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What’s Happening in the Commercial Leasing Market? An Interview!

I feel lucky to have terrific commercial leasing experts who are on my “speed dial” to answer questions about commercial leasing and to help me keep my finger on the pulse of that market.

I had a few questions for one of my friends in commercial leasing, Elliot Zelinger of Savitt Partners.  I thought we’d talk about a few of the bigger issues in commercial leasing world, the talked-about shift from midtown Manhattan as commercial hub, to Hudson Yards. And a little discussion about WeWork.  (EDITED FOR LENGTH)

Okay, Elliot.  Thank you for taking some time from your busy schedule.  My first question is about One Vanderbilt, a 1400-foot tall office building, which is already making major progress on the block directly to the West of Grand Central Station. Will this make a big difference in Midtown?  Will it really attract the tenants it expects?  Will it help the residential market?  (Elliot is indicated by EZ):

EZ: For starters, One Vanderbilt will change the landscape of the Grand Central area.  It will include a 14,000SF pedestrian Plaza, enhanced access into and out of Grand Central Station, fine dining by Daniel Boulud, and a plethora of amenities for tenants.  It’s a total game changer!

One Vanderbilt on 42nd Street

Do you think One Vanderbilt attracts creative tenants? Or will it probably be all financial services firms? 

EZ: It is too early to tell but I imagine with the price point they are looking for (around $135 per SF) it would be mostly financial service firms.

I know you also specialize in smaller footprint buildings- are other landlords doing a lot in Midtown, successfully, to attract creative tenants?  

EZ: The successful landlords in the boutique size range, which I do a lot of work in, have been pre-building space. Renovating lobbies and upgrading building systems (elevators, HVAC, etc.) have helped too. Landlords in the Midtown submarket have been struggling to attract and retain large tenants lately, and are offering more concessions (tenant improvement allowance and free rent) than ever to do so.

How real is the competition between midtown buildings like One Vanderbilt and the emerging Hudson Yards?  Do a lot of companies want to stay in Midtown but feel that the office space just doesn’t cut it in midtown?  Are there lots of options in buildings over there that aren’t brand new, the ones we see emerging on the skyline? 

EZ: The major competition now is with larger companies in class A buildings. Once the buildings become more leased and the neighborhood develops further we will see the second tier of tenants move in. In general, the Hudson yards buildings are more sleek and taller than classic Midtown Buildings. They are also built more efficiently. Example of companies moving from Midtown to Hudson Yards are Cooley LLP, Blackrock, Accenture.

I have seen lots of financial service firms also eyeing Hudson Yards, like Steve Cohen’s Point72.  What keeps them in Midtown and looking at spaces there?  

EZ: Look, there will be a large audience for both locations.  Many commuters in financial services still come in from Westchester, CT, etc. so this will be directly at Grand Central. The infrastructure of a new building like One Vanderbilt allows for optimal cable/internet connectivity.

Does the issue with Connecticut taxes effect the thinking of principals in Hedge Funds keeping their companies in CT?  Does this HELP One Vanderbilt attract those guys who decide “Hell, i’m going to have a bigger presence in NYC if the taxes also stink in CT.” 

EZ: Not quite sure about the CT taxes (having an impact) but take Blackrock for example. They signed at Hudson Yards and I know that the state of NY offered special tax credits to keep 2,672 jobs plus a pledge of 700 more in NY.

Hmm… Any secrets up your sleeve?  Any submarkets/neighborhoods that you see as worth our attention?

EZ: A submarket that is going to continue to flourish going into the New Year is the Fashion District. Transportation access has always been its crown jewel but there are many new restaurants and hotels popping up in 2017 and 2018 that will reinvigorate the neighborhood.

Do you mean Nomad and everything happening around there?

EZ: I would say I expect it to continue to flourish for the following reasons: It can only benefit from the activity in nearby Hudson Yards, there has been a major uptick in entertainment and dining options. For example, the Dream hotel just opened a phenomenal property with a rooftop bar and pool on 37th and 7th. There is a large Wolfgang’s opening on Broadway, renowned fast casual restaurants such as Mighty Quinn’s, Sweetgreen, ‘Wichcraft, Dig Inn, and Luke’s Lobster.

Any Other Trends to Take Note of?

EZ: An important trend in the market worth noting is the growing popularity of co-working space. This is evidenced by WeWork’s purchase of the Lord & Taylor Building for $850MM. WeWork’s recent valuation of $20B and Knotel passing 500,000 square feet of space under lease support the notion that many tenants favor short term, convenient, flexible office space solutions over a traditional long-term lease. We expect this to continue in the year to come.

Keep an eye out for other co-working centers such as Primary and Bond Collective that are making their mark and expanding in NYC.

How do Landlords compete with this model? Although it may not come cheap and could be a slight risk, Landlords that have prebuilt space under 20,000 SF have been more successful. Delivering a flexible
product (mostly open space, exposed ceilings, wood or polished concrete flooring, etc.) will go a long way in leasing vacant space.

Are Landlords Competing with WeWork?  Wouldn’t they prefer to rent out to these co-working companies and just collect rent?  As I understand, there isn’t a ton of arbitrage left for WeWork-type tenants anymore, meaning their markup on rents to tenants isn’t huge, anyway.  Why not lease up space to WeWork types and let them do the heavy lifting?

EZ: Yes and no. WeWork is a risk for a landlord. Some view it as a fad. What happens in a down market? It is risky putting all of your eggs in one basket and potentially having a huge vacancy in your building if they go bad or other companies pass them. Additionally, it represents a lot of wear and tear on your building lobby, elevators, bathrooms, etc.

As far as competition, tenants are flocking to WeWork more than landlords want to compete with WeWork.  So WeWork is stealing potential tenants.  Because of the convenience and lack of having to commit long term. WeWork is no longer just for start- ups, more mature companies find it an attractive option too.

Do you think that WeWork drives residential around it?  or is it the other way around? 

EZ: I don’t think there is a strong correlation between the two right now. WeWork is in rapid expansion mode so it is hard not to be conveniently located near residential. They are a destination brand.

Ok.  I Get That WeWork is convenient and offers a way for tenants fearful of commitment.  What else are landlords doing to stay competitive?

EZ: Right, it’s not only convenience and fear of commitment.  Flexibility has been a recurring theme in the office leasing market lately. In addition to flexible work spaces, it will also be a significant component of the way deals are structured in 2018. Tenant’s needs can change very rapidly and often require some sort of expansion, contraction, and renewal options to meet their demands at the time. It is important for Landlords to understand tenant’s needs in this market, even if that means deviating from their traditional model.

Flexibility on pricing, but more important on term. If a landlord were to anticipate some down time, build out a space for a tenant, give free rent, pay brokerage commissions, etc. it might not be until year 3 of the lease  before they recover their transactional costs.  This is why Landlords prefer and need a longer term to amortize their investment and see a profit. In today’s world, many tenants prefer a shorter term because they want the flexibility to be able to get acquired, start a new venture, etc. In a sense it could be risky for a landlord to do a 3 or even 5 year deal for these reasons. They are almost banking on the renewal or the next tenant to take the space with little modification.

Thank you, Elliot!! Elliot may be reached here with questions. 

 

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