Office In 'A Period Of Creative Destruction' As Owners Search For What Actually Gets Workers In
In the slow return to the office, landlords are in a fight for survival, and amenities have become their weapon of choice.
“What I'm seeing in the boutique office market ... is a bifurcation of products into winners and losers, there is a certain group of product that has amenities and intrinsic features that draw employees back to the office that allow employers to help employees, and this is what is very much in demand,” Rockrose Development Director Ted Traum said at Bisnow’s State of the New York City Office Market event this week.
“You have to be very surgical … in the past, you could say, ‘I just want exposure to the New York office.' Almost anything within certain parameters would do," he added. "Now you have to be extraordinarily cognizant of what it is that makes it a winner.”
While people have returned to New York City in droves, pushing the apartment vacancy rate down to less than 2% in Manhattan and rents up to new highs, the return to office has been far less robust. New York City’s office occupancy is still under 40%, per Kastle Systems data, a rate that has confounded, and often irritated, the city’s real estate community.
As many workers continue to bristle against return-to-office mandates, landlords are turning to costly amenity upgrades in an attempt to help lure people back to their buildings. It has become a question of survival, office developers, investors, designers and brokers said at the Bisnow event, in a market where brand new offices are constantly becoming available, and tenants have the power to be choosy.
It is a complex set of challenges that landlords are now facing, with little in the way of data to guide them — forcing them to think hard about what kinds of changes will be worth their while.
“I think it's an extraordinary moment of opportunity for Class-B buildings, because there's this democratization of real estate going on,” Industrious CEO Jamie Hodari said. "[Executives] are doing a much better job of listening to what employees want."
There is growing doubt about the future viability of Class-B and C buildings, and many have speculated there are many buildings in the city that will need to be repurposed. Hodari said companies in the past were simply being guided by what they suspected employees wanted, not what would actually improve their working lives.
"I don't think it's a secret that the average engineer or marketing associate doesn't care that much about whether the marble in the lobby is Carrara marble, quartzite or whatever else," Hodari said. "They care a lot about the experiential sort of moments throughout the day being the building. In a lot of ways those are more affordable, more realistic amenities.
Across the city, landlords are spending big on making changes to buildings. Nuveen Real Estate, for example, spent $40M renovating 780 Third Ave., now called The Gardens at 780, creating a new park, gym and wellness center, a café work lounge and new conference rooms.
Aby Rosen’s RFR Realty dropped $25M building what it is calling the Playground and Conference Center underneath the Seagram building, which features a basketball court, a rock climbing wall and a town hall space.
At Fisher Bros.’ 1345 Sixth Ave. the owners are running a $120M improvement campaign that features a new art installation in the building’s public space that also features an immersive, fine art performance that viewers can access through an app they can access on the free WiFi in the public park by the building. The developers are also rolling out a new amenity floor with a tenant lounge, a wellness center and hybrid meeting spaces.
The pressure is certainly on. Even after a first quarter that saw a slew of high-profile deals and 7.7M SF of leases signed, according to Savills — a 90% increase year-over-year and above the five-year quarterly average of 6.5M SF — availability rose to 19% in the quarter, a new high.
"A 19.5% vacant rate in Midtown means there are so many choices out there," Tishman Speyer Senior Managing Director Gus Field said. “It’s more important than ever to build amazing relationships with customers."
Humans have long been known to be fickle, however, and building tricked-out amenity space doesn't guarantee workers will use it.
“Who here works out at their office?” SomeraRoad principal Ian Ross asked the audience. “It's not as many as you think. And we focused for a decade on fitness at the office, so one thing we’re talking about is: Does fitness really matter, do people really want to work out with their co-workers?”
Silverstein Properties Executive Vice President of Asset Management Lisa Bevacqua said her firm isn't building stock standard gyms in its properties anymore in order to stay current with the whims of tenants.
“We build calmness rooms," Bevacqua said. "It's very flexible, you can use it for an event if you need to, or you can do meditation, stretching, or go to yoga classes. But it's a very flexible space … A gym, there's nothing else you can do with it.”
Outdoor space, greenery, light and air have garnered serious attention, particularly since the pandemic put renewed light on health, wellness and fresh air. Tishman Speyer is no exception, having just opened a landscaped rooftop park above Radio City Music Hall for the Rockefeller Center business community.
“We are really working to create a cool environment," Field said. "It's a real struggle to get people to come back."
But as hundreds of millions get pumped into updating old office buildings, so much is still uncertain about how companies and their workers plan to utilize the workspace in the coming years.
“For everyone who took economics, we're in a period of creative destruction,” Hines’ New York Office co-head Tommy Craig said. “[The] problem employers have in New York right now … is how to motivate four generations in the workforce.”