Companies are cutting down on both the size and number of private offices, squeezing in more people through “densification” into large open rooms, and then having small breakout rooms, food areas, telephone quiet areas and conference rooms.
“The jobs being added are not the senior banker in a corner office,” says Matthew Barlow, executive vice president at Savills Studley. “It’s someone working on a bench at Facebook.”
While benching is not the endgame, the options for a new workplace are, observes Marcus Rayner, vice chairman of Colliers International. “They will have a choice in the environment in which they work: home, cafés and different work settings,” Rayner says. “The nature of work has changed and it’s much more collaborative.”
In the past, building owners would take a floor, and create a few smaller prebuilts. But Brian Waterman, vice chairman at Newmark Grubb Knight Frank, says, “Tenants would rather pay a higher rent for built space than pay a lower rent and build it themselves.”
That is leading to multiple full-floor prebuilts and some businesses simply renting inside co-working spaces.
Even as NYC firms hired enough employees that, until recently, would have filled 40 million square feet of offices, that didn’t happen because of the densification, Barlow explains.
With many companies beginning to move from large blocks of space in Midtown to the new buildings at Hudson Yards, Manhattan West and the World Trade Center, as well as the new One Vanderbilt, along with the entirely revamped 425 Park Ave., 390 Madison Ave. and 4 Times Square available, there are also some worries that the space being left behind will become a drag on the market. But most leasing agents feel this Class A space will become an opportunity for other tenants.
“They happen to be blocks of space in pretty good buildings,” says Rayner. “Whether that will be a hindrance to the market? I don’t personally think so.”
There has been a slight uptick in sublease space and would be more, Barlow says, but some building owners have proactively terminated leases to either renovate the spaces or diversify the lease expirations in their portfolios. “They are trying to get ahead of the curve,” he explains.
Years of rejiggering the city’s most desirable corridors has affected lease costs and velocity, invented new markets and reinvented old manufacturing areas.
“There’s definitely activity in the marketplace all over the city,” says Bill Rudin, CEO of Rudin Management. “It is in all different segments of the marketplace; and the geographical boundaries will continue to expand.”
Waterman explains, “Not every building is going to work for every tenant but there are certainly opportunities for every kind of tenant whether creative or high-end financial.”
Today, the previous cost savings achieved by leasing downtown has also evaporated as newer and revitalized stock at Brookfield Place, the World Trade Center and 28 Liberty have pushed costs higher and closer to their Midtown and Hudson Yards counterparts.
“The bottom of the market right now is the same in all three markets [downtown, Midtown South and Midtow], at roughly $50 a foot,” says Rob Martin, vice chairman, JLL. “That’s a big change. No longer can you go somewhere else to find a block for $40 a foot.”
The bigger difference, Martin observes, is in the pricey end. Midtown and Midtown South rents are upwards of $150 per foot, while downtown’s upper end still ranges in the $75- to $80-per-foot zone, with perhaps a special top floor or two asking more.
To attract tenants to Midtown’s Plaza District, trophy building concession packages are at a historic high.
“The part of the market that will be affected will be at the high end,” Martin explains. “Hedge funds are having a tough year and not growing as much as they once were. A lot of supply is coming on in the high end.”
But Midtown South has so few big blocks of space that the desirable and better-run Class B buildings can achieve $60 and $70 per foot rents for small spaces — also historic highs.
Numerous buildings that have been upgraded and targeted towards tech tenants along Broadway in the Times Square South area from 34th to 42nd streets now have availabilities. “They are all competing for tenants and offering deals,” says Grant Greenspan, principal of the Kaufman Organization.
There are also groups of tenants that can’t afford $60. “They are looking at the Garment District where there is an overhang of space,” says Greenspan. On the side streets, owners are holding out for rents in the $38 to $42 per foot range, he says.
In the East Village, Vornado Realty Trust’s behemoth at 770 Broadway and its Class A neighbor 51 Astor Place owned by Minskoff, along with the Meatpacking District’s new 860 Washington Ave. developed by Romanoff Equities and Property Group Partners along with Aurora and Vornado’s upcoming 61 Ninth Ave. by the Apple Store can all garner rents well over $100 per foot.
‘Tenants would rather pay a higher rent for built space than pay a lower rent and build it themselves.’
– Brian Waterman, vice chairman, Newmark Grubb Knight Frank
Brooklyn and Long Island City’s reinvented old warehouses are also achieving rents into the $60s per foot, although there are still bargains here and there. The borough’s employee relocation benefits are helping keep net effective rents down with tax credits.
Rudin says, “You will see some significant tenants moving to Brooklyn.”
Because of incentives being offered in New Jersey and the PATH train as an accepted commute, the value proposition there is similar to the boroughs.
“Tenants that are looking in Jersey are also looking in Brooklyn and making a decision based on rental value and/or where the employee base is from,” says Waterman.
This is also causing companies to rethink splitting their workforces, with some going to a more creative and/or cheaper location. “As a bifurcated strategy, how could you not be looking to save on your operating costs?” Waterman asks.
