The city’s office market is all about hospitality and the flight to quality as building owners are sprucing up their products to woo the companies that are trying to entice their workers back to the office.
“It’s product not price,” said Howard Hersch, vice chairman of JLL, as some firms are forking over upwards of $100, $200 and even $300 per foot to get perched at the priciest properties.
That’s because tenants are “picky” and spending on quality spaces even if they are smaller than prior offices. “It would have been 20,000 square-feet before and now it’s 10,000 or 12,000 square feet,” said Peter Braus, managing principal of Lee & Associates NYC. “They spend the same but the quality level is higher and the dollars per foot are higher.”
Certain market sectors are also vastly outperforming others. “The obvious winners of the pandemic real estate market are the new buildings, said Michael Cohen president of Colliers Tri-State Region. “Work from home is just the next new way of making the workplace more efficient. It won’t replace the workplace but will augment it. It’s not the death knell of big cities.”
But there’s still a struggle to get employees back to work as occupancy was just 42.2% for the week of June 15, according to Kastle Systems’ metrics.
A Partnership for New York City survey of 160 companies found just 38% of workers present each day with 21% in two days per week. A whopping 78% expect hybrid work to become the norm.
Indeed, almost as soon as a company demands office attendance, they do an about-face as workers threaten to leave. “The employees are really running the show,” said Jodie Pulice, CEO, JRT Realty Group.
Recent surveys found the primary dog-ate-my-homework excuse for not leaving home is based on the fear of crime and riding the subway — something Mayor Eric Adams is addressing by adding cops to the underground, dismantling tents and chipping away at the crime stats.
Still, the couch potato career is a head-scratcher for those that have been commuting to the office regularly for over a year – including most real estate companies and attorneys.
The Partnership survey found 38% want more workers with 18% wanting to bump up their square feet. And right now, there is plenty to be found.
Recent stats from Colliers found a Manhattan availability rate of 17.2% in May, down .1% from April. Average asking rents were also down by 30 cents from April to $75.34 per foot.
At a recent NYU REIT conference, WeWork’s CEO Sandeep Mathrani said “If you want employees to come back, build a WeWork.” That’s because its co-working occupancies rose faster than those in regular offices as “the vibe was back.”
Tech companies, Mathrani said, are now facing the reality of where to put all their pandemic hires. “Now they are bringing them back and how do they house them, even if we bring them back one or two days a week?”
Coworking also worked for those who first showed up to empty offices and didn’t want to be by themselves. Instead, they parked themselves at such facilities closer to home or even at desks in their apartment tower’s amenity areas.
As the weather is better and daylight last longer, Winston Fisher, partner in Fisher Bros. said, “I’ve noticed a shift that the world is really opening.”
Once lifeless Midtown now has lunchtime throngs and many bigger companies are planning ahead with searches and signed leases.
HSBC leased 264,000 square feet at 66 Hudson Blvd. aka The Spiral, leaving its 452 Fifth Ave. offices to be re-leased and the building seeking a new owner after one deal fell apart. “[The building] has the genetics that will allow it to be a success,” opined Hersch.
A recent 84,000-square-foot expansion at 425 Park Avenue by Citadel, however, was sad news for 550 Madison Ave. which had hoped to add the investment company to its own tenant directory that now includes Chubb and Hermès, which leased 71,000 square feet in February.
Citadel, however, is also in talks to become the anchor tenant and provide the equity for a new 1,450-foot-high, 1.6 million-square-foot tower at 350 Park Ave./40 E. 5nd St. that would be developed by Vornado Realty Trust and Rudin Management.
These industry leaders see a future in which occupancy bounces back and companies want newer, better and bigger.
“There are buildings all over Midtown that are being set up for demolition or reconstruction with clauses in leases to terminate them if they want to tear them down,” said Cohen.
Hersch agreed “There will be more net losers where the product can’t be improved.”
According to Colliers, availability is up 72.5% since March 2020 with available offices now pegged at 92.91 million square feet of which 19.99 million square feet is for sublease — but the entire market is an astounding540.36 million square feet — the largest in the world. To get workers off their screens, employers are trying different carrots.
