As the Manhattan commercial market tightens, it brightens prospects for Lower Manhattan, but throughout the city, major landlords are looking to maximize profit as the balance shifts in their favor.
The Real Deal recently spoke with some of the top building owners about their properties’ retail and office spaces, what will lure tenants, and what obstacles they face.
From One Bryant Park, where developer Douglas Durst says he is in talks to achieve $100-per-square-foot rents in an office submarket quickly heading upscale, to One Times Square, one of the most visible retail spots in Manhattan, which remains curiously vacant, here is what they had to say.
Jeffrey Ackemann
Managing director, Jamestown Properties
A story in the Washington Post recently quoted an executive from Jamestown as saying it’s a terrible time to be a buyer. When do you think that will change? What conditions would have to change to make you start buying again?
It’s a difficult time to be a buyer at today’s historically low cap rates. Cap rates would have to rise and stabilize by 100 to 150 basis points before we would consider re-entering the core market.
You are reportedly exploring adding residential space at the Chelsea Market, the popular retail and office complex. Is that going forward? Would you also look at adding more office space there, since the office market is very tight?
We continue to explore the possibility of adding a residential component. The exact location, size, and timing of the project are the type of decisions we are currently sorting out. For office space, I don’t think so. At this time we believe the highest and best use of the additional FAR [floor-area ratio] that we may gain, given our proximity to the High Line, lends itself best to residential development.
Why is it that One Times Square’s retail space — the place where the ball drops, one of the most visible sites in the world — has been vacant for so long?
Well, we still have a lease in place with Time Warner and for the past 24 months we have had scaffolding around the building to facilitate maintenance work on the façde. Now that the scaffolding has been removed and site lines restored, a prospective tenant can better visualize its occupancy at One Time Square. The building represents a unique branding opportunity and frankly, we have been looking for the perfect tenant to replace Time Warner. We were recently very close to making a deal with a major national retailer; that blew up at the eleventh hour due to very unusual circumstances unrelated to the building. We had a couple of other good prospects as backups that we have now refocused on and are hopeful to have an announcement in the not too distant future. It could be in the next few months or by summer, but certainly before the year is out.
Donald Huffner Jr.
Senior vice president, Equity Office Properties Trust
Over the past year or two, you have been leaving secondary office markets and investing more in primary office markets like New York. Should we expect more building purchases here, or are prices too high in general?
We are opportunistic buyers, so we evaluate each market to see what the economic returns are. We would love to increase our portfolio in New York.
What sort of rent levels do you think you’ll get at the Verizon Building at 1095 Avenue of the Americas, which you purchased last year, once you renovate it?
The market continues to come up. The building will be delivered in the second quarter of 2007, so we have not set the rental rate. We are spending $250 to $260 million on renovation so it will be practically a new building. The renovation to the building will include a brand new HVAC system, a new curtain wall, and new elevator.
How have rising construction costs impacted improvements you make to tenants’ spaces?
The good news is that in our portfolio we have 110 million square feet. Eventually costs go up and construction costs more. In a weaker market, the tenant asks for improvements and tries to push the landlord to do them.
In a stronger market, the landlord holds firm and the tenant does it. In a stronger market, it is also more expensive for tenants to leave. So, if construction costs go up, if a tenant is expanding or is growing out of their space, we have a better chance of capturing them and keeping them.
Right now, we are 97 percent full, with the exception of 1095 Avenue of the Americas. As the market continues to tighten, it becomes more of a landlord’s market and there are increasing rental rates and decreasing free rent concessions. More of the burden for tenant improvements will shift to the tenant from the landlord.
How else does the tightening office market affect your properties?
We are moving our headquarters out of 527 Madison Avenue to allow a tenant to expand in one of our buildings. The idea is to hold on to tenants that you have great relationships with. We don’t want to move, but by moving to 717 Fifth Avenue, we give the tenant the flexibility to expand into the space.
What are you doing differently than other owners to lure brokers and tenants?
