CITY REVIEWS - NEW YORK

New York

By Donald R. Ciandella

New York Editor
Article courtesy of National Real Estate Investor.

Leasing and sales continue at a fast pace in New York City, following two straight years of brisk activity. The tight supply of quality office space in the strong midtown market has many users looking for alternatives in other parts of Manhattan, including the still-downtrodden downtown market. Momentum is rising on the investment side, too, led by foreign investors taking advantage of the weak dollar to grab a piece of still-seductive Big Apple real estate.

Development is part of the lexicon again, but instead of large floor plates and fiber optic cabling, builders talk about living room views and kitchen appliances. All of this activity is "80-20" development that includes an affordable housing component, and some of New York's most venerable firms are back in the fray.

While improved, the economy here is still relatively fragile. The job market improved modestly through the end of 1993 but has remained stagnant since, according to the Bureau of Labor Statistics. On the positive side, New York is home to more Fortune 500 companies than any other city.

Referring to the 20 million sq. ft. of office space leased in midtown last year, Cushman & Wakefield senior managing director David M. Gialanella says, "1994 was the best year of leasing in more than 10 years. There was pent-up demand that exploded with all types and sizes of firms making deals."

Net absorption totaled 1.6 million sq. ft. last year, and the vacancy rate fell to 14.3% at year's end from 16.4% a year earlier. The brisk activity carried over into 1995. About 4 million sq. ft. was leased in midtown during the first quarter. Gialanella says additional pent-up demand coupled with strong fundamentals should continue to drive the leasing market, which should total between 15 million and 20 million sq. ft. by year's end.

Carol Nelson, executive vice president of New York-based Edward S. Gordon, says the market has leveled off some from the robust level at the turn of the year, but it's still on the rise. She says midtown vacancies fell to 13.5% in March, and, looking at two major leases from the first quarter, adds that effective rents are up to the mid-$30s to low-$40s, with taking rents in the high-$40s to low-$50s.

Most of the available large blocks in Midtown were absorbed last year. Viacom International's lease for 464,000 sq. ft. at 1633 Broadway took the largest remaining block in midtown's west side off the market, and Alliance Capital Management's commitment for 249,000 sq. ft. at 1345 Avenue of the Americas took a large block off the Sixth Avenue market.

In the largest transaction of last year, Donaldson Lufkin & Jenrette relocated its world headquarters from downtown to 721,000 sq. ft. at 277 Park Avenue. The 20-year lease upped the overall occupancy of this Park Avenue submarket to 91%. According to Mark P. Boisi, managing director of Colliers ABR Inc., which represented the building's owner, Stanley Stahl, the building systems and common areas of the 1.6 million sq. ft. structure are being upgraded.

Firms with large requirements are looking at alternatives, and two of midtown's secondary submarkets that lagged behind the rapid recovery of midtown overall are among the beneficiaries.

"There's a ton of action in Grand Central and the Penn Station because, in part, that's where the available large blocks are," Nelson says.

Leasing in these two districts was up 40% in the first quarter, ESG says. Signed leases in Grand Central accounted for almost 25% of the 2.7 million sq. ft. leased in midtown during the first two months of the year. Vacancies in Grand Central dropped below 20% for the first time since 1993.

The largest deals in Grand Central include a 175,000 sq. ft. commitment by FCB/Leber Katz at 150 East 42nd Street and a 105,000 sq. ft. agreement by Meredith Corp. at 125 Park Avenue. To sign Meredith Corp., New York-based Newmark Real Estate, which is the agent for Sutom N.V., the owner of 125 Park, relocated or bought out 13 tenants to create a large contiguous block, gaining a 33% rental premium to the mid-$30s, Newmark executive vice president William G. Cohen says. The building is also in the midst of a $10 million upgrade.

One Penn Plaza, a building owned by a partnership of Harry Helmsley, Peter Malkin and MetLife Real Estate Investments in the Penn/Garment district, attracted two major deals, including a 114,000 sq. ft. commitment by National Health Service Employees Union. The 2.4 million sq. ft. building is about 90% leased with asking rents in the mid-$20s vs. mid-$30s to upper-$30s for comparable space in midtown. The 22-year-old high rise is undergoing an upgrade.

"Firms that haven't typically looked in this market are now because they can get a basket of concessions," adds Neil Goldmacher, managing director of Williams Real Estate, a New York-based firm that was recently appointed to sublease 100,000 sq. ft. for Digital Equipment Corp. in the 29-story Two Penn Plaza.