To help its tenants woo workers, GFP Real Estate has created a lottery for VIP suite tickets to rock concerts at MetLife Stadium. As they walk into the lobby each day, employees scan a QR code to be entered into the drawing. For 36 ducats to Coldplay that included free food and drinks – worth $1,200 – there were 3,800 entries.
In addition, many owners invested in their assets.
Fisher, who is also CEO of AREA15 which owns immersive entertainment experiences in Las Vegas and has another planned for Orlando, helped shape their office improvements that include digital art at 299 Park Ave. and 605 Third Ave., and an interactive augmented reality mural at 1345 Ave. of the Americas that can be accessed through a phone.
“We studied the great arrival lounges and airports and what are companies looking for,” Fisher added. “We believe in curating cool; function and cool can go really well together.”
At 1345, $80 million on updates included the creation of a David Rockwell-designed conference center and amenity space. “We always thought of our office as hospitality and dress all our security guards in Barney’s suits and are always thinking about the curation and the experience of not just the CEOs, but to also have a building that helps them get people back to work,” Fisher said.
Google’s head of real estate, Paul Darrah, has been hosting office get-togethers so people can see each other and remember who and what they have missed. That lost human connection was on view at Casa Cipriani at the annual CORENET NY dinner where hundreds of corporate real estate executives, including Darrah, were joyously greeting each other while mingling throughout the dinner.
“Now that tech companies are reducing their headcount, people will have to work harder to keep their job and it will mean showing up at the office and having mentors,” observed Darcy Stacom, chairman and head of capital markets at Cushman & Wakefield.
Tom Vecchione managing principal of the design and workplace services company, Vocon, said they are working on “massive headquarters projects” that won’t be ready for a year or more as companies know they will be back at the workplace. “If you want a job, remote works well,” Vecchione said. “But if you want a career you want to be with clients and have mentorship.”
“Although hybrid work is here…office isn’t dead,” explained Ric Clark, CEO of WatermanClark at a recent Young Men’s/Women’s Real Estate Association (YM/WREA) luncheon. “Better buildings will perform and focus on health, wellness, flexibility and choice and create an environment that validates that.”
As Hersch puts it, “They need better space to get their kids out of their couches.”
The problem for some building owners and the city, however, is that “Eighty percent of the deals are now being made in 10 percent of the buildings,” explained Pulice at another YM/WREA luncheon.
That lead to building owner, Leslie Himmel, saying, “Not all buildings will survive this.” Himmel believes some properties will be repositioned into residential and others will have the benefit of new capital infusions.
Right now, there are many vacant towers including 60 Wall St., 295 Fifth Ave., 522 Fifth Ave., 390 Park Ave., 825 Third Ave., 360 Park Ave. South and 636 Eleventh.
Brookfield is renovating the vacant 660 Fifth Ave. with new 11×19 foot windows and landscaped terraces that changed the entire look of the former 666 Fifth. and won a 222,000-square-foot lease with Macquarie in May.
“Frankly, a lot are vacant because they are going through an upgrade making the vacancy necessary,” Cohen explained.
Durst is spending $150 million on 825 Third to provide dynamic glass windows, modern aesthetics and tenant amenities including a 12th floor terrace, gym, and arcade games in a café and wine bar.
WatermanClark and Brookfield Properties are in the midst of a $100 million renovation of the landmarked Lever House at 390 Park Ave.
During a recent tour, WatermanClark’s Senior Vice President Alan Bernstein, showed off the still under construction public lobby and private third-floor hospitality space — Lever Club — which are getting groves of birch trees and seating designed by Marmol Radziner.
The narrow building is set perpendicular to Park Avenue with Lever Club’s main 15,000-square-foot, third-floor terrace to its south and a smaller 10,000-square-foot outside space to the north providing the ability to host different events.
“Everything is being restored and replaced and put back in its original condition or better,” said Bernstein.
Column-free 10,800-square-foot floors have all mechanicals on the midblock western end, leaving tons of windows and light. A new DOAS (dedicated outdoor air system) brings in and filters 100 percent outdoor air, allowing higher ceilings.
The large second floor of 35,000 square feet has its own 9,540-square-foot terrace and “a lot of interest,” Bernstein said, even though rents start at over $200 per foot.
