Uptick in Hiring Boosts Leasing, but Outlook Remains Unclear; Putting More People in Same Space
By ANTON TROIANOVSKI May 24, 2010, Wall Street Journal.
The market for Manhattan office space is emerging from a two-year slumber. But it’s up to the city’s jobs engine to make sure that it doesn’t doze off.
Midtown real-estate types are getting some of their swagger back. On Park Avenue, the landlord of the historic Seagram Building has already raised asking rents three times this year, according to brokerage Jones Lang LaSalle.
The new office tower at 11 Times Square is attracting interest.
On Eighth Avenue, the broker marketing the new office tower called 11 Times Square says he’s looking for rents of $120 per square foot on the upper floors despite the building’s location on the western edge of the midtown corporate corridor.
Optimists are saying that boutique banks and financial giants, law firms, ad agencies and even media companies are showing a greater interest in signing new leases for office space than any time since mid-2008. Leases are expiring, and companies that sense things are looking up want to lock in deals before it’s too late.
It’s far from clear, however, how long the burst of optimism will last. Despite the pickup in activity, many businesses aren’t expanding when they lease space partly because they have figured out how to use less space.
Also it’s unclear whether job growth—the driving force behind commercial real-estate demand—is coming back in force anytime soon. Until then, the skeptics say, new leases being signed by office tenants amount to a zero-sum game, filling up some buildings but emptying out others.
“Without any sustained job growth there will be no recovery,” said Billy Cohen of commercial real-estate services firm Newmark Knight Frank. “There will be only music chairs.”
Mr. Cohen would know. His task is to find tenants for some one million square feet of vacant and soon-to-be vacant space in the Empire State Building. Even though Mr. Cohen’s goal is to reposition the building as a home for large tenants like finance and media companies, the market is still so shaky that he’s willing to spend money on relocating dentists and other small tenants to other parts of the building rather than showing them the door when their lease runs out.
For now, the amount of available office space in New York doesn’t appear to be diminishing significantly. Research firm Reis Inc. says the first three months of this year represented the ninth straight quarter in which the amount of available office space in the city grew, bringing the total growth in available space since January, 2008, to 20.6 million square feet.
In March and April, however, the market seems to have stabilized a bit, with the amount of available space decreasing by 770,000 square feet, says brokerage CB Richard Ellis Group.
The reason the market seems to be bouncing along the bottom is deals like the one that Tiffany & Co. signed at 200 Fifth Ave., a newly renovated office building across from Madison Square Park. The jeweler will take 260,000 square feet in the building—but will vacate more than 270,000 square feet of space in three locations in midtown.
David Levinson, the co-owner of 200 Fifth, acknowledges that the tougher leasing market means he likely won’t be able to turn the kind of profit he projected when he and Lehman Brothers Holdings Inc. paid $480 million for the building in 2007. Mr. Levinson is also a real-estate adviser to News Corp., which owns The Wall Street Journal.
Tiffany, on the other hand, says it will save $125 million over the course of its 15-year lease at Mr. Levinson’s building compared with its current locations.
New York City employment has ticked up slightly this year, rising by about 70,000 jobs since January 2010 to a total of 3.6 million. That’s still more than 100,000 below the July 2008, employment peak.
As it is, many companies already have enough space to start hiring again without expanding their footprint. Mark Aaron, Tiffany vice president for investor relations, for example, said the new space at 200 Fifth Ave. will allow Tiffany’s headquarters staff to grow—even though the total square footage is smaller than what the company now occupies in its offices in midtown.
Part of that’s because companies that are signing new leases are finding ways to put more employees in less space by using the latest in furniture and office layout trends.
Smaller, well-to-do office tenants such as hedge funds appear to be leading the market upward. Brokerage Jones Lang LaSalle refers to the Seagram Building at 375 Park Ave. as a market bellwether for high-priced buildings because it caters to those kinds of tenants and tends to sign multiple leases with tenants every quarter.
The building’s landlords has boosted asking rents three times on new leases this year, the brokerage says. An executive for RFR Realty LLC, the building’s owner, didn’t respond to a request for comment.
Meanwhile, in one of the year’s biggest leasing deals, Proskauer Rose LLP last week announced it would become the first tenant for 11 Times Square, an office tower erected during the depths of the recession and set to be complete in June.
The law firm is moving out of space in the Morgan Stanley building at 1585 Broadway and in a positive sign for the market, the bank itself is expected to occupy the floors that Proskauer is emptying.
“There are so many tenants in the market now or making deals it’s mindboggling,” said Stephen Siegel of CB Richard Ellis, the broker for the developer in the Proskauer deal. “The bottom-fishers have just about gotten all the fish off the bottom.”