The big office space shuffle

With major tenants opting for new buildings, a slew of office towers look to fill big empty blocks

From left: 225 Park Avenue South, 4 World Trade Center and Douglas Durst
From left: 225 Park Avenue South, 4 World Trade Center and Douglas Durst

An array of Midtown’s large office buildings are working to backfill mega-blocks of space slated to be left vacant when tenants with hundreds of thousands of square feet move out. And they’re doing so on the precipice of a supply boom the Manhattan market has not seen in a quarter of a century.

The challenge comes after several years during which office buildings have been essentially shuffling the deck as large tenants’ leases rolled over.

“Basically what you’ve had is a lot of moving around in Midtown recently,” said Peter Kozel, a principal and consulting director at commercial brokerage Cresa, which represents tenants.

“When you look at it, you don’t really have any net absorption of space in Midtown,” Kozel said. “The availability rate has been basically flat for the last year and a half.”

Indeed, Midtown’s availability rate — which measures space available or that will become available in the next 12 months — dropped only .6 points to 11.8 percent in 2014’s first quarter year-over-year, according to Colliers International.

Meanwhile, a flurry of high-profile lease deals in the past few years have drawn tenants to new projects in Lower Manhattan and the Far West Side.

Time Warner’s plan to leave its eponymous tower for Hudson Yards and Condé Nast’s imminent move from its Times Square headquarters to One World Trade Center are just a few examples of office space swaps filling floors in one building at the expense of another.

In addition, the office-building boom means there will be more new projects luring in mega-office tenants, who will in turn be exiting more space. Over the next four years, 12 million square feet of new office construction will be delivered to the Manhattan market, according to Cushman & Wakefield, with more than 6.5 million square feet coming online this year — the most in a year since 1989.

In the case of a tenant that’s locked into a long-term lease at the bottom of the market, a rollover can present a landlord with the opportunity to secure a higher-paying tenant. But when a giant tenant leaves, it can also be a pressure-filled situation for the landlord, who has to lure in one of the few mega-tenants on the hunt for space, a process that can sometimes take several years. Illustrating those high stakes, late last month, the Durst Organization and the Port Authority of New York and New Jersey dropped the asking rents below the 65th floor at One World Trade Center from $75 a square foot to $69, citing a weak market and robust competition.

Deals signing tenants to hundreds of thousands of square feet are typically done years in advance, and only time will tell how Midtown’s aging office towers will fare against the new competition, Kozel said.

“We’re kind of in a period where we haven’t really seen the impact of these big-space users moving,” he said, explaining that only some of the new product has been put on the market so far. “It’s something that’s going to be happening over the next two years.”

Below is a look at how some towers with large vacancies are positioning themselves to lure new tenants.

4 Times Square

Three years after Condé Nast inked a deal to anchor One World Trade Center, Durst has yet to find a taker for the magazine publisher’s approximately 817,000-square-foot space at 4 Times Square — roughly half of the building.

Condé signed a lease in 2011 for 1.2 million square feet at One World Trade Center. The Port Authority is the majority owner of the trade center building, but Durst has a small stake in the tower and helped to negotiate the deal.

As part of the negotiations, the Port Authority agreed to assume the remainder of Condé’s Times Square lease, which runs through April 2019. The Port Authority will also share the costs of marketing the space as well as improvements made for the new tenants.

With Condé slated to move Downtown later this year, Durst is showing the 4 Times Square space regularly, a company spokesman said.

At a relatively young 15 years old, the tower is undergoing only minor upgrades and is in large part being shopped to potential tenants as is.

“We’re now in the process of backfilling their space. Obviously, at 800,000 square feet, there are only so many” potential tenants, said Durst’s head in-house broker Thomas Bow, who oversees the company’s 13-million-square-foot Manhattan office portfolio. “It’s certainly kind of like musical chairs. We’re all out there competing for the same tenants at the end of the day.”

Asking rents for Condé’s space, which occupies the fourth through 23rd floors, are in the $85- to $95-per-square-foot range, Bow said. Condé was paying around $75 a square foot, though that price was based on economic incentives provided to the anchor tenant that are no longer available, Bow said.

The block will be available early next year, by which time Durst could be looking at replacing the 1.8 million-square-foot building’s other large office tenant: Skadden, Arps, Slate, Meagher & Flom. The international law firm has more than 640,000 square feet on a lease expiring in 2020, according to real estate database CoStar Group.

Skadden reportedly issued a request for proposals earlier this year seeking 450,000 square feet of space. Among those receiving the RFP, according to the New York Post, were Silverstein Properties, developer of four towers at the World Trade Center site, and Brookfield Office Properties, which is building Manhattan West in Midtown and repositioning the former World Financial Center in Lower Manhattan, now known as Brookfield Place.

Skadden did not respond to a request for comment.

Time-Life Building

For the first time since it was built in 1959, the Time-Life Building at 1271 Avenue of the Americas will be repositioned as a multi-tenant building. In a little more than three years, its namesake leaseholder will decamp for Lower Manhattan, leaving nearly 2 million square feet empty in Rockefeller Center.

The Rockefeller Group, the building’s owner, plans to overhaul the iconic building following Brookfield’s announcement last month that it signed Time Inc. to a 700,000-square-foot lease at 225 Liberty Street, which is part of its five-building Brookfield Place campus.