Slater Traaen senior director of asset management and leasing at Mitsui Fudosan America who oversees 527 Madison Ave. said that boutique building has many private equity and hedge fund traders who are more dedicated to being the office.
“Tenants like it because it’s a private building that offers a [smaller] full-floor presence,” he said. An outdoor space on the 10th floor was recently renovated into a tenant amenity. “People needed to use it as an actual work space, especially in a post-pandemic workplace,” Traaen explained.
Their upscale prebuilts are a plus for companies that have bifurcated workforces. Instead of a conference room, they are creating a Zoom room for team meetings. “We have had tenants require more private offices and private space,” he added.
Over the last two years, Tom Vecchione managing principal of Vocom has created 500,000 square feet of pre-builts. He’s now working with 25 different owners to install them in several dozen properties. “They are curated for each industry and in a huge stretch of building types,” he said. “Potential tenants love a hands-free, seamless way to get to a final workplace and not have to go through designing and building and waiting for stuff.”
Most of the demand, he said, is for 4,000 to 5,000 square feet with a sweet spot of 8,000 square feet, but can get as big as 15,000 square feet, he said. They have sustainable parts and partitions that are easy to install and can be reused. “We make a space super flexible,” he said.
Vecchione also did a deep dive into first-class lounges at airports to see what could work for offices, dubbing it the “the un-work workplace.” “It’s all about the vibe and esthetics as people come in,” Vecchione said. “They want people to feel comfortable and feel at home and use natural materials to make it light and fresh.”
In Midtown South, Vornado is redeveloping Penn 2 with several floors overhanging the entrance, stairway seating for a Town Hall and 60,000 square feet of greenspace including a rooftop park. Its adjoining Penn 1 already has 100,000 square feet of new amenities, lounges and experiences that include a responsive stairway and digital artwork.
“I don’t know what they spent on that lobby and it is just unbelievable and raises the bar on what landlords need to deliver to compete for these credit, high-end office tenants because they created a package of amenities and a level of amenities in their lobby I haven‘t seen before,” said Peter Braus, managing principal of Lee & Associates NYC.
Owners are also investing in lobbies. The former Coca-Cola Building at 711 Fifth Ave. where the new Core Club is located has an extraordinary lobby that’s worth a peek to be wowed. The gold and black waiting area designed by Peter Marino for the Michael Shvo-led investment group, emotes an opulent era that harkens back to hotel and residential lobbies of the 1980s – but with even more impact.
“It’s like nothing else in the city and it makes a difference, and gives it a visual identity,” said Hersch of 711’s lobby. “[Michael Shvo] is brilliant in marketing and merchandising and most [building owners] don’t recognize they need to be experts in marketing and merchandising.” Hersch represents the company which is known for its residential and hospitality products.
Shvo is also reimagining the cast-iron Soho office and retail building at 530 Broadway with Snarkitecture, which is also a tenant. Here, Daniel Arsham created a site-specific art installation in the lobby while upstairs, unique pre-builts are on their way. “The design is ridiculous and out of control,” said Hersch about the upcoming institutional quality offices.
Midtown South, Soho and the Lower East Side are all now desired by edgy companies.
“Entrepreneurs and business owners are looking to plant their flag and build offices in neighborhoods that have more energy and can live, work and play where retail and restaurants are thriving,” said Adam Henick of Current Real Estate Advisors. “The pandemic has had a dramatic effect on how they are hiring and designing and building their offices.”
That’s why KPG Funds has redone the smaller, 446 Broadway, to create bespoke Class A offices for hedge funds and other creatives and developed a brand-new boutique building at 141 East Houston St. where Solana just leased several floors.
“Our buildings are cool, with high ceilings, big windows, unbelievable bathrooms and kitchens,” said Greg Kraut, CEO of KPG Funds. “Every little detail counts. Everything is about a sense of place.”
Tech companies seeking 30,000 square feet in Soho and the Meatpacking District that want to occupy in six to nine months have few choices there but many options in Midtown, Henick said.
His client, Andreessen Horowitz aka a16z lucked out in leasing 34,000 square feet at 300 Lafayette St. that included the roof.
