The Real Deal New York

Office developers compete for anchor tenants on Manhattan’s western edge

With only a finite number of large potential renters, the fight for office tenants on the West Side is heating up

May 01, 2013
By Adam Pincus

From left: Cushman & Wakefield’s Bruce Mosler and Brookfield’s Jeremiah Larkin at the Manhattan West construction site

Only a few times in modern Manhattan history has an entirely new office district sprung up all at once. In the 1930s, there was Rockefeller Center; the 1970s saw the World Trade Center complex; and today, developers are planning nearly 15 million square feet of new office space in the Hudson Yards area in the 30s on the Far West Side.

The new projects expected to rise over the next decade include the Related Companies’ North and South towers at Hudson Yards, Extell Development’s One Hudson Yards, Brookfield Office Properties’ Manhattan West and Moinian’s 3 Hudson Boulevard, as well as Sherwood Equities’ 447 10th Avenue and Alloy Development’s 450 Hudson Park Boulevard.

Avison Young’s Arthur Mirante, who is handling leasing at 3 Hudson Boulevard

But before starting construction on these new towers, developers must first land an anchor tenant willing to take at least 400,000 square feet of space. With only a finite number of large potential renters, the competition for office tenants is heating up, as some of the city’s top commercial leasing brokers and developers battle each other with slick marketing campaigns and — of course — behind-the-scenes jabs at rival projects.

Many companies are deeply reluctant to move to newly constructed buildings, especially in an untested neighborhood, brokers said.

For most companies, it’s cheaper to stay in place and renovate, explained Joseph Harbert, president of the Eastern Region for Colliers International. And some firms fear that moving out of prime Midtown, with its bevy of transportation options, will cause them to lose employees.

Related Hudson Yards President Jay Cross agreed, saying: “We compete against renewals as much as new construction.”

In 2011, fashion manufacturer Coach signed on to be an anchor tenant of Related’s South Tower. But Coach was already located a few blocks away, in a building directly in the path of Hudson Yards bulldozers. For many of the other big companies whose names are being kicked around as possible anchor tenants, a move to the Far West Side would represent a significant geographic shift from Midtown or Downtown.

There are currently 10 to 20 companies said to be on the hunt for large chunks of Manhattan office space, brokers said. These include media companies Time Warner, Sony, CBS and News Corp.; law firms White & Case and Skadden, Arps, Slate, Meagher & Flom; advertising firm GroupM; financial giant Credit Suisse; and fashion house Ralph Lauren.

Brokers for the new Hudson Yards–area towers are fighting to lure these tenants, but their efforts could be in vain if companies decide to stay in their current locations, or move to existing office towers instead.

Despite these challenges, Hudson Yards so far appears to be beating the odds. Last month, Related snagged two more tenants for the South Tower: French cosmetics maker L’Oreal and software firm SAP.

Developers in the area are also competing for tax benefits. A 15-year, 40 percent property tax reduction is being offered for the first 5 million square feet of office space to be built west of 10th Avenue.

Related said last month that it will apply for the tax break for the South Tower, which would leave about 3.3 million square feet up for grabs. After the first 5 million, the tax break drops to 25 percent.

But some developers may hold off on construction until the neighborhood is more established and competition wanes.

“We are waiting until rents get really attractive before we build,” said Ryan Nelson, senior vice president at Sherwood Equities. “Truthfully, it will probably be the next [construction] cycle.”

For the time being, sources said asking rents for most of the new towers range from $80 to $90 per square foot.

This month, The Real Deal took an in-depth look at the new towers planned for the Far West Side, and how they’re faring in the race to nab tenants.

North and South Tower

Size: North Tower, 2.4 million sq. ft.; South Tower, 1.7 million sq. 

Expected delivery: South Tower, 2016; North Tower, 2018

In the most highly anticipated project on the Far West Side, Related and Oxford Properties have teamed up on a $15 billion, 26-acre Hudson Yards mixed-used project. Last month, Related made major headway on the project when it inked a 99-year, $1 billion lease for the eastern portion of the Metropolitan Transit Authority’s rail yards, which stretch from 30th to 33rd streets and from 10th to 11th avenues.

Jones Lang LaSalle Managing Director Derek Trulson, who is part of a team marketing 1 Hudson Yards

Construction started in December on the South Tower, which is located at 501 West 30th Street and is the first building planned for the parcel. It took more than three years to lure Coach, which ultimately purchased a 740,000-square-foot commercial condo from Related. (As part of the deal, Related agreed to acquire Coach’s building a block north at 516 West 34th Street.) Now, the South Tower is more than 80 percent leased (including expansion options), with L’Oreal in contract to occupy 402,000 square feet and SAP having signed a lease for 115,000 square feet.

