Manhattan on track to become landlord’s market: SL Green

CEO Holliday won’t rule out Empire State Building bid
By Hiten Samtani | July 25, 2013 05:30PM

Manhattan is well on its way to once again becoming a landlord’s market, with a growing number of small high-end deals, a declining availability of bargain sublease space, and a strong local and national economy which would drive demand, SL Green Realty executives said in the real estate investment trust’s second-quarter conference call.

“You’d have to see availability go down to around 9 percent,” SL Green’s director of leasing Steve Durels said on the call, but continuing job growth would keep pushing demand, and “we’ll enjoy that spike in rent.”

The REIT — which walloped its New York competitors in second quarter stock market returns — has more than 1 million square feet of lease deals in the pipeline and anticipates total leasing activity of 2.3 million square feet in 2013, including 770,000 square feet of lease deals signed in the second quarter, according to CEO Marc Holliday.

“We’re running generally ahead of our December guidance,” Holliday said, referring to a projected expectation of performance. “We were very pleased with the results.”

These deals included Internet radio provider Pandora’s 52,450 square feet at 125 Park Avenue, and Spanish public works construction player Dragados’ 22,437 square feet at 810 Seventh Avenue, as The Real Deal reported.

Contrary to the common perception that New York’s financial sector is shrinking, half of the city’s job growth in the first half of the year came from finance and related industries, Holliday noted. (In general, tenants in these sectors are thought to need more space and can afford to pay higher rents, making them appealing to landlords.)

Holliday, whose manner is by far the most corporate of the major real estate players, said that “these [job] statistics continue to conflict with the refrain that I sometimes hear when I visit the shareholders.”

Marquee leasing deals at new office developments, such as Hudson Yards and the World Trade Center, rather than hurting the REIT’s position, would take away a key negotiating card from tenants, Durels argued.

“There’s been a drag on the market for the past couple years because there’s been no big tenant who didn’t use Trade Center or Hudson Yards as leverage to make better deals,” Durels said.

On the investment sales front, the recent rise in 10-year Treasury rates has been offset by investors’ expectations of rising rents, leaving cap rates relatively stable, Holliday said.

“We’ve taken advantage of this market by selling into it,” he said, referring to deals such as the recent $220.3 million sale of office building 333 West 34th Street to American Realty Capital.

Of the three asset classes – office, retail and residential – that SL Green is involved in, the company would be most cautious about acquiring new office assets in the coming year, Holliday said.

“We tend to look for value-add, off-market opportunities, and there are fewer of those than there were a few years ago,” he said.

In response to a question about whether SL Green would seek to join the suitors queuing up to buy the Empire State Building, Holliday was cagey, merely stating his belief that the private market would value the building and others in the proposed Empire State Realty Trust at a premium to the public market.

But he didn’t quite rule it out either. “We look at everything,” he said.