City planning through a pandemic

Floor by floor, construction workers are dismantling JPMorgan’s 52-story office tower at 270 Park Avenue. And while their work represents the largest intentional demolition in New York City’s history, it has come to signify much more than that.

City officials have hailed the replacement of the more than 60-year-old tower with a new glass and steel headquarters for the banking giant as the culmination of years-long planning. And preservationists have condemned it as the wasteful destruction of a recently renovated building.

Now, in the wake of a devastating pandemic, the former Union Carbide building is also a symbol of mounting uncertainty.

Way back when, I thought Midtown East was a great model. [Now] I think of 270 Park, and JPMorgan Chase tearing down that building for something even larger, when a lot of their people are going to be working from home.
Peg Breen, Landmarks Conservancy

The spread of coronavirus has pushed companies, including Twitter and Facebook, to rethink their physical office footprints and consider letting employees work remotely long-term. JPMorgan has even floated having employees rotate working from home after the pandemic subsides.

At the same time, the bank is moving forward with its plans to build a new 2.5 million- square-foot headquarters on Park Avenue, which is more than 1 million square feet larger than its existing tower and is intended to accommodate up to 15,000 employees.

And the massive project is part of an even larger goal: The surrounding neighborhood was rezoned in 2017 with the explicit aim to create 6.5 million square feet of new class A office space over the next two decades.

“Way back when, I thought Midtown East was a great model,” said Peg Breen, president of the Landmarks Conservancy. “[Now] I think of 270 Park, and JPMorgan Chase tearing down that building for something even larger, when a lot of their people are going to be working from home.”

Several monumental events of the past three months — from the global health crisis and strict shutdown orders to forecasts of a long-term economic fallout — have raised questions about the future of office markets across the country. Of course, landlords, developers and their brokers remain optimistic that tenants’ retreat from physical office space will be short-lived, that the lure of company culture and visible brand identity will ultimately win out.

But the pandemic, which underscores the innate risk in relying on specific asset classes and tenant types to transform a neighborhood, could reshape how cities work to encourage new development in the future.

“This is a situation where we can’t afford the regulations to lag behind the market,” said Mitch Korbey, who chairs the law firm Herrick Feinstein’s land use and zoning group.“We need to be sure that as we come out of this crisis, we’re aggressive and creative.”

Density dilemmas?

On paper, the rezoning of Midtown East could be seen as disastrous — if read solely in the context of the pandemic. The zoning change banked on demand for massive new office towers, with proximity to Grand Central Terminal serving as a main selling point.

But some believe the ongoing spread of coronavirus, which has started to subside in recent weeks, will have few long-term impacts on development in the district.

“The goals of the rezoning are still spot on,” said Dan Garodnick, the former New York City Council member who shepherded the district’s rezoning through the land use review process.
“People are social animals, and I expect there will still be demand for commercial space. But perhaps with slightly different design parameters to accommodate the moment.”

The rezoning incentivized tearing down the neighborhood’s aging office stock, while also requiring improvements to nearby infrastructure and the creation of more public space. The city projected that the creation of 6.5 million square feet of new office stock would take two decades to come to fruition.

That timeline could play in the neighborhood’s favor.

Former Department of City Planning chief Carl Weisbrod said New York’s office market may be in a fluid state for the next year to year-and-a-half. “In the short run, there’s going to be a hiccup for sure,” he said.

But Weisbrod, who’s now a senior advisor at the real estate and economic development consulting firm HR&A, added that the city has historically recovered from crises “surprisingly well and in new directions that we haven’t anticipated.”

He said he also thinks Midtown East is especially well positioned. Within less than a year of the rezoning, JPMorgan announced that it would tear down its headquarters. The bank received approval in late May to demolish down to the 41st floor of the building, according to the DOB.

At least three other massive office projects, including developer Harry Macklowe’s planned 1,556-foot-tall skyscraper at 5 East 51st Street, have been announced since. Macklowe didn’t return requests for comment on the project.

RXR Realty, which is planning a $3 billion office tower near Grand Central with TF Cornerstone and MSD Capital, has continued discussions that started before the pandemic with tenants in the technology and finance sectors who are interested in anchoring the property, CEO Scott Rechler said. The project isn’t expected to be delivered until 2026.

Still, until there’s a vaccine for Covid-19, many employees will continue to avoid mass transit and employers may not be eager to upgrade to larger spaces when they can only operate at 50 percent capacity.

In the short term, as construction sites begin to reopen, owners of projects that haven’t started or were early stages of development will have to carefully consider if and when they can restart work, said Linda Foggie, senior vice president and head of Turner & Townsends’ New York office.

But longer-term, the crisis could change how developers and planners think about density. Tenants will likely need more office space per employee, reversing the trend of cramming workers per every 125 square foot, Rechler said. For larger, well-funded companies that could mean a bigger footprint, with some employees working remotely. For less-established businesses, it could translate to a smaller workforce.

More than ever, planners should be thinking about how to build out other regions with access to mass transit, Rechler said.

