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As seen in
September 19, 1999
In a Tight Market, New Areas Bloom
Companies are going East Side, West
Side, all around the town.
by JOHN HOLUSHA
When executives of Kenneth Cole Productions, a designer of clothing
and footwear, decided to move the company's headquarters from
Carnegie Hall Tower at 152 West 57th Street to 601 West 50th
Street, at 11th Avenue, they gave up the ambiance of one of
the city's premier retail streets for a neighborhood perhaps
best described as Gasoline Alley.
Auto dealerships line both sides of the avenue, sharing the
space with bars, diners and a full-block Con Ed electrical substation.
The service entrance for Manhattan Chrysler Plymouth Jeep is
just a few paces north of the front door of 601 West 50th Street.
But with annual office rents in the area in the range of $20
to $30 a square foot, compared with $60 and above on 57th Street,
Mr. Cole stands to save a lot of overhead costs on the 126,000
square feet the company will eventually occupy. "Price
was a factor," said Barry Gosin, Chief Executive of Newmark
& Company Real Estate of Manhattan, which brokered the deal.
"Ken Cole is a guy who fights for every penny. But it is
also a trendy location for all his young creative people."
Mr. Cole's decision to move to a neighborhood far from traditional
office areas, along with similar moves by advertising agencies,
architectural firms and new-media companies to formerly industrial
areas, indicates that almost no Manhattan location is off-limits
in the current real estate boom.
The shift to nontraditional areas reflects a strong economy
in which employment gains have produced a tight market for office
space in most areas of Manhattan and have spurred the construction
of new buildings, notably in Times Square and the suburbs, particularly
the New Jersey waterfront.
The effects of the strong economy go beyond the office segment
of the real estate business. Retailers are jockeying for new
locations and testing new parts of town on the East and West
Sides. Hotel occupancy rates have fallen somewhat from the peak
levels of recent years, notably for the most expensive rooms,
but analysts say the business remains prosperous.
Indeed, veteran real estate executives say it is hard to see
a cloud on the horizon, despite the historic cyclicality of
the industry. The number of jobs in the city has been growing
steadily, largely spurred by Internet-based companies, and most
of the few new buildings that are planned or under construction
are already leased.
"The real estate market is as healthy as I have seen it
in three decades in the business," said Thomas P. Falus,
President of Cushman & Wakefield of New York, the real-estate
services company.
He said downturns in the real estate business had usually come
in reaction to excesses of the past, like the 17 million square
feet of office space that came onto the market in Manhattan
in the late 1980's and early 1990's. "Right now there is
no excess," he said. "There is no overbuilding and
no overpaying. Barring some unforeseen external calamity, I
don't see any reason why the market will not stay healthy."
Real estate executives said economic pressures were forcing
companies to look at previously neglected areas. "In this
market," said Mary Ann Tighe, Vice Chairman of Insignia/ESG,
the Manhattan real-estate services firm, "traditional patterns
are disappearing, the way they did in the late 1980's, when
non-garment tenants started moving into the Garment Center.
Now, industrial space on the West Side is not only acceptable,
but is desirable."
An example of the phenomenon, she said, is the Starrett-Lehigh
Building on 26th Street between 11th Avenue and the West Side
Highway, where space has quickly become more expensive as high-technology
companies replace the industrial tenants of the past. Martha
Stewart recently signed a lease for 75,000 square feet in the
building for editorial production facilities, including photo
studios and workshops and, potentially, an Internet development
site. Martha Stewart Living Omnimedia's main Manhattan office
is to remain at 11 West 42nd Street.
"Less than two years ago, you could have rented space there
for $9 a foot," Ms. Tighe said. "Today it's more like
$25 a foot, and people are lining up to get into the building."
She said many companies in creative fields are deliberately
avoiding traditional office locations in favor of industrial
buildings, whose expansive floors are easily adapted to open-plan
layouts. "I could do better economic deals in pre-World
War II buildings downtown," she said. "But many companies
want an Internet environment, where they can quickly form teams
to handle projects and solve problems."
Meeting the needs of the creative people who staff Kenneth Cole
Productions' product and store display units and its internal
advertising agency, figured into the decision to move to the
far West Side as much as saving money did, said Paul Blum, the
company's Chief Operating Officer.
"Everything we do is urban-inspired, so it would not be
advisable to leave the city," he said. "We could have
made a deal downtown, but that would have put us too far away
from the wholesalers who are in the 40's and 50's and like to
drop in and see what we are doing."
He said the far West Side is close enough to these customers,
and affordable enough to give the company space to spread out.
The pool hall on the ground floor will be replaced with a showroom,
he added.
The current demand for flexible office space comes at a time
when Internet companies, just a small presence a short time
ago, are becoming an important force in Manhattan real estate.
