Local Layoff Indicator Points to Prolonged Unemployment

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Big blocks of space go begging Theresa Agovino
Published: August 10, 2008 - 5:59 am
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Last Tuesday, nearly 70 brokers gathered in the new marketing center for 120 Park Ave. to hear about the building's virtues. While the brokers sat munching omelets and muffins they were told about the premier location, wraparound terraces, private parking garage and branding opportunities that come with the nearly 440,000 square feet of available space in the building.

“This is a rare opportunity for a corporate headquarters on Park Avenue,” says Paul Glickman, a vice chairman of Cushman & Wakefield Inc.

On Park Avenue, options are indeed limited. But on the storied street and beyond, the number of large blocks of vacant office space is soaring, with tenants spoiled for choice as they have not been in years.

As of June, there were 54 blocks of large space—defined as 100,000 square feet or more—available in Manhattan. That figure is up 35% from the year-ago period, according to Colliers ABR Inc., which also reports that in June there were 15 totally empty buildings, eight with large blocks of space. A year earlier, there were only six vacant properties, four with large blocks of space.

Large blocks can be leased at 909 Third Ave., 3 Columbus Circle and 345 Park Ave. Empty buildings include 545 Madison Ave. and 224 W. 57th St. and the old New York Times Building at 229 W. 43rd St.

Meanwhile, several real estate brokers estimate that there are only 15 to 20 tenants scouting for such large spaces. That imbalance between supply and demand in the large-space market is expected to push rents lower in the long term and make tenants more reluctant to rush into new leases in the near term.

“Last year, I'd be saying to clients, "You really need to get this done,' “ says Nicola Heryet, senior managing director at Colliers, who has two clients that are each seeking more than 100,000 square feet of space. “Now, you certainly don't want to lose a good opportunity, but there isn't the same pressure.”

Available space is multiplying for several reasons. Struggling financial services firms are dumping space on the market as they lay off employees. For example, Lehman Brothers is relinquishing about 167,000 square feet at 399 Park Ave. and 100,000 square feet at 605 Third Ave. Meanwhile, iStar Financial shed roughly 107,000 square feet at 1095 Sixth Ave.

Additionally, Bank of America, The New York Times Co. and others have moved into new buildings, leaving a swath of space in their wake.

In other cases, new owners have cleared out and refurbished buildings in the hope of charging higher rents. That's exactly what LCOR did after purchasing 545 Madison Ave. two years ago. The developer stripped the building down to the steel and rebuilt it as a sleek modern tower that the landlord hopes will appeal to high-paying hedge funds and private equity firms. To help lure tenants to the building, LCOR has prebuilt two office suites and is considering constructing another, says Lisa Kiell, a managing director at Jones Lang LaSalle, who is marketing the building.

Ms. Kiell says that the fact that small tenants can have their own floors in a luxurious boutique building is key to the property's allure. “Such tenants aren't important in a big building,” she says. The asking rents in the building, which will be ready in October, are between $110 and $150 a square foot.

Rents coming down

The trouble is that many other buildings in the area are chasing the same clientele, including 510 Madison Ave., which is being developed by Macklowe Properties and is set to open in October.

The big question is whether rents will buckle under the pressure of so much supply and a demand depressed by a sagging economy and skittish tenants. While the data published by most firms show rents holding fairly steady, some brokers insist that when incentives such as free rent and more generous construction allowances are factored in, rents are already down 15% to 20% from last year.

That is a challenge for the new owners of 120 Park Ave., among others. Brokers were impressed by the amenities at the former headquarters of the world's largest tobacco company, Altria Group Inc. But some say the asking rents of between $100 to $120 a square foot are too pricey.

That could be a problem as marketing for the building begins. Global Holdings Inc. bought the building earlier this year after Altria announced plans to leave the city. Altria retained only four floors in its home of the last 24 years on the corner of Park Avenue and East 42nd Street.

Mr. Glickman says the building will give a company an opportunity to have a major presence in New York. He also points out that a big tenant would be allowed to put its logo on the tower, not to mention enjoying large floor plates and high ceilings.

Mr. Glickman insists such attributes merit the asking rent, even in a crowded market.

TAgovino@crainsnewyork.com

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