Tenants can still receive a year of free rent and $40 per sq. ft. in tenant improvements in the Penn Plaza district, Goldmacher says.

Midtown south has also developed into an alternative for midtown firms as well as a first choice for creative firms. This district posted its most active year since the mid-1980s last year. Leasing totaled 2.7 million sq. ft. ž a 37% increase over 1993. Net absorption totaled 1.6 million sq. ft., dropping vacancies to 12.5% at year end.

In January, CS First Boston announced its anticipated commitment for 1.1 million sq. ft. at 11 Madison Avenue. The 2.2 million sq. ft. building is owned by MetLife and is part of MetLife's two-building headquarters. 11 Madison is undergoing a $200 million redevelopment that will be finished in mid-1996.

The investment banking firm signed a 20-year lease for 16 floors and will consolidate operations from four other New York buildings starting next year. The firm, which threatened to move out of New York, received a $27 million sales tax exemption on the purchase of equipment and $17 million in employee tax credits to stay in Manhattan.

Asking rents in 11 Madison Avenue are in the mid-$20, while asking rents in midtown south on average are below $20 per sq. ft. Cushman & Wakefield arranged the lease and is marketing the remainder of the building.

Robert Shapiro, executive vice president and chief operating officer of Grubb & Ellis New York, says value is paramount. "There's little loyalty to submarkets," he says, "and firms will take space as is."

Outside of the CS First Boston transaction, however, leasing in midtown south is beginning to slow because the market's modest supply of quality space is being absorbed. As a result, rents are rising, which is dulling the discount that is drawing midtown tenants, says Paul Peress, director of commercial leasing at the New York-based brokerage firm of Walter & Samuels.

At year-end 1994, asking rents in midtown south were on average 53% of asking rents in midtown. With vacancies in submarkets like Park Avenue South/Madison Avenue at 6.4%, the spread is shrinking.

Creative firms that would never pay the rents for midtown space are also drivers of the market. The Flatiron/Fifth Avenue and Union Square area is flush with multimedia, publishing and production companies. These firms are also reviving Hudson Square, a submarket between midtown and downtown and west of trendy SoHo. According to ESG, leasing rose 32% in February from a year earlier, and vacancies dropped to 13%.

Trinity Real Estate, which controls about 6 million sq. ft. of space owned by Hudson Square's largest landlord, Trinity Church, leased 400,000 sq. ft. last year and expects to match that level in 1995.

"We're an aggressively priced midtown alternative, and we're benefiting as midtown south and SoHo fill up," says Walter F. Spardel of Trinity Real Estate.

This summer Trinity expects to finish an upgrade to its 845,000 sq. ft. flagship building 345 Hudson. Floor plates in 345 Hudson are 55,000 sq. ft., which is greater than many midtown south buildings and virtually all SoHo buildings. In addition, Spardel expects to redevelop a warehouse building on Hudson Street into 300,000 sq. ft. of office space by 1998 or 1999. He also envisions developing a parcel adjacent to 345 Hudson, perhaps into a television or film studio.

Downtown's still downtrodden

If you believe a rising tide lifts all boats, then downtown may be an ocean unto itself. But there are positive signs and a strong sense that lower Manhattan will look vastly different in five to 10 years.

The reason for the optimism is a major initiative by the Giuliani administration, which gets good marks among real estate pros here for nurturing a pro-business climate, to spur leasing and redevelopment in downtrodden downtown. The plan, which is before city council, exempts tenants that lease space in structures built before 1975 from real estate and commercial rent taxes for three years, followed by three years of reduced taxation. For investors, the plan calls for a 10-year property tax abatement on commercial buildings that are converted to residential use.

"If the initiative is passed, it will help downtown to compete against New Jersey and Brooklyn," says Steve Swerdlow, executive vice president and managing officer of CB Commercial in New York.

It could cut occupancy costs as much as $3.50 per sq. ft., George Martin, branch manager of Julien J. Studley's downtown office, says. "We are getting more inquiries, including some from midtown firms, but we're advising clients to wait," Martin says. "It hasn't passed yet and no one knows if it will be retroactive."