According to figures compiled by Colliers ABR, the brokerage
and real-estate services firm, Internet and computer-based companies
signed 52 leases totaling 1.3 million square feet from January
through the end of July, with 515,000 square feet of that on
the West Side.
"Real estate is the second biggest problem for these companies
after raising money," said Paul J. Mas, Senior Managing
Director of Colliers ABR. "They need space to add bodies
to grow, because if they don't grow, they get left behind. The
standard growth rate is to double in size in one year and then
double again in two years."
Cushman & Wakefield has reported that the number of jobs
in the Internet and new-media fields in New York City is expected
to reach 188,000 by next year, an increase of 80 percent since
1997.
With the continuing deregulation of the telecommunications industry,
new types of telecommunications companies are bidding for space
as well, creating another new category of tenant. According
to Colliers, 31 telecommunications companies signed leases for
a total of 784,853 square feet in the first seven months of
the year. Six of those were in the old Port Authority distribution
building at 111 Eighth Avenue between 15th and 16th Streets,
another industrial building that is becoming home to the trendy
and high tech.
The growth of these new businesses, executives say, may provide
support for the overall economy of the region and the real estate
industry even if traditional business sectors in New York, like
financial services, suffer setbacks. "People are starting
to believe that this economy is different from the past, that
the growth of the Internet and biochemical industries have changed
the economic situation," said Benjamin V. Lambert, Chairman
of Eastdil Realty, a Manhattan real-estate investment company.
He said capital markets have largely returned to normal after
the turmoil of last year, when international events caused some
forms of financing, like commercial mortgage-backed securities,
to freeze. "There is a sufficient supply of capital available,
but the providers of capital were sufficiently daunted last
year, that underwriting standards have risen," Mr. Lambert
said. This means that developers need to find more equity to
complete transactions.
In addition, the price of money is slightly higher this year
than last because the Federal Reserve has increased interest
rates, Mr. Lambert said.
Because of last year's credit market turmoil, putting deals
together is more complicated, said Howard L. Michaels, Chairman
of The Carlton Group of New York. "Before that, you could
make one phone call and get 90 to 95 percent financing,"
he said. "Now you need to put two or three lenders together
to complete a transaction."
For these reasons, the pace of property sales dropped well below
the torrid rate of early 1998. Cushman & Wakefield reported
that 16 major Manhattan properties with a total of 13 million
square feet of space were sold for $2.1 billion in the first
half of this year.
One of the most significant was Chase Manhattan Bank's sale
of One New York Plaza to TrizecHahn for $390 million. The 2.1
million square foot building was thus valued at $185.38 per
square foot.
More recently, the closely held W & M Properties sold the
building at 1185 Avenue of the Americas to a group led by Goldman
Sachs & Company for $195 million. The 1.1 million square
foot building, on the south-west corner of West 47th Street,
was valued at $177.27 per square foot.
The August vacancy rate in midtown office buildings was 7.1
percent, according to Colliers ABR, and it is expected to stay
at about that level as the delivery of new buildings, like the
1.4 million square foot Condé Nast headquarters in Times
Square, makes space available elsewhere. The average asking
rent in midtown reached $42.74 a square foot in August, Colliers
reported an increase of 12 percent over the year-earlier level.
While the averages have come up, some individual deals have
come up far more. Colliers reported that leases were signed
at $80 a square foot at 9 West 57th Street and at 767 Fifth
Avenue, the General Motors Building.
The mid-year vacancy rate in midtown south was similar to midtown's
7.2 percent, but asking rents were sharply lower, an average
of $27.61 a square foot, according to Cushman & Wakefield.
Although the average asking rent has increased 28.1 percent
from year to year, midtown south remains the most affordable
office market in the city. The vacancy rate for Class A space
in the downtown area has dropped to 4 percent, according to
Cushman & Wakefield, the lowest in 18 years. The overall
vacancy rate downtown remained steady at 8.4 percent as the
pace of leasing slowed. But following the pattern of the rest
of Manhattan, the average rent rose to $32.31 a square foot
from $28.14 a year earlier.
Downtown is handicapped by transportation problems and by the
perception that it is remote from midtown, Mr. Falus said. "Downtown
does not seem to attract a meaningful migration from midtown,"
he said. "People would rather go east or west than south.
Somebody commuting in from Greenwich can get to Seventh Avenue
in the 40's more easily."
Steadily rising rents and a diminishing amount of available
space is good news for property owners. But the flip side for
tenants is steadily rising costs and a lack of leverage in negotiations.
James S. Meiskin,
President of Plymouth Partners, a tenant representative, said
some landlords were playing prospective tenants off each other.
"In the past, when you requested a lease, the space was
taken off the market," he said. "Now they are not
taking it off the market, and if a better deal comes along,
they'll take it."