Pre-builts. A lot of tenants are expanding rapidly. If you build it out for them, they will take the lease. We had a tenant that we built a 5,000-square-foot space for, and they suddenly found they needed an 8,000 square foot space, so we tore up the lease and they got the 8,000 square feet. We are doing pre-builts on every major vacancy that we have, though for 1095 Avenue of the Americas, we could go a lot of different ways, so we are letting the market define what that becomes.
Steven Kaufman
Senior managing director, Kaufman Organization
You are a big owner in the garment center — how is the ratio between fashion/garment companies and other types of companies in your buildings changing?
There has definitely been a shift in the direction of occupancy away from garment manufacturing to office use in my buildings. At 450, 462 and 470 Seventh Avenue, specifically, the showrooms are consolidating further up Seventh Avenue near 40th Street. Garment manufacturing is going; it’s almost gone.
While most of your properties are in the garment center area, you recently purchased an office and retail building at 130 Prince Street in Soho. You own only one other building in the area — 257 Canal Street. Why go there and what is your outlook for the office space in that area?
The outlook is very positive for office use in the Soho area. There are not many office buildings there and the ones that are there are in great demand. The one that we bought can be converted to residential. There have been a lot of conversions to residential and very little new construction. The office market is very strong.
What is your outlook on the market, including Lower Manhattan?
The eventual development of the World Trade Center area is good for the city and the space will be absorbed. The neighborhood should be developed as mixed-use with a residential component like in Chelsea, Soho, and Tribeca. Office and residential mixed-use has been very successful in those areas.
Albert Behler
President and CEO, Paramount Group
What is your outlook on the market?
We are bullish on the Midtown Manhattan market for the foreseeable future. There will be a substantial price differential for tenants to go Downtown. I personally prefer that some of the development in the World Trade Center be partly residential. There is a need for that.
What are the biggest obstacles or problems you face right now?
We are facing rising expenses that we have to, unfortunately, pass on to our tenants. The cost of energy and security is rising and real estate taxes are creeping up, so we are working on programs to buy power in bigger quantities and economize on elevator service contracts. That is an advantage for bigger landlords; the economies of scale can be used to reduce the cost of expenses. Right now, it is also hard to buy new properties. We are in the market to increase our portfolio but it is hard to find properties that would be of interest to us right now. We are looking all over Manhattan and in other cities as well.
William Rudin
President, Rudin Management
What does the tightening office market throughout Manhattan mean for your properties?
Lower Manhattan is doing a lot better. The tight Midtown market is impacting Downtown although that story hasn’t gotten a lot of play. As the economy continues to grow and Midtown tightens there will be no alternative other than to go Downtown. As a good portion of our market is Downtown, we want to be in a good position to rent and have long-term value. We are investing more in infrastructure like video lobbies, new security systems, elevators, and technology infrastructure.
What are your most notable plans for your properties right now and why are they significant?
We had 250,000 square feet of vacant space a year ago at 32 Sixth Avenue, the old AT & T headquarters in Tribeca, and now we are down to 50,000 square feet. Most of our tenants came from Midtown and many of the ones that have moved to Downtown are media and communications companies. That’s the other story. Italian TV broadcasting company RAI moved from Sixth Avenue in the 50s; Cambridge University Press came from the Flatiron District.
Carl Weisbrod
President, Trinity Real Estate
You are getting more arts, entertainment, and publishing tenants in Hudson Square, where nearly all your properties are concentrated. But the area still has a high vacancy rate for office space. What is your outlook?
Actually the vacancy rate is dropping rapidly and continuing to drop in a hot commercial market. We have already seen high-end creative tenants that three to five years ago would not look at Hudson Square, so that trend is irreversible even if the office market weakens, and I don’t think it will.
We signed leases recently with [film producers Harvey and Bob] Weinstein, the Guggenheim Foundation, and Workman Publishing. We also just signed a lease with WNYC public radio for 75,000 square feet, which is a large tenant, so that is significant for them and us. The neighborhood is really becoming a beehive of creative activity.
Hudson Square also has some of the lowest retail rents in Manhattan. What are your plans for retail in your properties?
We don’t look at retail as how we can get the maximum rent. We may be unique in that all our properties are concentrated in a neighborhood and we can influence the appearance of the entire area. We are trying to see how we can use it for neighborhood building and make the area one of the most exciting areas in New York. We are developing a strategy, but we are still in the beginning stages.
