New York Plaza District Offices Empty as Banks Cut Space
Manhattan’s Plaza district, the area near Central Park that commands the nation’s highest office rents, has a glut of space as financial firms cut back and tenants seek trendier neighborhoods south of Midtown.
The availability rate for offices in the Plaza submarket reached 12.3 percent last month, a two-year high, as space leased to Citigroup Inc. (C) and General Motors Co. (GM) went on the market, according to data from brokerage Colliers International. It was 10.5 percent in the third quarter of last year.
The Plaza district -- the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South -- is home to some of the nation’s most expensive and prestigious office towers, including the General Motors Building and 9 W. 57th St. About 30 percent of the market is financial-service firms, which have announced about 60,000 job cuts worldwide this year, according to data compiled by Bloomberg.
“The Plaza’s weakness is symptomatic of a larger problem,” said Michael Knott, a real estate investment trust analyst with Green Street Advisors Inc. in Newport Beach, California. “Manhattan’s economic engine is not firing, and that, of course, is finance.”
The 2008 collapses of Lehman Brothers Holdings Inc. and Bear Stearns Cos., both of which had offices in the district, have made financial and securities firms more conservative with real estate, said Peter Kozel, chief economist of Seattle-based Colliers. Many are suspending space decisions to see how the U.S. elections and Europe’s debt crisis play out, to get a better sense of future taxation and regulation levels, he said.
Office owners in the Plaza district have historically sought higher rents than in the rest of Midtown, even if it means leaving space unleased for longer. Asking rents averaged $80.74 a square foot at the end of August, the highest in midtown Manhattan, where the average is $71.28, according to Colliers. Midtown Manhattan rents are the most expensive of all U.S. business districts.
The Plaza area is so pricey because securities firms, hedge funds and money-management companies want to be near one another in New York’s top buildings, said Joseph Harbert, president of Colliers’ eastern region. The park, hotel and the Fifth Avenue and 57th Street shopping corridors are draws, as well as the idea that “it is close enough to transportation but not in the midst of all the congestion of Grand Central” Terminal, Harbert said in an e-mail.
The vacancy rate is defying Plaza market’s reputation as one of the most sought-after neighborhoods, Kozel said.
“There seems to be sometimes this feeling that some places are just immune,” he said in a telephone interview. “The big issue is the basic economy has not recovered the way it should or normally would have.”
Financial and securities firms employed about 444,000 people in New York City as of last month, about 30,000 fewer than they did in August of 2007, according to the city’s Independent Budget Office.
As financial companies scale back, technology, media and advertising firms have become the most active in New York’s leasing market, favoring neighborhoods below Midtown that are home to older buildings and converted warehouses. The availability rate in the area known as midtown south, which Colliers defines as between 40th and Canal streets, was 7.9 percent in August, according to the brokerage.
“Right now, Midtown just isn’t cool,” Jason Pizer, president of Trinity Real Estate, a landlord in the area, said last week at a forum sponsored by Bisnow Media, a publisher of online business newsletters. “The people who come to our buildings, they use words like ‘dude’ and ‘totally.’ They pound you, they don’t shake your hand. And right now, those are the ones making the space decisions.”
In the Plaza district, about 234,000 square feet leased to Citigroup at 666 Fifth Ave. went on the market in August. That building, a 41-story skyscraper at West 53rd Street, has almost 500,000 of its 1.5 million square feet available, according to Cassidy Turley, a St. Louis-based commercial-property brokerage with offices in New York.
The tower housed Citigroup’s private-banking operation, which has relocated to the bank’s offices at 601 Lexington Ave., the skyscraper formerly known as Citigroup Center, which is part of the Plaza District.
The move is part of the third-biggest U.S. bank’s effort to “consolidate our real estate footprint in New York City to achieve greater operating efficiencies,” Mark Costiglio, a Citigroup spokesman, said in an e-mail.
For the best quality, or Class A, offices, the Plaza area at the end of August had the highest vacancy rate of any of Manhattan’s 14 submarkets, according to Cassidy Turley. About 80 percent of the district’s 64.4 million square feet (6 million square meters) of offices is considered Class A. About 13 percent of that space is available for new tenants.