Some firms are still making deals. In April, New York Life Insurance Co. was reportedly close to signing a deal for 200,000 sq. ft. in One Liberty Plaza. Last year, several firms signed big deals, including Goldman Sachs, which expanded by 425,000 at One New York Plaza, Dresdner Bank's 190,000 sq. ft. commitment at 75 Wall Street and Daiwa Securities America Inc.'s lease for 125,000 sq. ft. at Financial Square.

Downtown was also buffeted last year by Donaldson, Lufkin & Jenrette's 700,000 sq. ft. relocation to midtown and the sale of Kidder Peabody, as well as defections to New Jersey by three smaller firms.

Overall, vacancies rose 20.4% by year end on leasing of 4.5 million sq. ft., The Galbreath Co. says.

In older buildings, the vacancy rate is 27.6%, CB Commercial says. Many of these buildings are not suitable for office users, says senior vice president Philip R. Sprayregen.

With investment banking firms still cutting jobs and the uncertainty of both the market overall and the mayor's redevelopment initiatives, Martin is not bullish about the last half of the year. "There's a lot of ambiguity among both tenants and landlords," he says.

Investors are back

Office building investment, which totaled more than $800 million last year, continues to heat up. The market has been primarily fueled by foreign investors, but domestic players are increasingly active.

In fact, last year's largest deal was by a joint venture of the Ohio State Teachers Retirement Systems, Edward Minskoff and Odyssey Partners, which bought the IBM building for $202 million.

"The fundamentals of the market are as strong as they've been in a long time. There's stagnant supply; and if you believe demand will increase, then we'll have a tightening market," says Chris Mundy, regional vice president of Equity Office Properties, the operating company for the Zell/Merrill Lynch Opportunity Funds, which made its first investment in New York City in March, closing on the $68 million purchase of 850 Third Avenue in midtown from The Prudential Realty Group.

Zell/Merrill Lynch Opportunities Fund III will finish the upgrade of the 500,000 sq. ft., which is 80% leased, by year end. Major tenants include New York Life, Citibank, Western Publishing and K-III Magazines. Equity Office expects to rent the remaining space in the low- to mid-$30s per sq. ft., which is in line with the prevailing asking rents in this midtown corridor. New York-based The Galbreath Co. was named the building's exclusive leasing agent and manager.

After a half-dozen deals by foreign buyers last year, German investors made two huge purchases downtown in 1995. Paramount Group Inc., the U.S. affiliate of a German publisher, paid $135 million for the 1 million sq. ft. Financial Square. And a group led by German investor Hugo Mann is reportedly set to buy One New York Plaza, a 2.5 million sq. ft. downtown building owned by Chase Manhattan.

"There seem to be more German investors in town every week," says Scott Latham, executive vice president of New York-based Eastern Consolidated Properties. He notes the heavy interest among Far East investors, particularly from Hong Kong and mainland China.

Foreign investors are also enamored of New York's luxury hotels. In April, Singapore-based CDL Hotels International Ltd. and Saudi Arabian Prince Walid bin Talal acquired a controlling interest in the prized Plaza Hotel by agreeing to assume Donald Trump's debt on the 815-room property. The mortgage was held by Citibank. The deal is estimated at $325 million ž a $400,000 per room price that's about twice the previous highest price.

The buyer reportedly plans a $28 million renovation program. In addition, a plan by Trump to build luxury condos on top of the hotel is still under discussion.

CDL Hotels, which is controlled by investor Kwek Leng Beng, also acquired the Hotel Millenium for $75 million and the Hotel Macklowe for $96 million. Both were sold by banks.

Hotels in New York recorded their 20th consecutive month of increases in rate and occupancy in March, says John Fox, senior vice president in the New York office of PKF Consulting. Room rates increased 5% ž well above the rate of inflation ž to $144.03 last year. The rate for rooms priced above $200 per night rose 6.6%, Fox says. Occupancy increased to 75.2% from 69.5% the previous year.

There is some talk of new development. An entity consisting of General Electric, Galbreath and The Trump Organization plans to redevelop the Gulf & Western Building to include 150 hotel suites.

Apartment development rises

There's demand for apartments here. The Real Estate Board of New York estimates that vacancies in market-rate and regulated apartments are about 1%.

"I've been in the business 20 years, and the rental market is the strongest I've ever seen it," says Clark Halstead, managing partner of New York-based Halstead Property Co. He says quality apartment properties are getting $40 per sq. ft. As a result, investors are assembling sites and developers are dusting off building plans.