Retailers are also paying more attention to Hudson Square now. The growing residential population on the perimeter of the neighborhood is having a positive effect. There is no greater perk than to live and walk to work. It is a manufacturing zone but properties in the surrounding areas have gotten variances.
What are you doing differently than other owners to lure brokers and tenants?
I don’t know if we are doing anything differently; but I will say that Trinity in the past had a reputation of holding out for its price, but increasingly we are getting more competitive and market driven so we are in a position to attract tenants that we wouldn’t have in the past.
Douglas Durst
Co-president, Durst Organization
Bank of America last month signed a lease for an additional 520,000 square feet of space at the Bank of America tower you are building next to Bryant Park. That increases its stake to 77 percent of the space in the building, up from 53 percent. What were the rent levels like for the lease and have you signed $100-per-square-foot leases in the building yet?
I really can’t discuss specific rents yet. But we certainly will be achieving the $100 per square foot on the upper floors, the floors that are available now. The encumbered floors are 42 through 50. We’re in talks with tenants in excess of $100 a square foot.
With the Verizon Building at 1095 Avenue of the Americas across the street being renovated as all-glass, and several other properties in the area being renovated, what will the area be like a few years from now?
We believe it will be its own sub-district just as the Plaza is a sub-district and will compare very favorably to other Manhattan submarkets. We think it will be the most desirable location in the city.
What are your most notable plans for your properties right now and why are they significant?
We are installing a communication system in all our buildings that will allow first responders to communicate throughout the building in case of an emergency. We are working closely with the Fire Department to create the program.
David Kaufman
Vice president of leasing, Trizec Properties
Leaving aside Lower Manhattan, what does the tightening office market throughout Manhattan mean for your properties?
Our properties in Midtown remain close to fully occupied with asking rents rising 10 to 15 percent over where they were the last year. Our properties overlooking Bryant Park are doing very well. The Grace Building is 99 percent leased and 1065 Avenue of the Americas is 95 percent leased with tenants including Yahoo! and Pace Advertising.
What are you doing differently than other owners to lure brokers and tenants?
We are just about to hit the six-month anniversary of our national program of paying 100 percent of brokerage commissions at lease signing. We’re able to pay most commissions within 48 hours following lease execution. We have also attempted to simplify our lease document and leverage our in-house regional counsel to streamline the leasing process. Closing a deal quickly translates into savings for owners.
Energy is the third largest budget line item in commercial real estate operations. We’ve made significant strides in controlling expenses and have seen more than a 16 percent reduction across the portfolio in energy consumption.
What are the biggest obstacles or problems you face right now?
Our largest opportunity is at Newport Tower in Jersey City. As the market continues to tighten in Midtown, I think companies will seek opportunities in the more challenged markets, such as Lower Manhattan and Jersey City. We’ve hired Cushman & Wakefield as our agent and will be unveiling a new marketing center in May.
Kent Swig
President, Swig Equities
What is your outlook on the market?
I am a very big proponent of building large office spaces Downtown, which brings tenants Downtown. When you build an aircraft carrier, you have to have the PT boats and the fuel and equipment boats. These big tenants need lots of support and what is lacking Downtown is the availability of big, high-quality office space. Downtown needs the big development that [Larry] Silverstein is going forward with. I think it’s very important to build the World Trade Center out with large office space.
There are only three major high-rises available with 500,000 square feet of tenant space in Midtown — the New York Times headquarters building, the one that the Durst Organization is building for Bank of America [One Bryant Park], and 522 Fifth Avenue. The lack of space is a real problem for tenants and will drive them Downtown.
What are the biggest obstacles or problems you face right now?
In the entire Downtown market, the problem is the lack of progress on the PATH station hub and memorial. The Port Authority has to get it together. The memorial needs to be built. Nobody has a problem with a building that has an empty lot next to it; 500 Fifth Avenue never had a problem with tenants because of the corner lot being empty. But if the entire Bryant Park was a hole in the ground sitting there, no one is going to rent there. The public sector should put their house in order before they start criticizing the private sector.