Time occupies almost all of the 1.97 million square feet in the 47-floor Rockefeller Center tower.

Sign Up for the undefined Newsletter

In a statement to TRD, the Rockefeller Group said Time’s decision to move was not a surprise and that it would undertake a “major capital improvement program” to reposition the tower as a “multi-tenanted building.”

“Given Time’s lease runs through 2017, we are looking forward to the opportunity to renovate and bring to market approximately 1.9 million square feet of some of Manhattan’s most efficient and well located office space,” the statement said.

Brookfield’s Downtown coup was the latest move in its campaign to fill the gaping hole left by Bank of America/Merrill Lynch, which opted not to renew its long-term lease in October.

Amid a $250 million upgrade of the campus’ retail and common spaces scheduled to wrap up next year, Brookfield said 3 million of the 4.2 million square feet left behind by the bank’s departure is now re-leased. Brookfield officials said 60 percent of the square footage leased in the last 18 months has come from companies relocating from Midtown and Midtown South.

In November the company signed law firm Jones Day to 330,000 square feet at the complex’s 250 Vesey Street.

The law firm will consolidate space spread out across three properties, including its headquarters at 222 East 41st Street, where it is the largest tenant in the 390,000-square-foot property.

That building’s owner, Columbia Property Trust, did not respond to a request for comment.

225 Park Avenue South

Another landlord looking to fill a giant hole is Orda Management, which will have a nearly empty 225 Park Avenue South on its hands when the Port Authority leaves behind some 377,000 square feet later this year as it heads to 4 World Trade Center.

Newmark Grubb Night Frank is already shopping about 480,000 out of the total 506,365 square feet combined at 225 and 223 Park Avenue South. Orda plans to connect the two adjacent buildings with an interior staircase and upgrade them in the hope of landing tech, media, advertising and information tenants, often collectively referred to as TAMI firms.

Newmark would not comment on what the Port Authority was paying, but said Orda is asking for rents in the mid-$80s.

“To a certain extent, a lot of these older buildings are very much in demand,” with tech tenants, said Newmark’s Brian Waterman. (Other than the tech giants, many companies in this world seek out Class B office space because they prefer the character of older buildings. However, some said that they may sign on for older space simply because it’s more affordable.)

Waterman said he is targeting tenants from Fortune 500 companies to smaller tech and media firms, citing Sony’s decision to move from the building that bears its name at 550 Madison Avenue for the Art Deco 11 Madison Avenue, built in 1932, as a case study in demand for older buildings.

“To a large extent, a lot of tenants are looking at these types of headquarters buildings,” he said, “not necessarily glass and steel.”

Sony sold its building to the Chetrit Group last year for $1.1 billion and signed a lease for nearly 548,000 square feet at 11 Madison.

75 Rockefeller Plaza

Scott Rechler’s RXR Realty is starting from the ground up at 75 Rockefeller Plaza. The company is shopping for tenants to fill its entire 623,000-square-foot building, which will be empty once Time Warner’s master lease at the 33-story tower rolls over in July.

RXR signed a 99-year leasehold last year with the building’s owner, Egyptian billionaire Mohamed Al Fayed, and will shell out more than $100 million to reposition the property for higher rents.

“It’s a major renovation of the asset, well in excess of $130 million in capital improvements,” said William Elder, RXR’s executive vice president and managing director of its New York City division. “Basically there won’t be anything remaining except for the façade, which has landmarked status. New windows, soup to nuts. It’s going to be a full redevelopment delivered to market for tenants up and running for the first quarter in 2016.”

Time Warner left the building in the early 2000s when construction on its Columbus Circle headquarters was completed. The company has managed the Rockefeller Center property since 1993 and subleases to a number of tenants, including the Warner Music Group, which last year inked a deal to take 288,250 square feet two blocks west, at the Paramount Group’s 1633 Broadway.

Warner Music was paying rents at Rockefeller Plaza in the $40s, according to news reports. Elder said it was premature to talk about asking rents, and added RXR is eyeing large tenants whose leases are expiring in competitors’ buildings before focusing on signing smaller leases.

“We’re in the market right now targeting larger tenants. It will be a bit of time before we can start the renovation, which will take 15-plus months,” he said. “The planning stage for a move of multi-hundred-thousand-foot occupancy by requirement is something that takes years to plan for. It’s not something that just happens overnight.”

1155 Avenue of the Americas

Another Sixth Avenue property that will have a large void on its hands is Durst’s 790,000-square-foot tower at 1155 Avenue of the Americas.

The building’s largest tenant, the white-shoe law firm White & Case, signed a 440,000-square-foot lease early last month four blocks north at Rockefeller Group’s 1221 Avenue of the Americas, otherwise known as the McGraw-Hill Building.

White & Case has about 280,000 square feet at 1155, according to Costar, and the building currently has roughly 37,000 square feet available.

The McGraw-Hill Building itself struggled to replace a large tenant when the French bank Société Générale signed a deal in 2010 to decamp to the Brookfield’s 245 Park Avenue. The company signed its lease for about 442,000 square feet on Park Avenue, leaving behind a 500,000 square foot empty block before McGraw Hill landed White & Case.