Only a handful of Manhattan developers may be capable of building large office towers on speculation, especially after the market collapse that followed the last office building boom of the late 1980s and early ’90s and drove many out of business.
But for the first time since then, developers appear to be lining up to try, and they are using lessons learned from that era.
Some of the speculative projects in the pre-construction and construction stages are 11 Times Square by SJP Properties; 510 Madison Avenue by developer Harry Macklowe; and 150, 175 and 200 Greenwich Avenue, to be built as part of the World Trade Center site reconstruction by developer Larry Silverstein.
Rumored to be speculative bets are an office tower being contemplated by the Related Companies and Boston Properties at Eighth Avenue between 44th and 45th streets, and a Boston Properties tower planned for 250 West 55th Street at Eighth Avenue.
For its part, Boston Properties said they anticipated having a pre-leasing agreement in place for the latter prior to breaking ground late this year.
In addition, the Forest City Ratner-owned portion of the New York Times building, 505 Fifth Avenue and 7 World Trade Center are other recent speculative projects where leases have been signed or tenants have already moved in.
Overall Manhattan vacancy rates are running about 5 percent, with average office asking rents at an all-time high in the first quarter at $53.43 per square foot, according to Cushman & Wakefield. Many real estate experts consider it high time for developers to enter the high-stakes speculative development market.
“It’s a pretty good gamble, with vacancy rates the way they are and rents the way they are,” said Robert Von Ancken, an executive managing director at Grubb & Ellis and an appraiser who has valued such office behemoths as the Empire State Building and the Chrysler Building. “Manhattan is so far below what’s called equilibrium for vacancy rates, which is somewhere around 8 or 9 percent, that we’re in a very safe and envious position,” he said.
The ’80s wipeout
But overshadowing what might normally be an exuberant moment are memories of the bust that began in the late 1980s. That period wiped out some speculative office developers, such as Ian Bruce Eichner, who developed 1540 Broadway, and the husband-and-wife development team David and Jean Solomon at Solomon Equities, which built 1585 Broadway, said Mary Ann Tighe, chief executive officer of the New York tri-state Region at CB Richard Ellis.
“One of the side effects of what happened in the ’90s in Manhattan [was] we lost an entire generation of developers in New York City,” she said. “You never got that next wave coming up.”
Consequently, there are few Manhattan developers prepared to take on the monumental task of erecting a commercial skyscraper without committed tenants.
“I would venture to say there are probably less than a dozen who have deep and consistent experience building skyscrapers,” Tighe said. “I’m not talking about a 200,000-square-foot residential building. I’m talking about a million-square-foot skyscraper.”
The lack of competition could be a boon for an intrepid developer willing to enter the Manhattan market — for instance, SJP Properties, which has embarked on its first speculative venture in New York City with 11 Times Square. But for developers who’ve been in the market a bit longer, there are bleak memories of the last time Manhattan’s commercial real estate market went to the wall.
“Banks were forcing people to foreclose,” said Thomas Elghanayan, president of Rockrose Development Corporation, which built its first office venture, Carnegie Hall Tower at 152 West 57th Street, during the market collapse. “There was blood in the streets.”
That bust followed a boom in office construction that had been ongoing since the 1960s. And in the ’80s, about 50 million square feet of office inventory was added, Tighe said.
“There had been spec development in the ’60s and the ’70s in New York and around the country, and all of that development was absorbed,” she said. “So people had the presumption that they could add 50 or 60 million square feet, as we did in Manhattan in the ’60s and ’70s, and it would once again just get absorbed.”
Tighe pointed out that office rents that quadrupled in an 18-month period — from $9 to $10 a square foot in 1979 to $40 a square foot in 1981 — also catalyzed development. By the late 1980s, the city was offering a special tax program to spur office development west of Sixth Avenue.
“If you got your foundation and footings in the ground by a date in ’86 or ’87, you were entitled to get this particular special tax program,” called the Industrial Commercial Incentive Program (ICIP), Tighe said. “And what you saw was an incredible surge of development, as developers went out and got financing on the presumption that if they built it, they would come.”
Quite a bit of that development was speculative, and office space grew to oversupply in Manhattan, she added.