Related will have to do it all over again with its second, larger building, the North Tower. Adding to the challenge is that the North Tower, designed by Kohn Pedersen Fox Associates, will rise on an 8.6-acre platform covering active Long Island Rail Road tracks. (Construction on the $750 million platform will also provide a foundation for several other buildings.)

Competing brokers who asked not to be identified said potential tenants might have a hard time imagining the long-discussed platform being constructed any time soon.

But Related’s Cross said construction on the platform will start in January. That would allow for delivery of the building in 2018, as long as an anchor tenant is in place, he said.

As a selling point, Related is highlighting the large footprint of the North Tower, which financial firms could use for trading floors. Plus, the skyscraper will be adjacent to a planned 500,000-square-foot retail building, which Related hopes will allay tenants’ concerns about being isolated on the Far West Side with few food and shopping options.

“We are part of a mixed-use project,” Cross said, “so you don’t have to think about an in-house cafeteria [like] you might in other projects.”

To sweeten the pot, Related is also offering to swap properties or sell portions of the building as commercial condos, as it did with Coach. Related has also offered that the first companies that sign on for space will get in “at cost.”

Cross pegged the approximate asking rent for the North Tower at $90 per square foot and the price for a condo sale at between $900 and $1,100 per foot, for a hypothetical 1 million square feet.

Manhattan West

Developer: Brookfield Office Properties

Size: North Tower, 2.2 million square feet; South Tower, 3.2 million square feet

Expected delivery: 2016 or 2017

Brookfield first announced the Manhattan West project more than five years ago during the real estate boom. Designed by Skidmore, Owings & Merrill, the project would also sit atop railroad tracks, requiring a platform to cover them.

Like many projects dreamed up back then, Manhattan West was halted during the downturn. Then in 2011, the plans were dusted off and reintroduced, with a cheaper platform that would be built more quickly. But after being on the market for nearly two years — longer than any other project except Related’s — Manhattan West still has not landed an anchor tenant. Furthermore, the towers have evolved from a commercial-only concept to one that could include residential as well.

Despite not having a tenant, Brookfield plans to begin construction of the $300 million platform in August, with completion set for October 2014, according to Bruce Mosler, chairman of global brokerage at Cushman & Wakefield. Mosler’s team was hired to market and lease Manhattan West.

Brookfield has largely finalized the design of the North Tower, but could build it or the larger South Tower first, or even both simultaneously, depending on the anchor tenants’ needs, Mosler said.

“There are use groups we are talking to that would encompass one tower, and there are users we are talking to that would require us to build [both] towers” at the same time, Mosler said.

Real estate executives not involved with Brookfield’s project said Time Warner is looking closely at the two towers, as well as at Related’s project.

Mosler and Jeremiah Larkin, senior vice president and director of leasing at Brookfield, ticked off the advantages of the site, including the South Tower’s 90,000-square-foot floor plates, the largest of the six competing projects. Insiders also noted that the platform will be just 2.6 acres (compared to roughly 8.6 acres on Related’s site), so it will be easier to construct.

“We have the best location,” Larkin said, noting the project is just a block from Penn Station.

But the tradeoff is that the project will receive tax breaks of only 25 percent, compared with the more generous 40 percent decrease for projects west of 10th Avenue.

Mosler and Larkin would not reveal the asking rent, saying only that the rents would be “competitive.”

3 Hudson Boulevard

Developer: The Moinian Group

Size: 1.8 million square feet

Expected completion date: 2016

Some consider the Moinian Group’s 3 Hudson Boulevard to be the best-positioned of the Far West Side’s new buildings: It sits on top of the No. 7 subway station and across from the Jacob K. Javits Convention Center.

Another advantage to the FXFOWLE Architects–designed project is that “you are not on a platform, you are on bedrock,” said Arthur Mirante, president of the tristate region for commercial firm Avison Young, which is handling leasing at 3 Hudson Boulevard. He said he also points out to potential tenants that “no water got anywhere near this with [Hurricane] Sandy. [Yet] you are on the Hudson River with water views.”

Like Related did with Coach, Moinian will look for prospective tenants that would want to sell their existing building in exchange for a condo unit at 3 Hudson, Mirante said.

Asking rents in the 1.8 million-square-foot building are currently $85 per square foot, according to Mirante, but ultimately, “We hope to achieve in excess of $100 [per foot] in the tower.”