Some of the biggest U.S. REITs own or have stakes in real estate in the district, including Boston Properties Inc. (BXP), which controls the GM Building and 601 Lexington. At the GM Building, the Detroit-based automaker’s asset-management unit is leaving 114,000 square feet, which it has put on the market as a sublease. That is one of the Plaza district’s largest new vacancies, according to Kozel of Colliers.
Those are GM’s last offices in the building, said Laura Toole, a company spokeswoman. The staff of about 200 has been relocated to smaller offices at 1345 Avenue of the Americas, she said.
The GM Building offices “were sized for about 500 people,” Toole said. “So we’re going to a smaller, right-sized space, which in the end we hope will result in a significant savings for the company.”
Boston Properties is maintaining its Manhattan occupancy rate at about 97 percent in the face of defections, Robert Selsam, the Boston-based REIT’s New York regional manager, said in a phone interview. When the law firm WilmerHale LLP vacated about 170,000 square feet at Boston Properties’ 399 Park Ave. near East 53rd Street, earlier this year it was replaced by three financial companies and another law firm, which filled all except one and a half floors of the vacancy, he said.
“We’re still seeing a lot of interest from smaller financial-service firms,” he said. “It’s not a growth industry for the large financial firms today.”
Boston Properties also is trying to lease 510 Madison Ave., a 347,000-square-foot, 30-story tower that it bought almost completed and vacant in 2010. The building, which was designed to appeal to boutique-sized hedge funds, is now about 55 percent rented, with four more agreements in final negotiations, Selsam said.
It’s not just financial companies giving back space in the Plaza district. The landlord at 555 Madison Ave. listed about 168,000 square feet leased by Sony Corp., the Tokyo-based electronics company. At 520 Madison, one block south, software maker Oracle Corp. and investment adviser Peter J. Solomon Co. gave up a combined 94,000 square feet. Those spaces become available in February, according to Cassidy Turley.
The biggest contiguous vacancies in the submarket include 241,000 square feet at 280 Park Ave., where Deutsche Bank AG and the National Football League gave up space. That tower is jointly owned by Vornado and SL Green Realty Corp. (SLG), Manhattan’s biggest office landlord. At 9 W. 57th St. -- whose owner, Sheldon Solow, is known for only accepting top-dollar for space -- 452,000 square feet are empty, more than half of it for almost a year, according to Cassidy Turley. Much of that space was formerly leased to Bank of America Corp.
“A majority of the large-scale vacancies in that district come from the financial-services sector,” said Peter Hennessy, Cassidy Turley’s New York region president.
The Plaza district’s availability remains well below the peak of 15.6 percent it set in the second quarter of 2009, during the aftermath of the financial meltdown that followed Lehman’s September 2008 bankruptcy filing.
While asking rents in the Plaza have risen 6 percent this year, they surged 10 percent to an all-time high of $55.47 a square foot in midtown south’s most expensive submarket, Gramercy Park, according to Colliers. Rents in Gramercy Park have increased every quarter since the middle of 2010, a 33 percent jump during that period.
Office owners are still getting top dollar in the Plaza district. The spread this year between rents landlords achieved there and those in Midtown overall is 17.2 percent, the highest in records dating to 2002, according to CompStak Inc., a New York-based leasing data service.
Rents tend to take awhile to adjust to higher vacancies, Harbert said.
“Landlords who own high-end buildings have generally paid a lot for them and have pro-forma rents they need to achieve,” he said in an e-mail.
Kozel said he expects the Plaza district’s availability rate to tick higher in the coming months as financial firms continue to reduce staff, citing Deutsche Bank as an example. The Frankfurt-based company said on Sept. 11 that job cuts will exceed the 1,900 it announced in July, and it will reduce regional back-office functions.
“The Plaza district will come back again,” said Hennessy of Cassidy Turley. “This may be somewhat of an aberration in the marketplace. How often is the Plaza the weakest market in Midtown? We need some stability both in Europe and in the United States, and we need some certainty about what our tax environment is going to look like going in post-2013.”
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