But Mitchell Steir, an executive vice president of Julien J.
Studley, another tenant representative, said tenants and their
brokers can employ strategies to probe for opportunities. For
example, he said, savvy brokers can find out which space will
be vacated over the next few years and use the information to
their clients' advantage. "As you view the data, it is
not technically available," he said of such space. But
landlords likely to lose tenants soon may be willing to make
deals now to prevent vacancies.
"There is usually more there than immediately meets the
eye," he said.
The Suburbs
Waterfront
Space Is Much in Demand
Commercial tenants are bidding for space
along the New Jersey waterfront as fast as construction projects
are announced, said Seena Stein, President of Newmark of New
Jersey. "I've never seen anything like it in 20 years,"
she said. "There is an unending flow of people coming from
New York and some of them are bidding money over the asking
price to get space."
Among the tenants that have signed deals for waterfront space
are American Express, PaineWebber, Lord Abbett and U. S. Trust.
The Lefrak Organization, Hartz Mountain Industries, Mack-Cali
Realty Corporation and SJP Properties are developing office
properties along the waterfront.
The vacancy rate in the waterfront market was reported at 4.75
percent early this year by CB Richard Ellis, a real-estate services
company, which also said the average asking rent increased to
$26.23 per square foot in early 1999 from $22.28 at the end
of 1997. Statewide, the vacancy rate held steady at 9.7 percent
while the average asking rent topped $21 a square foot for the
first time since the 1980's.
Speculative office construction is resuming on Long Island,
with Mitchell Rechler, Executive Vice President of Reckson Associates
Realty Corporation of Melville, reporting that his firm is planning
a 550,000 square foot project in Melville. The two 275,000 square
foot buildings are to be constructed next to the Long Island
Expressway and are scheduled to be occupied in September 2000.
Mr. Rechler said several smaller projects by other companies,
totaling several hundred thousand square feet of space, were
also under way. He said most of the space available on the Long
Island market was divided into small units and big blocks were
unavailable.
CB Richard Ellis reported that the overall vacancy rate for
Nassau and Suffolk Counties was 7 percent at the end of the
first quarter and that company expansion was creating a need
for additional office space. Average asking rents in the two
counties reached $22.15 per square foot.
In Westchester County, most buildings are being constructed
for specific customers, rather than on speculation. The same
is true for Fairfield County in Connecticut. Westchester's vacancy
rate was 18.7 percent at the end of the first quarter, according
to CB Richard Ellis, while Fairfield's was 7.8 percent. The
average asking rent in Westchester was $20.94 a square foot,
while the average rent in Fairfield was $25.42 a square foot.
Both represent a moderate increase over the year-ago rate.
Retail
More
Interest Off the Beaten Track
As with office tenants, rising rents are
forcing retailers to seek out locations on side streets they
once would have avoided and consider parts of the city away
from more traditional retail areas.
"People no longer feel they absolutely have to be on the
main avenues," said Benjamin Fox, a partner in New Spectrum
Realty Services, a Manhattan retail brokerage. "We are
seeing a lot of activity on side streets now. A lot of secondary
spaces that used to stand empty are renting now."
Richard A. Seligman, President of Retail Development Partners
of New York, said, "You are hearing a lot of talk about
Nolita and NoHo these days," referring to the areas north
of Little Italy and north of Houston Street. "They are
going there because they don't want to pay $200 a square foot
in SoHo."
He said asking rents in prime locations along avenues in SoHo
had increased from $175 to $225 a square foot a year from $35
during this decade. "That's where Madison Avenue was seven
or eight years ago," he said.
Madison Avenue in the 50's and 60's has, of course, changed
as well. Top locations now command $400 to $450 a square foot,
Mr. Seligman said.
This is pushing retailers to the outskirts of Manhattan. On
the East Side, after decades of delay, parts of the Bridgemarket
complex are due to open next month in the vaults under the Queensboro
Bridge. The development is to include two restaurants operated
by Sir Terence Conran, a Conran home furnishings store and a
market-style Food Emporium.
On the West Side, Jeffrey, a clothing store, recently opened
in a former warehouse on 14th Street close to the West Side
Highway. Brokers say the proprietor, Jeffrey Kalinsky, might
be able to be a little aggressive on his pricing because he
is paying only $23 to $26 a square foot in rent, compared with
the vastly higher rents in more established retail locations.
Big-box retailers, which stock a large variety of a few categories
of merchandise may find opportunities in the old industrial
buildings of the West Side as well, said Robert K. Futterman,
President of a Manhattan brokerage firm bearing his name. "Ikea,
Home Depot and Costco have been hovering over New York for years,"
he said. Likely locations, he said, are along 10th and 11th
Avenues in the 20's to the 50's.
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