A challenge facing the project is that while Moinian is well known as a residential developer and an office owner, the firm has limited experience as a ground-up, Class A office tower builder. Moinian’s residential management was criticized in the wake of Hurricane Sandy, and insiders said the company’s access to construction financing is not as strong as other developers’. For that reason, sources expect Moinian to partner with a more-established office landlord to move the project forward, much as it did with SL Green Realty at 3 Columbus Circle.

In response to those criticisms, a spokesperson for Moinian said the company has three decades of development experience and strong relationships with lenders, and issued the following statement: “The Moinian Group is looking forward to breaking ground on 3 Hudson Boulevard and efficiently delivering this elegant office tower to Manhattan’s new West Side.”

The spokesperson declined to comment on whether Moinian is planning to partner with another developer on the project.

1 Hudson Yards

Developer: Extell Development

Size: 1.75 million square feet

Expected completion date: TBD

Extell Development, headed by Gary Barnett, owns a parcel at 34th Street, just south of Moinian’s. Barnett is planning to construct 1 Hudson Yards, a 1.75 million-square-foot office building, on the site. But construction will not start until a tenant or tenants have committed to take at least 400,000 square feet of space, said Jones Lang LaSalle Managing Director Derek Trulson, who is part of a team handling leasing at 1 Hudson Yards.

But he said the MTA is readying the foundation for the Extell site as it builds the new No. 7 subway station, which gives the project “a running start” in terms of “speed to market and certainty of delivery.”

Extell has a reputation as a prolific residential and commercial builder, and is currently completing the 748,000-square-foot Gem Tower office building at 50 West 47th Street in the Diamond District.

But this parcel, like Moinian’s, is located on 11th Avenue, which could make it more difficult to lure tenants, brokers said.

Trulson, however, said the site is “central to all of the Hudson Yards district.”

And unlike the multitowered Related and Brookfield sites, which some tenants worry could be under construction for years, “we are one building,” Trulson said.

He declined to specify the asking rent, but said Extell would fight for tenants.

“We are going to be competitive,” he said. “The nature of the site and our basis allows us to be. We believe we will be as competitive as anyone in the market.”

450 Hudson Park Boulevard

Developer: Alloy Development (possibly with Boston Properties)

Size: 1.1 million square feet

Expected completion date: TBD

Alloy Development is far less well-known than its competitors, and its site is the smallest of those now vying for tenants.

Alloy assembled the site — west of 10th Avenue between 35th and 36th streets — in 2007. The location has been cleared and stands ready for a tenant, but there’s no set development plan in place, according to Alloy president Jared Della Valle, an architect and developer.

Brooklyn-based Bernheimer Architecture drafted a rendering, but the design was created to give tenants an idea of what the site could look like, and is not an active plan, Della Valle said.

“Our opportunity is more build-to-suit,” said Della Valle, noting that the building can support floor plates as large as 48,000 square feet at its base.

Della Valle is working informally on plans for the project with large office owner Boston Properties. The two are each looking for a large tenant for the site, which Alloy could develop by itself or in partnership with Boston Properties, Della Valle said. Boston Properties did not respond to requests for comment.

But Della Valle said he is also entertaining other possibilities, such as selling the site, or leasing it on a long-term basis to another owner or developer.

A leasing team hasn’t yet been hired, although he said Alloy is keeping the brokerage industry “up to date” on the project.

447 10th Avenue

Developer: Sherwood Equities

Size: 2.5 million square feet

Expected completion date: TBD

Leasing agent: None

Midtown-based Sherwood Equities, headed by CEO Jeffrey Katz, owns three parcels in the Hudson Yards area. But much like Alloy, it is less well-known than most of the other Far West Side developers.

Sherwood is planning an office tower at 447 10th Avenue at 34th Street on a site it’s owned since 1986. (Sherwood’s two smaller sites in the district will likely become residential or mixed-use towers.)

But the firm is in no hurry to start construction on the massive office project, Nelson said, and Sherwood is not competing as fiercely for tenants as some of the other developers in the area.

“We are not being as aggressive as the others,” Nelson said. With rents in the untested neighborhood still relatively low, the firm feels that “it does not make sense to fight tooth and nail.”

He said he expects rents in the area to rise dramatically once tenants start moving in to other new buildings.

Sherwood is nonetheless on the lookout for tenants in need of large chunks of space. Sources said the firm responded to an inquiry from Time Warner about potentially taking space at 447 10th.

Nelson declined to comment on Time Warner specifically, but confirmed that Sherwood would indeed respond “if a tenant came along that needed 2 million square feet.”

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    Nelson declined to comment on Time Warner specifically, but confirmed
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