Mixed Prospects

Demand for New Office Construction Tilts toward High End

by Diane Greer

The clear leader, as usual, is Midtown Manhattan, said Donald Lutt, managing director of GVA Williams Brokerage Services of New York, a commercial real estate firm that handles transactions in Manhattan's business districts.

"Midtown is doing phenomenally," he added. "Availability is 9.5 percent in New York City. Our estimation is once you get below 10 percent, you see a shifting from a tenant's to a landlord's market."

Supply is on the way in Midtown, including two new office high-rises on opposite ends of the Times Square district - the Bank of America Tower at One Bryant Park at Sixth Avenue and 42nd Street and the New York Times building at 41st Street and Eighth Avenue - and a major renovation of the former Verizon building across from Bryant Park on Sixth Avenue. Expected rental rates in the new spaces range from $80 to $90 per sq. ft., Lutt said.

advertisement

But even that tab of roughly 3 million more sq. ft. won't put much of a dent in the largest office market in the country, which has 190 million sq. ft., Lutt said. The existing low vacancy rates will not spur a marked increase in speculative construction because the lack of available land forms a high barrier for the market, he added.

Steven Pressler, executive vice president and area general manager for Skanska USA Building's New York office, said he expects the region's hot condominium market to cool and open more opportunities for office construction. The company, which is based in Parsippany, N.J., has no current office projects in Manhattan, though it has one in Queens and recently handled a four-phase redevelopment project at the Rockefeller Center complex in Midtown.

"The market is clearly starting to come back up, but it doesn't compare with the condo market," Pressler added.

Where offices are coming on line, tenants expect premier amenities, easy access to restaurants and shopping, and efficiencies of operation.

Another prime feature in demand today is incorporating sustainable design features, said Daniel Nall, senior vice president for Flack + Kurtz of New York, a mechanical engineering firm that is working on the New York Times building, which is slated for completion early next year. The 1.6 million-sq.-ft. building, more than half for the newspaper's staff and the rest for speculative office leasing, has a cogeneration backup power system, glare control mechanisms, and automatically adjustable blinds to promote energy efficiency.

"Part of it is energy efficiency, part of it is the indoor environment that has to do with productivity and employee retention, and part of it is public relations," Nall added.

In the same vein, the 52-story Bank of America building, scheduled for completion in 2008, is the first office building of its size to seek platinum-level Leadership in Energy and Environmental Design status from the United States Green Building Council. The project entails installing a 4.6-MW cogeneration plant, an underfloor air ventilation system, and a recycling system for rain and wastewater.

The owners of the New York Times building are not pursuing LEED status, citing the additional oversight and costs the certification process entails.

Beyond the Midtown Office Market

Lower Manhattan's office development sector remains sluggish, with vacancy rates at 16 percent. Speculative development has been sparse in Lower Manhattan because average rents of $33 per sq. ft. seldom support the investment, Lutt said.

The only new construction downtown ready for market is 7 World Trade Center, which will open this spring. Tishman Construction built the $700 million, 52-story, 1.7 million-sq-ft. tower for Silverstein Properties with numerous sustainable design and life-safety features, such as encasing elevators, utilities, and stairs in a 2-ft.-thick, vertical concrete core.

Silverstein financed construction with insurance proceeds stemming from the Sept. 11 attacks and $475 million from the federal Liberty Bonds program - resources that let the project proceed without an anchor tenant. As of early last month, 7 World Trade Center had signed two tenants, the New York Academy of Sciences and Ameriprise Financial, each taking a floor or less.

Lutt said he expects downtown's prospects to rise as the Midtown market tightens and as improvements to city subway lines near the World Trade Center move ahead. But he said that one potential sticking point for prospective tenants is a possible stigma about locating next to the World Trade Center site and operating near active construction for the next 10 years on features such as the 1,776-ft.-tall Freedom Tower, museums, and a Sept. 11 memorial.

One bright spot emerged in late November when Goldman Sachs Group broke ground on its 740-ft.-tall world headquarters and trading facility on the last commercial lot in Battery Park City, diagonally across from the planned Freedom Tower on West Street. Goldman selected New York-based Pei Cobb Freed & Partners to design its 43-story, $2.4 billion building for which it will seek gold LEED certification upon its opening in 2009.

