Pricey Upgrades Name Of The Game For NYC Landlords Competing With New Construction
In New York City's brutally competitive leasing market, the owners of older buildings are being forced to spend big on renovations in order to keep tenants from fleeing to new buildings.
Over the last eight years, Midtown has lost millions of square feet of tenants moving to other areas of the city. Much of that is caused by companies being lured by brand-new office towers downtown and the rise of Hudson Yards.
This last quarter, the submarket felt that phenomenon acutely: negative absorption there reached 2M SF and availability jumped to 11.5% as more than a dozen blocks of space greater than 100K SF hit the market.
Changing tenants tastes and scores of new development means landlords of office buildings are under increasing pressure to upgrade their offerings to compete.
“The market used to be focused on location, location, location. Hudson Yards changed the conversation to product, product, product,” said Bill Edwards, executive vice president of Core Holdings at Rockefeller Group.
His company will finish a multiyear renovation this year on 1271 Sixth Ave., a 1960s office building that has undergone a $600M worth of upgrades.
“Hudson Yards has helped the entire market rethink their assets, and the product that we are all delivering,” Edwards said.
New York City’s building stock is famously aging. In fact, 76% of Manhattan’s inventory was built prior to 1980, according to Savills’ research team.
Construction slowed toward the end of the 1980s and early 1990s, Colliers International Tri-State President Michael Cohen said. But over the last nine years, 26M SF of new or dramatically renovated office product has become available in Manhattan, according to Colliers numbers. Over the next five years, another 22M SF will be added.
The bar for landlords has been reset, experts said, and it is going to cost them.
“Owners and investors [of older buildings] have no choice but to take a hard look at what they've got and see how they can adapt it for the new century,” Cohen said.
“Ripping up the carpet and polishing the floors is not cheap … This metamorphosis is very expensive and that doesn't include the building systems, it doesn't include the new lobbies, it doesn't include the roof decks and all the other amenities that the older building stock is incorporating in order to compete.”
He added that competition has become so brutal that some buildings will simply have to be torn down, complicating things further for landlords in leasing.
Buildings like 415 Madison Ave. and 485 Madison Ave. have demolition clauses, Cohen said. Notably, J.P. Morgan last year announced it will tear down its office building at 270 Park Ave. and replace it with a 2.5M SF skyscraper for a brand-new global headquarters.
Savills Vice Chairman Jeffrey Peck said there has been a reluctance to build office buildings speculatively in New York City, and agreed the Hudson Yards and downtown developments caused a seismic shift in the office leasing world.
“We’ve stayed with the same staid buildings for decades … now that a developer took a chance on the Far West side, we’ve got all this new construction,” he said.
“Typically, landlords have done minor modifications to their lobbies when they saw their big vacancies. [Now] we are talking about major transformations of these 1950s, 1960s and 1970s building to compete.”
Sources pointed to buildings like the Durst Organization’s 1155 Sixth Ave., where the company has spent more than $100M on upgrades, SL Green’s 1185 Sixth Ave. and Vornado’s major revamp of One Penn Plaza as just a few examples of landlords' responses to this new paradigm.
Just last week, Brookfield revealed its plans for the office building it owns at 666 Fifth Ave., which involves spending $400M on a new facade, upgrading interiors and building mechanics. There are also major reimaginings of buildings taking place around the city, including Vornado’s revamp of the Farley Post Office and Oxford Properties re-creation of St. John’s Terminal, where Google is creating a new office campus.
Rockefeller’s Edwards said the company was faced with a choice at 1271 Sixth Ave., when Time, its long-term tenant, left the building back in 2016.
“We were left with a 2.1M SF office building in a prominent location on Sixth Avenue with a 1960s window wall and 1960s vintage mechanical systems,” he said. “We took that as an opportunity to completely replace the window wall, replace the HVAC systems, new elevators systems, lobby, exterior plazas and really take this asset to virtually new construction.”
Major League Baseball took 400K SF there in 2016 and law firm Latham & Watkins leased 407K SF in the building last year.
The major point of difference was changing the window line, Edwards said, to open up the light and views.
“If you go down the path of ‘do nothing’ … you are leasing a 1960s building in 2019. You pay the price on the rents and you pay the price on the leasing velocity,” he said, adding there have been widespread upgrades along Sixth Avenue office buildings.
“It’s a rare situation where, whether organized or not, we’ve all come together as landlords to invest in our assets to improve the overall submarket.”
The city's aging office stock will be discussed at Bisnow's New York State of the Market event at One Manhattan West on Oct. 30th.