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As seen in
July 1, 2001
Sublease Space Surges Onto Market
in Manhattan
10 million square feet is offered, five
times the total of a year ago.
by JOHN HOLUSHA
Sublease space is flooding onto the market in Manhattan, as
dot-com and telecommunications companies go out of business
or greatly shrink their operations. According to a survey by
Julien J. Studley Inc., a brokerage that specializes in representing
tenants, there is more than 10 million square feet of sublease
space currently on the market, compared with slightly less than
2 million square feet a year ago.
And it is not just empty space. Many of the dot-coms and telecommunications
companies were richly financed by venture capitalists during
their brief existences, and they equipped their offices with
state-of-the art telephone systems, computers and furnishings.
Unlike conventional office deals where a tenant leases empty
space and negotiates with the landlord for a contribution toward
building the interior, the furnished space is an attraction
to companies that can save their share of construction costs
and move in without waiting.
The current climate of economic uncertainty is making these
finished spaces all the more attractive, said Marc R. Shapses,
a senior managing director of the Studley firm, who recently
brokered a deal for Chanin Capital Partners, a financial services
company, to move into 12,000 square feet of space at 330 Madison
Avenue.
"In the climate of 2001, people are saying, `Let's be conservative
and not invest a lot of money fixing up space,' " he said. "In
the late 1990's, people lost sight of expenses and invested
heavily in space."
The space at 330 Madison, which is at 42nd Street, was given
up by Cypress Communications Inc., an Atlanta-based provider
of broadband communications services in large office buildings.
Earlier this year the company announced it was scaling back
its marketing efforts so that it would not need additional rounds
of financing, which was becoming increasingly difficult to obtain.
Instead of seeking to wire buildings in 28 cities, the company
said it would concentrate on only seven metropolitan areas,
and New York is not one of them. The offices, on the 11th floor
of the building, are nicely furnished, with executive offices
on the outer rim and cubicles for workers in the interior. They
also provide an indication of how fast things can change in
the technology business. Some of the telephones are connected,
but others are still in boxes on the desks and it appears that
the space was never occupied.
Sublets like this are difficult to arrange, Mr. Shapses said,
because landlords have to give their approval of the arrangement
in most cases. And many prospective users of the abandoned space
do not want to become the tenant of a fading or failing dot-com
or communications company.
Similarly, most high-tech companies are not eager to get into
the real estate business and would prefer to leave the space
and their lease obligations behind. "What the previous tenant
really wants is to get off the hook," Mr. Shapses said.
The landlord in this case, Vornado Realty Trust, was willing
to restructure the deal, Mr. Shapses said, and Cypress was written
out of the picture and Chanin reached a deal directly with the
landlord.
Another complication is the size of the deposit a new tenant
must offer the landlord to get sublease space. Many dot-coms
were forced to post letters of credit of two to three years
rent to get space because of their lack of experience and credit
standing.
"Landlords do not want anything less secure, even if the new
tenant has better credit," said Michael J. Monahan, an executive
managing director with Insignia/ESG. He said the big letter
of credit was something of a tradeoff for being able to move
into space built at someone else's expense. In such a case,
he added, it is important to negotiate terms that reduce the
deposit after four or five years of rental payments.
In many cases, landlords are still collecting rent on space
available for sublease, and they are reluctant to jeopardize
the rents they are able to charge for space they lease directly
to tenants by having the sublets offered as bargains. According
to a recent report by Grubb & Ellis, the real estate services
company, most leases contain clauses barring tenants from offering
sublease space at a rental rate lower that the one stated for
direct space in the building.
Although the sublet space may eventually rent for less than
direct space, this does not show up in rent statistics, which
are based on published asking rents.
Much of the sublet space is concentrated downtown, said Ruth
Colp-Haber, a partner in Wharton Property Advisors, with trophy
buildings in Midtown unaffected because their owners routinely
refuse to lease space to any company without well-established
credit.
The availability of sublease space means that some buildings
that are listing only modest amounts of vacant space really
have a lot more empty floors. For example, Ms. Colp-Haber said,
the building at 33 Whitehall Street has only 3 percent of its
space available for direct leasing, but when sublease space
is added the building is 42 percent available.
Other downtown buildings with substantial direct and sublease
space availabilities, Ms. Colp-Haber said, include 100 Broadway,
with 34 percent; 75 Varick Street, with 43 percent; and 233
Broadway, with 22 percent.
In Midtown, buildings with high combined space availabilities,
according to Ms. Colp- Haber, include 330 West 34th Street,
with 30 percent; 9 West 57th, at 41 percent; and 111 West 40th
Street, at 25 percent.
The flood of sublet space, which has increased
by about seven million square feet since the end of last year,
is affecting the entire market for office space and increasing
the negotiating power of tenants, said James Meiskin, president
of Plymouth Partners, a brokerage that specializes in representing
tenants.
"Sublets have increased to 20 percent of total availability
as a result of the stock market, the squeeze on corporate earnings
and the bursting of the Internet bubble," he said. He noted
that the increased availability of these spaces was putting
pressure on landlords to offer concession to attract tenants
even in the strongest parts of the city.
"Landlords in the Plaza District are offering $35 a square foot
for interior work and six months free rent," he said, referring
to the general area between Third and Fifth Avenue in the 50's.
"Eight months ago it was one month of free rent and nothing
for work."
Mr. Meiskin said the office rental market had been "artificially
high" in recent years as dot-coms, communications concerns and
other start-up companies scrambled for limited space in Manhattan.
He said space in marginal locations, like downtown, SoHo and
the far west side of Manhattan, will be unable to sustain recent
rent levels as more sublease and direct space comes on the market.
"Space in downtown and 12th Avenue was never worth $50 a foot,"
he said. "Just a few years ago that space was going for $8 to
$12 a foot." Sometimes moving into prebuilt space can be a mixed
blessing, Mr. Monahan observed. He said he brokered a deal under
which Fulcrum Global Partners, a financial services company,
took over space at 535 Madison Avenue at 54th Street that was
once occupied by eColony, an Internet company.
Much of the space is usable as is, but Fulcrum had to go the
trouble of demolishing some interior offices to set up a securities
trading floor. "Usually when you start to demolish a space,
it is best to blow it all out and start over," Mr. Mohahan said.
But he said the configuration of the building and the quality
of the existing installation made it more economical for Michael
Petrycki, the chief executive of Fulcrum, to retain the perimeter
offices as they were.
"Mike decided to put his money into the trading floor and some
supplemental air-conditioning and kept the rest of the floor
intact, taking advantage of what was there," Mr. Monahan said.
He said the cost of building offices for Internet companies
ranged from $125 to $200 a square foot, because of the need
for intensive wiring and telecommunications connections. By
taking advantage of what was already in place, Fulcrum was able
to focus its resources on the trading floor and reduce its overall
expenditure. "He probably saved $30 to $50 a square foot," Mr.
Monahan said.
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