“We need to densify where density belongs,” he said. “Sprawling is not the outcome you want to have.”

By design

I feel even more strongly that that is a flaw in the Midtown East rezoning, and it’s one we should revisit. Midtown East should adopt the goal of creating a truly mixed-use neighborhood.
Mary Ann Tighe, CBRE

Long Island City and Downtown Brooklyn were rezoned to spur commercial development, but instead resulted in condo towers that far outnumbered new office space. Midtown East already has the built-in infrastructure and surrounding residential communities to accommodate office growth, Weisbrod noted.

“Could growth be delayed somewhat because of what has happened over the past three months? Yes, I think that’s a real possibility,” he said. “But I think the fundamentals are very strong.”

Mary Ann Tighe, CEO of CBRE’s New York tri-state region, said she doesn’t believe there’s any danger of office development in Midtown East outpacing demand. She argued that tenants will likely favor new office buildings post-Covid due, in part, to large open floor-plates and better air quality.

But the pandemic highlights the rezoning’s singular focus on office use. Tighe said air rights in the district should be made available for some residential space.

“I feel even more strongly that that is a flaw in the Midtown East rezoning, and it’s one we should revisit,” she said. “Midtown East should adopt the goal of creating a truly mixed-use neighborhood.”

Outside Manhattan, Korbey said, the pandemic has emphasized the need for more mixed-use development, specifically more flexibility in zoning regulations in residential districts in the outer boroughs to allow for other uses.

Former Deputy Mayor Alicia Glen argued a similar point and said the city needs to focus more on building out a five-borough economy, through actions like the rezoning of Gowanus in Brooklyn. “These are long-term plans that require consistent political leadership and being responsive to what’s happening on the ground,” Glen said during a recent video panel hosted by The Real Deal.

“Stopping spending on housing or schools or not moving forward with things like Sunnyside Yards would be incredibly irresponsible in respect to a long-term plan for recovery,” she added.

Breen said she’d like to see some of the existing, older office buildings in Midtown East repurposed for housing and other uses.

“I know they wanted it to be a business district, but look at Lower Manhattan,” Breen said. “There’s plenty of business, but there’s also plenty of residential. Nobody could’ve seen that happening.”

Forever bullish

Plans to transform a neighborhood often hinge on the arrival of powerful brands.

Amazon’s planned headquarters in Long Island City, though ultimately abandoned, set off a year’s worth of speculation over how a single company could dramatically alter housing, transportation and demand for commercial space.

Twitter’s headquarters in San Francisco attracted other tech companies and inspired residential development in an otherwise vacant and blighted area. Condé Nast’s move to One World Trade Center in 2011 is considered the catalyst for a wave of so-called TAMI (technology, advertising, media and information) tenants migrating to Lower Manhattan — previously considered the exclusive domain of financial firms.

So, when Big Tech companies announce dramatic changes in their office plans, it sends shockwaves through the commercial real estate industry. Though commercial landlords and brokers have dismissed the idea that such announcements pose an existential threat to physical office space, many acknowledge that more businesses are warming up to allowing their employees to work from home part-time.

“I think people will work differently,” Rechler said. “This becomes more likely a scenario where people know that they can use technology.”

Ultimately, though, he and others believe most professionals will still want some face time in the office, giving companies a reason to keep their space. Recent leasing activity also shows promise for the office market once the pandemic subsides.

Late last month, TikTok committed to taking more than 230,000 square feet in the Durst Organization’s One Five One tower in Times Square. Facebook also still seems poised to lease 740,000 square feet at the renovated Farley Post Office. Downtown Alliance President Jessica Lappin said she was encouraged by the news that Uber affirmed last month that it still planned to move into 3 World Trade Center, despite company layoffs and office closures throughout the country.

“I don’t think people will want to work permanently from home,” she said. “Setting aside productivity, it’s hard to build culture, it’s hard to build teams if no one meets in person.”

Downtown Brooklyn could see an uptick in interest, as company’s look to shorten commutes for their employees, said Ted Koltis, president of Colliers International’s eastern region. But he views the push to work from home a temporary feature of the city’s office market.

“Companies chose to be there because the brand of the company is tied so strongly to where they are,” he said. “If they don’t have a physical office footprint, there is something lost.”

Ariel Property Advisors’ Howard Raber said an important thing to watch will be rent rates: If office rents drop in Manhattan, that could negatively impact demand in the outboroughs. Lower rents in Brooklyn and other areas outside have been a major draw for businesses opting out of Manhattan.

Investment in housing and economic development over the next fews years will be crucial, Dan Doctoroff, CEO of Sidewalk Labs, told TRD this month.

“I’m pretty optimistic, assuming we don’t blow it over the next several years, and do not make these investments, watch people leave because the quality of life declines, and we don’t give people confidence in the future, and then we’re in bad shape,” he said.

“The risk is over the next several years where we’ve got to inspire confidence in the future of this city, and we’ve got to retain people to the extent that we can,” Doctoroff added.

Write to Kathryn Brenzel at kathryn@therealdeal.com.