The Real Deal New York

Shelter in place

Renewals for existing deals dominate TRD’s 2018 ranking of the largest office leases on perpetually space-strapped Long Island, but insiders say new tenants will soon be making their way to Melville
By Haru Coryne |
Research by Jerome Dineen
February 19, 2019 11:00AM

1 Jericho Plaza in Jericho

On paper it looks as though Long Island’s office leasing market had a bit of a bounce back last year, with landlords closing deals at a rate that far outpaced a sluggish 2017.

The 10 biggest leases of 2018 amounted to almost 600,000 square feet, nearly twice the volume of the year before, according to TRDs analysis of brokerage data.

But many of those deals were renewals or restructurings. In the top leasing deal in 2018, Sterling National Bank doubled its space at 1 Jericho Plaza, while the New York State Insurance Fund (NYSIF) downsized at 8 Corporate Center Drive in Melville in the fifth- largest lease of the year.

In fact, leases for new tenants were the minority among the year’s top deals, and none of them exceeded 100,000 square feet — which has been a running trend since 2015, when Publishers Clearing House took 172,000 square feet in Jericho, making for the last of the big deals. Brokers said that availability is low even at the 50,000-foot mark, especially at the higher end of the market.

“If you’re looking for 50,000 square feet and above in an A Class building, in Nassau or Suffolk County, there are five buildings you can look at,” said David Pennetta of Cushman & Wakefield. “Whereas 10 years ago, there might have been 20.”

Pennetta is hopeful that Long Island is approaching the level of pent-up demand that would make it profitable for developers to build new inventory again.

“Right now, we probably have about 700,000 square feet of tenants who are looking for space and haven’t been able to find it,” he added.

However, that may still be a long time away. Rental rate growth remains slow across the region, even in western Nassau, where asking rents for office space rose by 2 percent annually between 2016 and 2018, according to market data from Cushman. Around Melville, in western Suffolk, there was practically no growth at all, and elsewhere, rents have actually dipped.

In the meantime, the NYSIF lease is an example of how tenants and landlords have been working out deals in a market that has little inventory.

The insurance company had been a tenant at 8 Corporate Center Drive for more than 10 years, according to Tony Fromer of the We’re Group, which owns the property. NYSIF’s prior office took up the top two floors of the three-story building — about 83,000 square feet. With the lease coming due, the agency wanted to drop most (but not all) of its third-floor space, Fromer said.

But a partial vacancy on the third floor would have left the We’re Group with a trickier space to market, considering it’s far better to have the whole floor vacant to show prospective tenants, Fromer said. NYSIF vacated the third floor entirely, kept the second and took up a small space on the first. The company renewed for more than 10 years.

“Out in Melville right now, there’s not a lot of quality, large space available,” Fromer said. “From a landlord’s perspective, it’s an advantage to have a nice, full floor to offer somebody, as opposed to having it broken up.”

For NYSIF, staying in place meant avoiding the high cost of moving, according to JLL’s Eric Launer, who represented the insurance carrier. And with time remaining on the lease, leaving would have meant waiting out the rest of the term, paying for space it neither wanted nor needed.

Still, NYSIF did shop around.

“We toured the market and short-listed three potential other options, but ultimately staying and downsizing was the most effective.” Launer said. “If we were looking for that much space in a Class A trophy building, it doesn’t exist.”

To reno or not to reno?

With little new development on the horizon, landlords feel the pressure to maximize space within their own buildings, as the We’re Group did, and to update their facilities as often as possible, brokers said.

T. Weiss Realty just finished a major renovation of a 20,000-square-foot space at 105 Maxess Road in Melville, which long-time tenant Esteé Lauder vacated last year as part of a larger consolidation of its workforce in Long Island City. Weiss redid the space’s ceiling and walls, leaving exposed steel and rafters to produce a loft effect.