Virtually all projects recently finished or planned are 80-20 projects in which developers set aside 20% of the units for low-income families to qualify for low-cost financing via the federal low-income housing tax credit and the city's 20-year property tax abatement (which was recently extended to south of 96th Street).

New York-based Related Cos. has two projects under way and two more planned ž all are 80-20 developments. The firm has started demolition work for a project that will contain 250 apartments and 200,000 sq. ft. of retail space in the rejuvenated Union Square area, and it recently resumed work on a 180-unit project on the upper east side that was delayed because of community opposition to the building's height. Related was also one of several firms chosen by The Port Authority to develop about 1,000 units in downtown's Battery Park City. The firm also has approvals in place for a 270-unit job on the upper west side.

New York-based The Brodsky Organization finished the first phase of its 1,000-unit West Side Towers ž another 80-20 project. Market-rate rents start at $1,175.

Millennium Partners expects to finish the 143-unit Lincoln Triangle on the upper west side this summer. All of the units in the 30-story building will be market-rate. The project is adjacent to Millennium Partners' 46-story Lincoln Square, which contains 110 apartments, 83 condominiums and retail space. The firm also expects to break ground at a nearby site on a 325-unit development.

Silverstein Properties, a New York-based developer, is seeking financing for the 1,800-unit, two-building development on midtown's west side.

The Trump Organization and a group of Hong Kong investors still hope to start work on Riverside South at Manhattan's last undeveloped waterfront site. The project is approved to include 5,700 apartment units as well as 1.8 million sq. ft. of office and retail space and a 30-acre park.

Rockrose Development has several 80-20 projects under way or planned, including a 148-unit job in Greenwich Village. The firm also purchased a 201-unit, 30-year-old property for $14.5 million from New York University Medical Center last year. The building was renovated and repositioned as a high-end rental building called Plaza East. Units range from $1,345 to $2,995.

Conversions are an active market, particularly in trendy downtown locations like Tribeca and SoHo, despite the city's "Brac" tax ž an $11.50 per sq. ft. assessment on conversions of light industrial and warehouse buildings that have been vacant less than five years. Lawmakers are considering a repeal of the tax as well as rezoning measures to spur more conversions.

Big box retailers try city life

Some large national retailers, whose national expansion has been curtailed because of the dearth of new development, are helping to change the face of retailing in New York.

Bed Bath & Beyond is credited with pioneering the New York City market for big box retailers in 1992. Barnes and Noble, Today's Man and Burlington Coat Factory soon followed with stores. In April, Filene's Basement and T.J. Maxx joined the fray, opening stores adjacent to Bed Bath & Beyond in a seven-story, landmark building that once housed the Seigel-Cooper department store. The project is a development of New York-based Tishman Speyer Properties and is being called the first urban power center. T.J. Maxx occupies 60,000 sq. ft. and Filene's has 40,000 sq. ft. The Gap will move its headquarters into 200,000 sq. ft. of space on the upper floors.

Crate & Barrel and Today's Man opened locations in midtown; Daffy's located a store near Macy's Herald Square; and Bradleys opened a multilevel store in Union Square. Earlier this year, Kmart signed a lease for its first Manhattan store ž 140,000 sq. ft. in One Penn Plaza.

"During the recession, rents were at a point where these retailers could make deals," Edward A. Friedman, executive managing director of New York-based Newmark & Co., says.

According to Rose Associates vice president Bruce A. Spiegel, demand from national tenants continues at a fast pace. The firm signed upscale BeBes to an upper east side building it manages for New York Life Insurance Co. The 3,000 sq. ft. store is BeBes' third in Manhattan.

The trend will continue as long as there's space available in the districts where these tenants want to locate. But, Friedman says, less prime space is available and rents are edging up as much as 10% to 15% in the best retail districts.

"The prime areas have come back very strong," he adds, citing Fifth Avenue around 50th Street in midtown as an example. Following recent commitments by Liz Claiborne, Banana Republic, Disney and Today's Man, there are only one or two large sites available now compared to 10 a couple of years ago.

While New York's economy has slowed, there's no indication it will go backwards, concludes a Bureau of Labor Statistics economist. "The industries that are strong in the city ž financial services, entertainment, social services and health care ž are expected to grow in the future. It's just a question of when `the future' is."

For some, the future is now.