By Herbert Lash
NEW YORK, Nov 10 (Reuters) - A new skyline rising across
Manhattan poses a challenge for the owners of the city's aging
office buildings as they face expensive overhauls in order to
compete against a wave of amenity-rich towers nearing
completion.
Manhattan has the oldest office infrastructure in the world,
and record levels of available space by 2017 will test the moxie
of landlords who are losing top tenants to the new buildings
mostly going up in Lower Manhattan and on the West Side.
Firms such as Time Warner Inc (N:TWX), News Corp (O:NWSA), L'Oreal and Conde
Nast, among others, already have moved or agreed to relocate
either downtown at the developing new World Trade Center
complex, or the West Side's new Hudson Yards district.
By the end of the decade, about 18 million square feet of
new office space will be built in the biggest building spree
that New York has seen in more than three decades. While just 4
percent of the city's entire office space, even owners of prime
Class A space need to ensure they can retain or sign the best
tenants.
By late next year, big blocks of space will open up, adding
pressure to a market with nine or 10 buildings, largely in
Midtown, that realtor Savills Studley says already are
struggling with "empty building syndrome" - tenant vacancy rates
of 75 percent or higher.
"Unless there is some big wellspring in demand and unless
there's a bounce-back in the core tenants - the financial and
legal sector - we don't see where the demand is going to come
from," said Keith DeCoster, director of U.S. real estate
analytics at Studley, a unit of Savills Plc SVS.L .
To nab tenants, some landlords are getting creative with
renovations, and some even had to wait years to empty a building
of tenants that had long-term, staggered leases.
Developer L&L Holding Co LLC waited a decade for leases to
expire last year so it could "re-imagine the geometry" of a 1953
building at 390 Madison Avenue once occupied by United Nations
offices, said L&L co-founder and chief executive David Levinson.
When finished in 2017, the building just north of Grand
Central Terminal, could help spur renewal of a largely
nondescript stretch of Midtown, a long-time office district
where the average building age is 75 years.
Three million pounds of steel and concrete will be gutted
from the 24-story building's base and eight new floors will be
added on top.
MAKEOVER
The makeover aims to compete with newer structures and
overcome a zoning hurdle: a completely demolished structure
would have had to be smaller in size. By retaining most of the
structure, only 18 percent will be dismantled, the new building
will have the same square footage as the original.
The new design includes a three-story atrium, an open-air
deck, the gutting of four floors to allow for two new ones that
are double-height and a new corner at 46th Street inspired by
Alice Tully Hall at Lincoln Center. Sunlight is maximized with
floor-to-ceiling, energy-efficient glass exteriors throughout.
"You're going to definitely see more of this," Levinson
said. "If the owners don't do it, their buildings are going to
be what we call commodity buildings, and they're going to rise
and fall based on when the tide comes in."
Levinson declined to say how much the makeover will cost.
The New York Post said the building's acquisition and renovation
might approach $1 billion.
Another pressure point for landlords is space per worker has
been cut in half since the 1980s. When law firm Skadden Arps
moves to 1 Manhattan West in five years, it will reduce its
footprint to 550,000 square feet from more than 800,000,
Studley's DeCoster said.
The departure of Skadden Arps and Conde Nast from 4 Times
Square from a building that debuted to much fanfare just 16
years ago has led owners the Durst Organization to plan $80
million to $100 million in renovations, said Tom Bow, who is in
charge of leasing at Durst.
Amenities will be anchored by an existing Frank
Gehry-designed cafeteria and will include new private dining, a
conference room and possibly a gym, Bow said.
Renters may lease less space than the past as they shed
boardrooms or other areas no longer used daily, and opt to rent
communal areas provided in the re-designed building, he said.
The challenges for these structures have emerged even though
Manhattan real estate remains strong because of heavy appetite
from foreign investors and well known companies such as Facebook (O:FB)
and Twitter (N:TWTR). The availability rate is just 4.2 percent in
Midtown South, Studley says.
Many expect the new space to be absorbed as the building
boom is less speculative than three decades ago, when large
buildings were built without tenants lined up.
"You cannot equate the next cycle with the downturn of the
late '80s, early '90s," said Michael Cohen, president of the
tri-state New York area at Colliers International.
"But you can say the math simply argues that the new
construction being done...is going to leave in its wake
increasing inventory in other parts of town," Cohen said.