In the Flatiron District, the namesake triangular edifice is being transformed into 21st-century offices. On the northeast corner of Madison Ave., SL Green is adding glass curtain-walled stories to the eight-story full block podium at One Madison that runs along E. 23rd St. to create a 1.4 million-square-foot campus with 26-stories that will open in 2024.
Similarly, Columbia Property Trust’s boutique 799 Broadway leased 71,000 square feet to Wellington Management.
To continue its transition from stodgy to slick, IBM will eventually consolidate at One Madison in 328,000 square feet. “Any company looking to attract and retain is looking for good space,” said Hersch.
The Bromley Companies’ former department store building at 122 Fifth Avenue is getting a $100 million transformation to 300,000 square feet and a new rooftop pavilion. It is now half leased to Microsoft while Allbirds is nesting in some of the retail space.
“This is the ultimate mixed-use neighborhood with retail, office and residential,” said Nicholas Haines, CEO of Bromley Companies of the Flatiron area. “We are reimagining for today’s tenants and it’s important to have outdoor space.”
In Nomad, the vacant 700,000-square-foot former textile building at 295 Fifth Ave. is undergoing a $350 million transformation by owners Tribeca Investment Group, PGIM Real Estate, and Meadow Partners with leasing through CBRE.
Bromley’s broker, David Falk, president of the Tri-State Region of Newmark, said the company “did everything right.” But he added, “Transform doesn’t always mean spending $50 million.” It could be doing little things, he said, so people get a different vibe, whether it’s music or flowers or having a security guard in a suit rather than a uniform.
Near Union Square Park, the new Zero Irving on East 14th Street has signed several full floor deals with asking rents at $125 per foot.
On a recent tour of Essex Crossing, it was clear that despite being on the Lower East Side, from the offices and terraces, the skyline views of Midtown’s skyscrapers and the practically adjacent Williamsburg Bridge are spectacular.
Here, Verizon is preparing to move into the majority of 155 Delancey St. Its option on 145 Delancey Place expires at the end of July so for now, Cushman & Wakefield is marketing its 173,092 squarefeet with asking rents of $90 per foot. Both buildings connect to the 150,000-square-foot underground MarketLine with numerous food offerings and have terraces and green spaces.
But there are plenty of B and C office buildings that are not going to make it. Already BlackRock gave its lender the keys to 1790 Broadway. Yes, they overpaid, but they didn’t want to pour in good money after bad.
“For the first time we are seeing technical obsolescence befall assets,” said Hersch pointing to the DNA of the assets –ceiling heights, air quality, elevator size and slowness whether of the elevators or the building’s internet — as mattering to workers. “A certain genetic code will not work any more,” he said.
Lofts are easier to fix than others that have low ceilings and small windows.
That’s why companies like KPF Funds have invested in smaller properties such as 441 Broadway on the Lower East Side and built a new one at 141 E. Houston St. – and getting triple-digit rents.
Times Square has several towers with large availabilities but owners are investing and there is some leasing traction.
For instance, 5 Times Square, which is getting a $48 million infusion for amenities and upgrades, gamed Roku for both the former Ernst & Young blade signage as well as the top eight floors in a 240,000-square-foot deal completed in the $90s per foot in January as first reported by the Post.
Rudin Management’s 3 Times Square is getting $25 million in upgrades and signed a 243,000-square-foot deal with Touro College for a building-within-a building campus. .
At 1568 Broadway L&L Holding paved the way for its TSX Broadway project by lifting the historic Palace Theater 30 feet into the air to move it out of the way for a grand retail space below the remodeled tower. A proscenium will bump out over Broadway where those on and around the Red Stairs can watch bands perform.
In the Financial District, since the 1.6 million-square-foot 60 Wall St. which became vacant after Deutsche Bank moved to Columbus Circle, Paramount is leading a $250 million makeover to get it up to snuff. That renovation includes a new curtain wall on the lower floors, lush garden walls, open spaces and outdoor terraces.
“What I see now is hope,” said Pulice of JRT Realty Group. “If you don’t think we are New York strong and the Capital of the World you shouldn’t be in this industry.”
Added Mary Ann Tighe, CEO of CBRE’s tri-state region, “We are going to watch our city ripple into a new age and 10 years from now we will say we transformed ourselves because we responded to workplace needs and/or trends.”