Other parts of the city face tight office supply, but that may not translate into construction.

From 14th Street to 34th Street, conversions of office buildings to residential have resulted in limited office supply, with a vacancy rate of 8.8 percent and rents averaging $36 per sq. ft. Even so, Lutt said the math does not work to build new office structures.

"You need to collect $60 to $70 per sq. ft. to break even, and no one is going to pay that much money to be in Midtown South," Lutt said.

There is slightly more office construction activity in Brooklyn and Queens, Lutt added. Citigroup of New York broke ground in October on a $290 million, 15-story, 528,000-sq.-ft. office building in the Long Island City area of Queens. The Court Square Two building, next to an existing Citigroup tower, will benefit from $30 million in infrastructure improvements the city government has promised in order to spur area development.

In the Bronx, Simone Development of New Rochelle, N.Y., built a speculative, 460,000-sq.-ft. building at Hutchinson Metro Center in the Pelham Bay area. It has completely leased the $50 million complex, which has parking, a fitness center, security, and proximity to public transportation. Simone will break ground this summer on an adjacent 260,000-sq.-ft. office building.

"It's an upcoming market for development," said Joe Simone, president of Simone Development. "For some reason, it's the last borough to develop, and right now, it is starting to get hot."

New Jersey Hopes for Turnaround

Upward pressure on office rents in New York could lead businesses to follow the path of other companies in decades past that have relocated to New Jersey, said Robert Rudin, executive vice president of Cushman & Wakefield of New Jersey, a commercial real estate firm.

The firm projected overall state vacancy rates at 19.2 percent for last year. While office inventory has remained relatively stable since the Sept. 11 attacks, several new developments have broken ground, with 791,000 sq. ft. under construction, compared with 180,000 sq. ft. at the end of 2004.

"Despite the oversupply, there are four substantial buildings being built, which would appear to defy reason," Rudin said.

He said that much of the existing inventory is 15 to 20 years old and needs extensive rehabilitation, including mechanical, electrical, and plumbing work. With rents in the low $30 per sq. ft. range, developers find it difficult to justify renovations.

Possibly in response, several corporations are taking on such renovations and new construction themselves. Sanofi-aventis Group of New York, a pharmaceutical company, announced last fall that it will relocate to the former AT&T facility in Bridgewater, N.J., and renovate the site.

Meanwhile, Novartis Pharmaceuticals in East Hanover, N.J., is constructing two five-story office buildings and a parking garage. Turner Construction, out of its Somerset, N.J., office, is providing construction management services.

One of the few large speculative office projects in New Jersey is a five-story, 175,000-sq.-ft. class-A office building in Parsippany, on which the Gale Co. of Florham Park, N.J., broke ground last year [see Morris County feature]. The $40 million building is the first speculative office space built in Morris County since 2001.

Connecticut Market Still Sluggish

"The commercial office market is slow," said Robert Hickey, president and CEO of van Zelm Heywood & Shadford, an engineering firm based in West Hartford, Conn. "What is occurring is upgrading and filling of existing office space."

As with New Jersey, high vacancy rates prevail in Connecticut. George Bagley, a principal with Sound Commercial Real Estate Group of Greenwich, Conn., reported a 22 percent vacancy rate in Stamford, a business hub. However, Bagley said there is significant leasing activity.

There may be more change on the horizon. A 15-story office building is being planned in Bridgeport, Conn., on land leased from a church. The 320,000-sq.-ft. Trinity Place project would feature retail and dining elements. Los Angeles-based Lowe Enterprises is managing the effort.

Meanwhile, the British-owned Royal Bank of Scotland announced it would begin development this year of a new $400 million, 500,000-sq.-ft. complex in downtown Stamford near Interstate 95. The Stamford Advocate reported in early January that the bank had purchased or was set to buy several lots, including a site formerly marketed for a 23-story office tower by the New York-based Louis Dreyfus Property Group.

"The market is slightly depressed, except in the better-quality, better-located buildings," Bagley said. "I see Stamford as an opportunity."