Founder Ted Weiss admitted it was painful to lose a major tenant. “Turnover is the bane of any office owner,” he said, adding that it made sense to upgrade the space immediately. 

“We continue to invest in our own properties so that they don’t become stale,” Weiss said, noting that he is in contract with two separate tenants for 80 percent of the rebuilt space.

And in Jericho, a big renovation project helped Onyx Equities secure the largest deal of the year in Sterling National Bank, which signed a long-term expansion for 110,000 square feet, or roughly twice its previous footprint.

Onyx said in a statement that the renovation brought about a “surge in leasing activity” at the building.

The renovation was a factor in Sterling’s expansion, said Al Callegari of DLC Management, which represents Sterling National Bank in its real estate transactions nationally. Callegari declined to go into specifics about the deal, but noted that the expansion followed on Sterling’s 2017 merger with Astoria Financial, which had rented the original suite.

Medical tenants head east

A host of medical firms took new space in the two counties last year, accounting for all four of the year’s biggest new leases.

NYU Winthrop Hospital took the largest space at Steel Equities’ 211 Station Road in Mineola, making it the third-largest leasing deal of the year. The hospital network has been growing quickly since its creation in 2017 out of a merger between NYU Langone Medical Center and the local Winthrop Hospital. It’s been joined by other rapidly expanding networks such as Stony Brook and Mount Sinai, leaving Long Island Community as the last unaffiliated hospital in Nassau and Suffolk, Newsday reported last year. 

(Click to enlarge)

The growth of direct health care providers has spilled over into the traditional office sector.

“It’s been a boon for Long Island,” said Ted Stratigos of Avison Young, who, with Michael Leff, represented Professional Physical Therapy in its move to new corporate offices at 576 Broadhollow Road in Melville. It was the seventh-largest lease of the year. The sports therapy provider, which acquired competitor ProEx in 2017, tripled the size of its headquarters with the new lease, Stratigos said.

Co-working has continued to hold its own, with Regus renewing its space in RXR’s building at 68 South Service Road, one of two business centers it runs in Melville. It was the 10th-largest lease of the year.

The industry could stand to benefit if the crunch for available space continues. 

“The cost to sublease or transition out of a space or to renegotiate terms are enormous,” said Michael Berretta, who leads North America operations for Regus’ parent company, IWG. “It’s a very difficult process. The alternative of being able to sign a short-term agreement makes sense.”

Regus already runs 10 business centers with 209,000 square feet of space in Long Island and is weighing an expansion in the region, Berretta said. (See TRD’s look at the tri-state area’s co-working market on page 14.)

105 Maxess Road in Melville

Also looking to expand is T. Weiss Realty, which offers short-term leases and co-working space out of its TOTUS Business Center, also at 105 Maxess Road. The current facility takes up one floor of the 149,000- square-foot building, and Weiss said the company is looking into opening a second location.

Melville rising

Although last year saw tenants mostly frozen in place, 2019 might bring the thaw.

One of the largest Class A spaces to enter the market recently is 275 Broadhollow Road, a four-story building with about 130,000 square feet of rentable space, owned by CLK Properties. 

Capital One, a long-term tenant, vacated all four floors at the end of last year, and CLK has started a major renovation to modernize the space.

“They’re revamping the entire building,” said CBRE’s Matt Manoogian. While the offering has attracted attention from prospective tenants, he said, nothing is in contract yet.

If a new tenant decides to occupy the whole building, it will be the first deal of that size that Long Island has seen in years — and a sign of Melville’s strong position in a loosening market.

“The next large deals on Long Island will probably be done in Melville because it has the available space to accommodate them,” said CBRE’s Phil Heilpern.

Fromer, a third-generation member of the family-owned We’re Group, agreed. The firm built all of its own assets, he said, and many of its largest properties are in Melville.

“Nassau County doesn’t have as many options for large-space tenants, whereas Melville does,” he said. “Back in the day, when my grandfather and my great-uncle built these things, they built big.”