Are Office Condos Past Due For A Comeback In NYC?
The climb in Manhattan office rents shows no sign of stopping, with average asks hitting nearly $73/SF according to the most recent numbers from Cushman & Wakefield. One almost has to ask: Why not just own office space?
As Colliers International Tri-State president Michael Cohen put it in a recent interview, “…a lot of the ‘value’ supply under $70/SF is basically vanishing. It’s remarkable that $70/SF is now the dividing line between the ‘value' and upper class of product in Midtown, but that’s where it is.”
Rudder Property Group’s Michael Rudder (above) tells us for most users, the cost of an office condo works out to roughly that $70/SF range when you factor in mortgage payments, interest, common charges and taxes.
According to a report prepared by Rudder, as of the second half of 2015, the dollar value of office condo sales was actually down $44M from the first half of the year. In terms of total SF, the drop was even bigger: about 149k SF, down from about 191k SF.
With rents rising at the rate they are, what gives?
There’s just not much inventory, Michael says. Only about 10.5M SF of Manhattan’s roughly 400M SF of office inventory is made up of condos—a drop in the bucket.
Few developers have been stepping into the space in recent years. That’s all the more so with ground-up developers.
A prominent exception is Extell Development, which initially sought to market all the space in its International Gem Tower at 50 West 47th St (above) to office condo buyers in the precious stone and jewelry industries when it opened the building in 2013.
After seeing weak demand for the units, Extell sold a 319k SF upper portion of the tower to SL Green, which is renting the Class-A space at asking rents of around $100/SF. The lower floors still haven’t sold out after predictions that the entire building, including the upper floors that were sold to SL Green, would go within a year.
This past February, The Real Deal reported that the remaining units would be marketed more broadly than just to jewelry industry users.
The right user can make all the difference, Michael says. Nonprofits; foreign firms, especially from Asian countries with a cultural tradition of ownership; and users like embassies and consulates are among those he’s seeing the most interest from at properties like 866 United Nations Plaza (above), where Rudder is marketing spaces of between 1k SF and 50k SF and bigger.
"You can’t just go build these things anywhere,” Jack Guttman tells us. “You have to have a hook.”
At the Chelsea Arts Tower, which Jack developed in 2007 and 2008, that hook was art and fashion tenants.
The project sold out, except for a top floor unit that Jack’s firm held onto to use as its own space, with average pricing in the $700s/SF. It was, at the time, the only ground-up development selling office condos in Manhattan. Today it would hit well over $1,300/SF, by Michael’s guess.
Jack tells us he’s looking at another possible office condo project. The hesitance among office users to own a piece of Manhattan may come down to a willingness to stick your neck out, Jack tells us.
“Nobody likes to be a leader,” he says. "Nobody likes to take risks like me. Nobody wants to be different."
We’ll see how long that can remain the case in the current office market.