Look for Class B and C office space on Manhattan’s West Side to be the next hot market for commercial real estate investors, thanks to an anticipated rezoning that would bring more office space and higher rents to the area.
The City Planning Department’s proposal for the rezoning of the Garment District, expected to be announced in a few weeks, will allow for more Class B and C office space in the area bounded by 35th and 42nd streets between Fifth and Ninth avenues.
That could lead to an end to the good deals for companies leasing space in the area. It could also push building sales as investors buy properties to renovate and fill with new tenants.
“That’s the most sought-after area and product type today for sales,” Adelaide Polsinelli, senior executive broker at Besen & Associates, said. “With all of the rezoning of the Garment District, it is the final frontier of deals.”
Brokers say the short walk to Penn Station, Grand Central Station, the Port Authority Bus Terminal and stops for most subway lines make the Garment District and its fringes a convenient location for many businesses. While the area has been in demand, current zoning restrictions deter office space and favor garment manufacturing.
Erik Schmall, corporate managing director at Studley, said that tenants are currently at a disadvantage in terms of how much space they can lease and the types of spaces they can put together. The potential rezoning, which City Planning Director Amanda Burden mentioned at a Crain’s breakfast in February, will allow tenants to create more business-friendly layouts in side-street buildings.
The rezoning effort still has to work its way through the city’s land-use process, and it may encounter opposition from organized labor. Union representatives for the garment industry have promised to fight the possible changes, but brokers are optimistic about the eventual transition of the neighborhood.
Schmall noted that restrictions on office space have not previously curbed rising rents in the neighborhood. Since the end of the last decade, prices have gone from the high teens and mid-twenties per square foot to between $30 and $50 a square foot. Following rezoning, brokers are estimating a jump to $50 a square foot as a base price. That would make prices competitive with Class B space in Midtown, which is going for roughly $45 to $55 a square foot. Class A space in Midtown is leasing for between $85 and $100 a foot.
“The whole thing is going to change quickly,” said David Levy, co-owner of Adams & Company. “It will free up a lot of owners to do things with their property that they couldn’t do before.”
Vacancy rates for the area are estimated at about 4.4 percent.
Currently the neighborhood has approximately 3.5 million square feet of class B and C office space, according to Levy. Schmall said the owners of 1333 Broadway want to reconfigure it and increase rents as current leases expire. He said he expects other building owners in the area to do the same.
Brokers are predicting investors will combine properties in order to build new buildings, as well as renovate existing buildings.
“It has lagged behind,” Matthew Astrachan, executive vice president at Cushman & Wakefield, said, describing the area as a new major commercial epicenter. “There are great opportunities on the side streets.”
With the changes and investment opportunities in the neighborhood, Astrachan said that the low prices could be a thing of the past in a few years, and the neighborhood could be competing with Midtown, especially if new buildings come online in the wake of any rezoning. He cited the New York Times Building as an example of how formerly fringe areas have benefited from the tight Midtown market.
“Two to three years ago, if you told me that someone would sign a lease for $100 a square foot on the top of [the New York Times Building], I would have been surprised,” he said.
The possible rezoning has sparked political fireworks and some backtracking.
Burden’s spokeswoman has stressed that her comments were in response to a question at the breakfast and that the matter is still under study in her department. Any rezoning would still have to be reviewed and approved by community boards, the City Planning Commission and the City Council before it takes effect.
“With Bloomberg in power, we have a better chance than before, since he has been real estate focused,” Polsinelli said, noting that the mayor has advocated for creating more office space citywide. Burden’s spokeswoman said that the City Planning Department has been working with economic development officials in planning more commercial zoning changes across the city.
While the focus is on office space in the West 30s and 40s in the wake of Burden’s comments, Schmall said that the garment industry should not be considered dead in New York. He said the area remains the best space in Manhattan for garment showrooms and that they will most likely fight to stay in the area.