What Third Avenue foretells about the future of New York offices

In New York’s office market, a couple of blocks can make all the difference between thriving and surviving — or not surviving. 

Such is the case on Third Avenue, where availability is over 20 percent. A few blocks away, on Sixth and Park avenues, average availability is 11 to 12 percent, just a point or two away from a healthy equilibrium. 

Third Avenue office owners are trying everything to keep their properties afloat. Some have turned to expensive renovations to entice tenants, while others have looked to residential conversions. A couple have pivoted to niche markets, such as health care. Others have maintained healthy occupancy by embracing the role of “value play,” and offering more affordable rents than those on Sixth or Park. 

These landlords are fighting to avoid another fate: default, foreclosure, or handing a building to the lender. 

“Third Avenue is a kind of microcosm of the Manhattan market, where all of the different strategies are being played out in this one corridor,” said Frank Wallach, a managing director of research and business development at Colliers.

An aging neighborhood

Third Avenue has been harder hit than its neighboring Midtown corridors (between 40th and 59th streets) by the shift to remote work. But its problems began decades ago. 

“Third Avenue has always been a value play corridor,” Wallach said. “This is a story that has been going on for years.”

It begins in the post-war years, when rising demand for office space first drove developers to Third Avenue. Within 20 years, a new office corridor had arrived. But the avenue’s relative distance from Grand Central — compared to historic powerhouses Madison and Lexington — made it a second-tier workplace destination from the beginning. 

Now, those Third Avenue offices are aging. Even the nicest of them can’t stake a claim upper-tier Class A status, making them the victims of the city’s recent flight-to-quality.

Before the pandemic, that meant lower rents and slightly higher vacancy. But now, it means much higher vacancy. In mid-2022, Third Avenue had an availability rate of up to 29 percent. That was higher than Manhattan’s overall average at the time, and a far cry from Midtown’s average of 16.4 percent. 

Renovations

The most obvious play for a landlord of an aging tower is a renovation. The reasoning is simple: Class A buildings, even those with less-than-ideal locations, have far outperformed their aging peers. 

Third Avenue landlords have looked to the success of larger Class A Midtown buildings, which have installed amenities as models. “A lot of these buildings need major upgrades and renovations to older products to compete,” Wallach said.

The best example of such a play is at the Durst Organization’s 825 Third, where a $150 million renovation wrapped up last year. 

The firm has 137,000 square feet of space listed for lease on the property’s website, though about 10 percent of it won’t become available until later in the year. That would place direct availability at about a quarter of the building’s office area. Still, it has had success luring new tenants recently. 

Solar developer Dimension Renewable Energy signed a lease in February for an entire floor. The asking price was $88 per square foot, according to Commercial Observer. That would place its rents near the top of Third Avenue, where average asking rent is $66.

Across the street at 850 Third Avenue, HPS Investment Partners is looking to make the same move. The firm was one of two recipients of the city’s recent M-CORE program, which will extend a $58 million tax break in exchange for a $60 million renovation.

Even the most ambitious renovation won’t be enough to draw tenants from Midtown’s best offices. But it can draw them away from competitors on Third Avenue, or those Downtown, where rents are more comparable. 

Conversions

Lower Manhattan may be the epicenter of office-to-residential conversions, but there are several potential conversion plays along Third Avenue, too. 

The most ambitious plan belongs to SL Green, which announced its intentions to convert 750 Third Avenue during an investor call in December. 

In 2019, the tower was 92 percent occupied. Now, it’s almost entirely empty, and the firm hopes to convert the entire property.

“We are preparing the building to be the shining example for office-to-residential conversions,” said Robert Schiffer, managing director at the firm, at a December investor call.

The project is fraught with many of the same challenges facing other conversions. 

The developer will have to remove a massive block of the building to create legal light and air for units on the larger lower floors. Floor use efficiency on those floors will average 70 percent. 

Such drastic changes are expensive, though, and SL Green said the project does not make sense without a property tax break, given the high property taxes on rentals.

“Even a full market conversion does not pencil,” Schiffer said. “But we can create market housing here and affordable housing generating attractive returns with a full tax abatement.”

SL Green isn’t alone in looking for such help from the state legislature. Bill Rudin is doing the same at 845 Third. 

Rudin Management built the tower in the early 1960s, but falling occupancy has pushed the firm to consider other options. A conversion won’t pencil out without a tax break. 

“You have to be patient,” Rudin said in an interview. “See where the world goes, see what happens up in Albany, see what happens with interest rates.”

Health care pivot

While major office leasing industries including finance and law have shifted away from Third Avenue, others have moved in to take some of that space.  

“Third Avenue is a very interesting example of buildings being able to attract the new and growing industries that did not have a major foothold in the office market previously,” Wallach said, pointing to health care in particular. 

It’s not just office leasing. Memorial Sloan Kettering shocked the real estate world in 2022 when it purchased half of 885 Third — the famous Lipstick Building — for $300 million. MSK turned the building into a major hub for its administrative and research staff, rather than a traditional health care facility. The space was previously home to law firm Latham & Watkins, which moved to Sixth Avenue in 2021. 

MSK also leases space across the street at 165 East 52nd, home to an outpatient facility. At 777 Third, the Hospital for Special Surgery holds a lease for 99,000 square feet. 

These health care facilities aren’t targeting Third Avenue. Rather, the corridor has benefited from shifting leasing trends in that industry. 

“There’s been a massive increase in health care office leasing in large blocks of central business districts. Third Avenue has captured some of that,” Wallach said. 

That isn’t the only niche market in the corridor, though. Some Third Avenue offices have found a niche catering to government tenants, thanks to their proximity to the United Nations headquarters.

Buildings like 666 and 633 Third, in particular, have made a living off these occupants. Consulates for Denmark, Jamaica, Liechtenstein, South Africa, the Netherlands, Finland, Switzerland and Uruguay all have homes on Third Avenue. Many of them own office condos, rather than renting. UNICEF and Gov. Kathy Hochul also have offices in the corridor. 

Value play

Even as some office landlords try new strategies to win over tenants, some have embraced the role of the value play by offering lower-than-average rents. 

Third Avenue’s average asking rent is $66 per square foot, making it closer in price to Downtown ($58 psf) than Midtown ($79 psf). 

According to Wallach, that makes it “very much a value play compared to the rest of Midtown, and competitive with other areas of Manhattan.”

Many of the properties that have succeeded with this play have completed renovations in the last 10 to 15 years, or were built after the construction boom of the ’50s and ’60s.

Global Holdings’ 875 Third falls into the latter category. Built in 1982, the building has maintained solid occupancy throughout its history. The 665,000-square-foot tower has just 43,000 square feet of direct availability, placing occupancy at 93.5 percent. 

Asking rents at the property reportedly range between $65 and $75 per square foot, above the neighborhood average, but still well below other avenues. 

Then there’s Fisher Brothers’ 605 Third, nestled between Grand Central and the UN. The building has historically been among the healthiest on the avenue, and direct availability sits at about 5 percent. As of 2021, average rent there was just below $65 per square foot. Its tenants include the United Nations Population Fund and diplomatic missions for Turkey and Japan.

Whether any of these strategies can save Third Avenue’s office market remains to be seen. But they won’t only play out on that corridor, industry insiders say.

“These are not just Third Avenue trends,” Wallach said. “They’re things that you can see in many areas of the market.”