By TERRY PRISTIN Square Feet April 15, 2009 New York Times
A striking 40-story tower under construction on Eighth Avenue between 41st and 42nd Streets in Midtown Manhattan has a number of things going for it, including floor-to-ceiling windows, still relatively rare for an office building; six terraces; a thick concrete core that reduces the need for view-obstructing columns; and many of the latest advances in energy-efficient technology.
But less than one year before it is due to be completed, there is one major thing that the 1.1-million-square-foot tower, known as 11 Times Square, is lacking: tenants.
In the 1980s, 53 million square feet of newly built office space flooded the market and led to a collapse of real estate values. For many years afterward, lenders would not finance speculative projects, so only those with commitments from anchor tenants were built. In the current decade, developers have been relatively restrained, adding only 20 million square feet, according to the brokerage firm CB Richard Ellis.
As real estate values and rents escalated in middecade, however, a few developers were able to secure hundreds of millions of dollars in financing for ground-up construction or extensive rehabilitation of existing buildings — all without any advance lease commitments but with heady expectations of high rents.
In addition to 11 Times Square, which is being developed by SJP Properties of Parsippany, N.J., and Prudential Real Estate Investors, these buildings include 510 Madison Avenue, at 53rd Street, which is also entirely new; and several buildings that have been or are being completely transformed, including the former headquarters of The New York Times Company at 229 West 43rd Street, near Times Square, and 545 Madison Avenue, at 55th Street. In a building at 3 Columbus Circle, which was formerly called 1775 Broadway, the owner, Joseph Moinian, is spending $100 million on renovations, including installation of a new glass facade, said James D. Kuhn, the president of Newmark Knight Frank, the brokerage company that is marketing the building.
Two planned redevelopment projects outside Midtown — at 375 Pearl Street in Lower Manhattan and 330 Hudson Street in SoHo — have been indefinitely postponed because they have no tenants or construction financing, according to industry sources who were not authorized to speak about them.
These days, as vacancies in Manhattan climb and rents decline, developers of new or rehabbed buildings find themselves competing with cheap sublet space on Park Avenue and in other desirable locations. In March, the amount of actively marketed space that is vacant now or will be available within a year in Midtown reached 14.2 percent, the highest it has been since July 1994, CB Richard Ellis said. The average yearly asking rent for sublease space in Midtown was $60.44 a square foot, far less than the rents that were envisioned in the new or renovated buildings.
Those developers are also finding that capital-constrained tenants would rather stay put than spend money on a move — a trend that landlords are eager to encourage.
Most of the new or newly rehabbed buildings have yet to attract office tenants. One exception is 510 Madison Avenue, where the developer, Harry Macklowe and his son, William S. Macklowe, leased one floor to a hedge fund, Jay Goldman, in December 2007 for well above $100 a square foot.
But now, the lease may be in jeopardy. In a lawsuit filed in February, Jay Goldman accused the Macklowes of failing to meet their obligations by not delivering the space on time. In their legal filings, lawyers for the developers say the lease called for a period during which Jay Goldman would create its offices, with $400,000 of the cost to be absorbed by the Macklowes. They also accuse Jay Goldman of seeking a “pretext” to back out of the lease because of the “changed economy.”
There have been no takers for the office space at 229 West 43rd Street, now known as the Times Square Building, despite what Brian D. Gell, a vice chairman at CB Richard Ellis, describes as “cool funky space” for a tenant that is not seeking a “cookie-cutter building.”
Africa Israel bought the building for $525 million in April 2007, and has poured more than $150 million into renovating it. Recently, some newly created retail space, most of it in the basement and subbasement, was rented to Running Subway Productions, producer of the recent Broadway show “Dr. Seuss’s How the Grinch Stole Christmas.”
Africa Israel recently took a $380 million write-down on the building, according to The Jerusalem Post. Its principal lender, Credit Suisse, recently sold some of the debt to Banco Inbursa, a company controlled by the Mexican billionaire Carlos Slim Helú (who also recently lent $250 million to The New York Times Company).
These extravagant projects were fueled by the explosive growth of the financial services industry, the westward migration of law firms and other prestigious tenants to Times Square and Columbus Circle and the expectation that annual rents would soar above $100 a square foot. Some large tenants did pay more than $100, including the law firm Akin Gump Strauss Hauer & Feld, which leased 203,000 square feet at One Bryant Park, a new tower at 42nd Street and Avenue of the Americas, and Colgate-Palmolive, which renewed its lease for 528,000 square feet at 300 Park Avenue, at 49th Street, its headquarters since 1955. But most of the tenants willing to spend that much on rent were much smaller hedge funds.
“The hedge fund community was this decade’s Internet bubble, and they were insensitive to pricing for the most part,” said Mitchell S. Steir, the chief executive of Studley, which represents commercial tenants.
Like landlords throughout the city, developers of new or newly renovated buildings are tailoring their marketing efforts to today’s economic realities. The Macklowes initially hoped to lure hedge funds to 510 Madison Avenue by incorporating a health club and a 20-yard-long swimming pool into their plans. But in the current environment, prospective tenants have more practical concerns, brokers say. To spare future tenants the expense and bother of outfitting their offices, for example, Macklowe Properties hired the design firm Gensler to create turnkey offices on two floors.
In November, LCOR, the company that stripped 545 Madison Avenue to its steel frame and rebuilt it, invited 150 brokers to lunch at the 17-story building and gave some of them $500 gift cards from Alfred Dunhill, a new retail tenant in the building. “It was a pretty effective way of getting people in to see the finished product,” said David A. Sigman, a senior vice president at LCOR.
With the recent decision by Boston Properties to abandon plans to build at 250 West 55th Street, 11 Times Square will be the only new office building on the West Side aimed at large tenants. Part of the marketing strategy involves convincing prospective tenants that the column-free design will permit them to house their employees in less space, said Steven J. Pozycki, the chairman and chief executive of SJP Properties. “When you’re coming up against a lease expiration and you haven’t touched your space in 20 years,” he said, referring to tenants, “you see that the paradigm has changed, and there are resulting economies.”
SJP and its partners have spent more than $1 billion on construction and other costs and initially hoped to get rents of $90 a square foot or more, a level that some brokers say was a stretch for an Eighth Avenue building.
But Mr. Pozycki said he was not surprised that prospective tenants had been dithering for months, unable to make a decision. “No one wants to make a big financial commitment,” he said.
Copyright 2009 The New York Times Company