With a 6 percent commercial vacancy rate in Manhattan and a scarcity of large blocks of space, big companies that want to expand are currently creating office campuses rather than using a single building for their headquarters.
“We’re seeing it. There are two scenarios: the space crunch, and also some price point concerns,” says William Elder, senior vice president at SL Green Realty Corp.
Of course, some of Manhattan’s largest office tenants already have campuses. These players include Pfizer, which occupies some 2.44 million square feet among several buildings it owns or leases, including 235 East 42nd Street, 205 East 42nd Street, 685 Third Avenue, 150 East 42nd Street, 219 East 42nd Street and 605 Third Avenue.
Financial services firms, in particular, have undertaken the campus strategy in prior years. JP Morgan Chase, for example, owns or leases roughly 12.3 million square feet of commercial and retail space in the city, according to the company’s Securities and Exchange Commission filings. These locations include the 1.3-million-square-foot, 50-story bank and office building JP Morgan Chase owns at 270 Park Avenue, as well as offices at 277 Park Avenue and 245 Park Avenue.
What’s different now, say brokers, is the severe lack of availability as Wall Street firms come off a robust 2006 and are in growth mode. According to Cushman & Wakefield, at the end of last year tenants in search of a block of space over 250,000 square feet in size that was available within six months had only three choices in Midtown, one in Midtown South and five in Downtown.
The situation has not improved in 2007. And this dearth of space comes as finance and insurance employment in New York City grew 2.1 percent in December 2006 compared to the prior December, according to New York State Department of Labor statistics.
Typically, companies searching for 250,000 square feet or more turn to the campus solution. But now brokers say the Manhattan space crunch has grown so extreme that smaller companies, especially law firms, are starting to explore the campus strategy.
Law firms go campus
Recent examples include Sidley Austin, which just signed a deal for 90,000 square feet at 1251 Sixth Avenue. The company also operates an office at 787 Seventh Avenue, a couple of blocks away.
The new space had an asking rent of $100 per square foot, and Sidley reportedly closed the deal at $90 per square foot.
Gus Field, executive vice president at Cushman & Wakefield, says he has been meeting with law firms that are interested in moving non-income-producing functions out of Class A buildings and into lower-cost space.
SL Green’s Elder is also seeing this trend. “Just given lack of available space and low vacancy rate I would say we’ve been seeing much more of it and from smaller size firms, law firms,” says Elder. “The last 12 to 18 months there’s been a bigger pickup in that kind of activity.”
Pros and cons
Operating an office campus can provide clear benefits for a large firm. It’s a lot cheaper to expand to Class B space than to pick up more Class A space. Also, in post-Sept. 11 New York, many companies are leery of having all their employees gathered in one location because of safety and security concerns.
While companies like the prestige of one big headquarters, brokers say it can lead to big headaches. New construction takes time, as both the New York Times and Hearst can attest, and it can be astronomically expensive in today’s market. Obviously, building a large showplace is not an option for a small law firm. In addition, a large headquarters can be an albatross during an economic downturn.
“Whatever you find to be the most expendable portion of your campus, you can get rid of it,” says Neil Goldmacher, a principal at Newmark Knight Frank. “The worst thing that can happen is you build one monstrous headquarters and have to cut back, and all of a sudden you have a third party in your headquarters building.”
Still, there are downsides to the campus strategy. Employees can feel like second-class citizens if they work in a location with lesser-quality amenities than the main headquarters. Having multiple offices also means paying for multiple mailrooms and other services, including security. In addition, staffers may waste time trekking from one space to the next, especially if the campus is not highly concentrated.
“No question, there are inefficiencies that come with the territory,” says Cushman & Wakefield’s Field.
Next up?
Yet the tight office market means more companies are expected to create office campuses or add to existing ones. Lehman Brothers, for example, has reportedly been closing in on a sublease deal for 1271 Sixth Avenue for about 400,000 square feet. If completed, this deal would expand the company’s campus in that neighborhood. Lehman already has an office at 1301 Sixth Avenue, two blocks from its headquarters at 745 Seventh Avenue.
Bear Stearns, also using the campus strategy for a total of 350,000 square feet at two sites in Midtown, is expected to add more space. The firm is reportedly close to a deal that will expand its 148,000 square feet of space at 237 Park Avenue by 107,000 square feet, adding to the 90,000-square-foot site it has at 320 Park Avenue.