At the same time, the ongoing savings-and-loan crisis nationwide, as well as amended tax laws, created a sudden disinterest in investing in property — both commercial and residential — by the end of the decade, said Stuart Saft, a partner with LeBoeuf, Lamb, Greene & MacRae’s real estate division.
As the national economy was floundering and unemployment shot up, Black Monday took place on Oct. 19, 1987, the second-largest one-day percentage decline in stock market history, Saft said. Though the stock market recovered in about two weeks, the decline was enough to topple the teetering commercial real estate market nationwide. New York City, too, was hit.
“Banks took over buildings, and there was a lot of available space for a year or so,” Saft said. “Then it began to be absorbed into the market. We had a number of European companies come in and buy up office towers. And the Japanese came in and bought up a lot of property.
“Very quickly, the market solidified, but the developers, many of them, had already lost their properties,” he said.
It took the entire decade of the 1990s, while the United States economy adjusted to a global economic system, to recover, Saft added.
In the meantime, only a couple Manhattan developers built speculative properties. One was Axel Stawski of the Kipp-Stawski Group, who renovated 579 Fifth Avenue on spec in 1987 and developed 565 Fifth Avenue in 1991. He then built 360 Madison Avenue in 2003 and 505 Fifth Avenue more recently. All of the properties were mid-sized office buildings ranging from 300,000 to 400,000 square feet.
Stawski, who has no future plans for a speculative office building, was guarded in his optimism about the projects being initiated currently.
“I think when the market will change, some of the projects being mounted now will fall by the wayside,” he said.
Douglas Durst, a co-president of the Durst Organization, built the 1.6-million-square-foot 4 Times Square as a speculative venture, but soon after the project became public knowledge in 1995, Conde Nast signed on as the main tenant. He too said he had no current plans for another speculative venture.
Since the bust of the late 1980s, speculative projects have been difficult to finance, as banks backed off from providing construction loans. But that appears to be changing as robust market conditions have begun to hold sway. Projections for employment growth among office users by the New York State Department of Labor are rosy in New York City, with business and financial occupations anticipated to grow by 11.1 percent by 2014 and legal occupations projected to grow by 13.6 percent.
“We’re at a point in time where the high-end rental rates being achieved exceed the cost of new construction, which is justifying today’s market costs for development of new projects,” said Paul Glickman, an executive vice president with Cushman & Wakefield.
How much is too much?
What’s the amount of new office space Manhattan can handle? Currently the perception is that there’s a shortage. For one thing, a considerable amount of office space has been converted to residential use in recent years, especially in Lower Manhattan.
According to Grubb & Ellis research manager Richard Persichetti, since Sept. 11 about 8.1 million square feet of space has been converted from office to residential Downtown.
Of course, Manhattan lost 13.4 million square feet of office space in the terrorist attacks of Sept. 11, Persichetti said.
The market has been slow to respond. Since 2001, only 10.9 million square feet of office space has been developed in Manhattan, according to CB Richard Ellis, with only about 3.5 million square feet of space in the works.
Other estimates put the amount of space gone out of circulation somewhat higher. Robert Sammons, director of research at Colliers ABR, said 13 million square feet of space has been converted from office to residential, and 15 million square feet of office space was lost on Sept. 11.
Compounding Manhattan’s squeeze is the fact that by 2010 almost 64 percent of office buildings will be at least 50 years old and technologically outdated, according to CB Richard Ellis. Also, there are few sites available for large office buildings to be constructed.
As a result, even a slowdown in the national economy and an uptick in unemployment figures nationwide would be unlikely to cool the overheated Manhattan commercial real estate market, said Robert Von Ancken, an executive managing director at Grubb & Ellis.
“I think you’d need at least 10 million square feet of additional space in the Midtown area” to maintain equilibrium, he said. “And you just don’t know where you’re going to put it.”
Beyond that, to remain competitive in an international market, Manhattan must continue to add office space, brokers said. For instance, Tokyo saw the completion of four new buildings, totaling about 2.2 million square feet, in just the first quarter of 2007 alone, according to CBRE.
“There is a tremendous need for buildings that are wired for the 21st century,” said Stuart Saft, a partner with LeBoeuf, Lamb, Greene & MacRae’s real estate division. Plus, he said, there’s demand for more “green” buildings to protect the environment and bring down operating costs.