FEATURE ARTICLE, SEPTEMBER 2004

A GROWING NEW YORK
SL Green predicts good things for Manhattan office properties.
Jaime Lackey

Manhattan’s current office market is trending upward, according to Gerard Nocera, COO of SL Green Realty Corporation, an office REIT and the largest owner of office properties in New York City.

On September 11, 2001, New York lost more than 20 million square feet of office inventory in the terrorist attacks. In the past 2 years, leasing activity has been down in Manhattan. But signs are pointing to a strong recovery.

“We’re now at the precipice of what we believe is a turnaround in the market,” Nocera says. “We believe early to mid-2005 should see a real turnaround in the marketplace for standard size units.”

There are more tenants looking at vacant space and making offers, Nocera says, but there are still some available 10,000- to 15,000-square-foot sublets that compete against direct space. For big block users looking for 200,000 to 300,000 square feet, though, the choices are already very limited.

Law firms and accounting firms, which typically use large blocks of office space, have done well through the recession and kept vacancy in New York from going any higher than it did, according to Nocera. In addition, financial institutions — which have gone through a series of reductions over the last few years — are hiring again. This increased hiring activity will eventually result in increased demand for space.

“The Plaza district is doing well, the Grand Central district is showing signs of strength and Midtown West is solid,” Nocera says. “However, there is still weakness in the Penn Station area, and there are still a lot of sublets in the Park Avenue South district.”

SL Green is more concerned with Midtown Manhattan, though, as the majority of its holdings are located in Midtown. The company owns or has interests in 15.1 million square feet of office space in 26 buildings located near public transportation hubs, including Penn Station, the Port Authority Bus Terminal and Grand Central Terminal.

In Midtown, overall asking rents for office properties range from $35 to $52 per square foot. The overall vacancy rate for direct space in Midtown is currently 8.2 percent; another 3.6 percent in sublet space brings the total to 11.9 percent. The vacancy rate peaked at 12 percent in second quarter of 2003.

“In Midtown, virtually all major blocks of sublet space either have been leased or have blocks of space ready to be leased,” Nocera says. “For every piece of space that is in the market, there is at least one tenant interested in it.”

Tenants are looking for well-located space with good floor plans. Space needs to be in move-in condition, particularly with smaller units. Tenants are concerned with technology (including T-1 or T-3 connections), telecommunications and satellite. Since September 11, tenants are more concerned with security. Landlords have to decide whether to provide turnstiles and automated security or security guards to check passes in the lobbies. Emergency power is also more important since the blackout in August 2003.

Developing in New York takes patience and know-how. Nocera explains, “New York is a very unique animal because you can’t develop new areas. In New Jersey, you’ve got submarket after submarket and sprawling land, so a new building is relatively easy to put up. To build new inventory here takes a minimum of 5 to 7 years. Just to develop the site and put together a parcel sometimes takes 10 to15 years.”

For example, The Durst family of The Durst Organization worked for 40 years to put together the site for the company’s 2.1 million-square-foot Bank of America Tower at One Bryant Park, which broke ground August 2. The building is slated for completion in 2008.

“New York is a very difficult market to do business in,” Nocera says. “There are great barriers to entry. It is very hard to buy properties here, and it is very expensive. There are complicated insurance and union situations to consider. You have varied zoning areas and various community boards that have their say in what you’re going to build. It is also a very litigious town.”

Terrorism insurance is a major issue for owners in New York. According to Nocera, “You have to carry terrorism insurance as a separate policy now. Terrorism insurance affects the cost to run the building, which eventually affects the value of the building, which eventually affects what buyers can afford — or cannot afford — to pay for the building.”

Despite the complications that come with developing and owning property in New York, owners and developers continue to seek the rewards.


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