 Park Avenue on 55th Street for $140 million and tear it down for an office tower, though the plan looked like an uphill battle as the month drew to a close.

Two blocks south, Macklowe Properties changed plans for a long-standing project at the southwest corner of Madison Avenue and 53rd Street. Hotel and residential condos — out. About 350,000 square feet of Class A office space — in.

The Century Club at 7 West 43rd Street and Fifth Avenue is negotiating to sell most of its air rights to developer Aby Rosen, who intends to build a new office tower.

A few blocks west, at Eighth Avenue and 42nd Street, New Jersey-based SJP Properties this summer announced plans for a new office tower on a vacant parcel the company purchased from Howard and Edward Milstein. Farther up the rapidly gentrifying Eighth Avenue corridor, Boston Properties last month announced plans to build an office tower at the corner of Eighth Avenue and 55th Street.

Office vacancy rates may now be low enough — and rents high enough — for new office projects to pencil out to big profits for developers.

Vacancy rates dropped to 6.4 percent during the third quarter, according to reports. Many analysts predicted that figure is headed toward a historic low of 3 percent.

Rents for top spaces are well past the psychological benchmark of $100 per square foot, with the highest asking rents in premier buildings hitting $175 per square foot.

“Rent is spiking up to levels unheard of a few years ago, and it’s pretty amazing to watch,” said John Cicero, managing principal at commercial appraisers Miller Cicero.

In Midtown South, owners of the International Toy Center last month backed off plans to convert the two-building complex fronting Madison Square Park to condos. Instead, Toy Center owner Joseph Chetrit has approached brokers, asking them to find him commercial tenants to fill the buildings at 200 Fifth Avenue and 1107 Broadway, the New York Post reported.

Real estate trust Vornado appears to be particularly bullish on office development. Other published reports last month said Vornado is expected to develop a major office tower on the site of the Pennsylvania Hotel, across from the entrance to Penn Station, and that investment bank Lehman Brothers could be a major tenant.

In Harlem, Vornado unveiled its intention last month to build 500,000 square feet of office space and 100,000 square feet of retail at Park Avenue and 125th Street.

Recently or nearly completed Manhattan office projects — 7 World Trade Center, the New York Times building, the Bank of America tower, 505 Fifth Avenue and the overhaul of the Verizon Building at 1095 Sixth Avenue — won’t satiate market demand, analysts and brokers say (see below).

Rising employment rates and the conversion of office buildings into condominiums during the hot residential cycle led to a net loss of space, and it needs to be addressed, said Cicero.

Other recent deals augur potential for more new towers, though many projects are only in the early stages.

In November, Brookfield Financial Properties spent over $100 million for a parcel on Ninth Avenue next to a lot it has owned for 20 years. The company could build a 4.6-million-square-foot office complex, double the size of the Empire State Building.

Several weeks before, L & L Holding Company bought an 84-year ground lease at 425 Park Avenue for $1 billion, which raises the prospect of a new building — likely an office or hotel — eventually rising there. Ownership of the site, between 55th and 56th streets, doesn’t kick in for several years, however, according to reports.

If they build it, tenants come

The success of the few Manhattan office projects under construction or recently completed may be a bellwether for the next few years as developers open the throttle on building.

Robust leasing rates at new buildings, including the New York Times headquarters rising across from the Port Authority bus terminal in Times Square and the Bank of America Tower overlooking Bryant Park, should ease worries on the part of developers now starting Manhattan office projects.

The $1 billion Bank of America tower, at the northwest corner of Sixth Avenue and 42nd Street, is 98 percent leased at an average rent of $138 a square foot. The mammoth 2.1-million-square-foot glass building will feature a bold, environmentally friendly design.

At the new 52-story New York Times tower on Eighth Avenue, space within the 1.5-million-square-foot building is divided in two: the New York Times plans to occupy and lease 800,000 square feet, while developer Forest City Ratner is leasing the rest to a variety of tenants, including several law firms. Broker figures put the entire building at almost 80 percent full at an average rent of $85 per square foot.

The New York Times Company, which planned to move most of its staff into the building when it announced the project, is considering taking advantage of the hot office market and placing more space on the market, the company said last month. It already had 155,000 square feet on the 23rd through 27th floors available for lease, but plans to add to that amount. Some Times employees have been laid off, freeing up space, while others would work in less expensive areas of the city.

The Forest City Ratner portion of the building is about 90 percent full, said Mary Ann Tighe, CEO of the tri-state region at CB Richard Ellis, brokers of the Forest City space. Only spaces with encumbered leases remain, including a five-year slot on one floor and four other floors offering 10-year leases, all of which are subject to options by larger tenants.

For Tighe, the building embodies two trends that she foresees for the new office market: the move to fringe areas in Midtown and the commitment to world-class architecture (the building was designed by architect Renzo Piano), which “redefined the nature” of the building’s Eighth Avenue location across the street from the Port Authority, she said.

Not everyone predicted the revival of the office market.

“Go back and see what fun people made of Forest City Ratner when they announced this,” said Tighe. “Forest City Ratner determined that they needed to get $70 a square foot, which no one had ever gotten before. At the time we went into the ground, rents on Eighth Avenue were at $30. It took real guts to go ahead with this building.”

At 505 Fifth Avenue, a recently completed boutique office building of 275,000 square feet, leasing has been strong. The building, which is next to the New York Public Library’s main branch, is already more than 90 percent occupied at rents of over $90 a square foot, according to brokers.

A block to the west, 1095 Avenue of the Americas, formerly the Verizon Building, will consist of 1 million square feet of overhauled space. One tenant, Dechert, a law firm, has been signed for 234,238 square feet. Asking rents range from $80 to the low $100s.

The building, which just started on its $260 million redesign, is owned by Equity Office Properties, which was recently gobbled up by the Blackstone Group, a private equity firm. The change in ownership may be what is slowing down leasing negotiations, according to reports.

Other office buildings, like the recently completed Hearst Tower at Eighth Avenue and 57th Street and the Frank Gehry-designed IAC headquarters building on far West 19th Street in Chelsea, were built only for one tenant and therefore — no doubt to their developer’s delight — 100 percent leased up at the time they were built.

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