Feb. 11 (Bloomberg) -- As Manhattan developers plan millions of square feet of office towers featuring the most modern amenities, some of their biggest potential tenants have decided they’re better off staying in their current homes.
Five of the six largest New York leases since the end of 2012 have been renewals, according to data from brokerage Newmark Grubb Knight Frank. Credit Suisse Group AG, Citigroup Inc. and UBS AG -- the types of large financial companies that traditionally have made up the core of the city’s office market -- opted to stay put after considering moves to new skyscrapers.
“Major financial institutions are not expanding dramatically,” said Joseph Harbert, eastern region president of Colliers International, a commercial-property brokerage with offices in Manhattan. “If you’re going to lease up a new building, you’re going to have to do it with other tenants.”
The renewals highlight the challenge faced by developers seeking tenants for the technologically advanced towers planned at Manhattan’s World Trade Center site and far west side. Financial companies are scaling back space needs or seeking to reduce costs, while many of the technology and media firms that have been the market’s most avid office consumers over the last three years have largely chosen older buildings.
Manhattan has more than 25 million square feet (2.3 million square meters) of new office space either just completed, under construction or ready to start, according to Newmark data. Another 6.3 million square feet of offices are in the planning stages.
At the same time, the Real Estate Board of New York, the trade organization for the city’s commercial landlords, is pushing for a revival of former Mayor Michael Bloomberg’s aborted attempt to rezone the office districts surrounding Grand Central Terminal to replace old and obsolete towers.
The group cited a study by the city’s Independent Budget Office issued in September that projected that the city needs about 52 million square feet of new office space between now and 2040 to accommodate expected job growth and space that could be lost to conversions and demolitions. The former mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
It’s an “open question” whether there will be enough appetite for new offices to fill that amount of space, Harbert said. REBNY President Steven Spinola argues that the 2013 data represent current market realities that could reverse abruptly. The average Manhattan office building is more than 70 years old, according to REBNY.
“The pendulum goes back and forth,” Spinola said in a telephone interview. “I think financial institutions are going to get back into expansion mode and will be looking for the kind of space we’re talking about.”
The tenant mix has shifted more to technology, advertising, media and information firms that tend to take smaller blocks of space. Such “creative” companies represented 24 percent of the leasing market last year, about the same share as financial services, according to brokerage Cushman & Wakefield Inc. In 2005, financials made up 29 percent of the market, while the creative industry was only 17 percent. Law firms have fallen to 8 percent of the market from 11 percent.
In the latest example of a bank making cuts, London-based Barclays Plc said today it would eliminate as many as 12,000 jobs. The firm has offices in New York.
Of the 344 leases last year by financial companies -- including banks, hedge funds and private-equity firms -- only 20 were for more than 50,000 square feet, according to Cushman.
The “vast majority” of tenants seeking 250,000 square feet or more -- enough to anchor a new skyscraper -- have chosen to remain in their existing locations, Isaac Zion, co-chief investment officer for SL Green Realty Corp., said at an investor presentation in December. The trend is likely to continue, he said in a phone interview.
“When you relocate, you’ve got to spend all that capital at once,” said Zion, whose company is Manhattan’s biggest owner of office buildings. “If you stay where you are, you can manage that over a long period of time. You can stage it better to spread out that risk. Once you move, you have to do it at once. Then what if your business changes? What if things evolve?”
SL Green, which has 14 office buildings within five blocks of Grand Central, favors the rezoning of the area and is planning a 65-story new tower immediately west of the train station. Many companies are opting to stay put because of a shortage of new construction in East Midtown, a “prime location” for office tenants, Chief Executive Officer Marc Holliday said in an e-mail.
Last month, Zurich-based Credit Suisse said it intends to remain at 11 Madison Ave., a 1931 tower once used as a setting by Woody Allen for the movie “Radio Days,” for its U.S. headquarters. The second-largest Swiss bank came close to a deal to anchor a skyscraper at Brookfield Office Properties Inc.’s Manhattan West, according to brokers at Cushman & Wakefield Inc., which represented the developer.
Brookfield is planning 4 million square feet of new offices at its Manhattan West project, part of an effort to transform the now largely industrial area west of Pennsylvania Station into a new commercial district. The area also is where Related Cos. is building Hudson Yards, a 17.4-million-square foot development built largely over a 26-acre (11-hectare) train yard. About 10 million square feet will be offices.
Matthew Cherry, a Brookfield spokesman, declined to comment, as did Marcy Frank, a Credit Suisse spokeswoman.
Credit Suisse’s decision came about four weeks after Citigroup extended its 2.6 million-square-foot lease at SL Green’s 388-390 Greenwich St., in Tribeca, last year’s biggest New York office lease. The bank is poised to leave its headquarters at 399 Park Ave., according to landlord Boston Properties Inc.
Citigroup, the third-biggest U.S. bank, had weighed anchoring the proposed 2 World Trade Center tower in lower Manhattan, according to two people with knowledge of the negotiations, who asked not to be named because the process was private. It also rejected a move to the Hudson Yards project earlier in its decisionmaking process.
Shannon Bell, a Citigroup spokeswoman, declined to comment on its space decisions, as did Dara McQuillan, a spokesman for Silverstein Properties Inc., which controls 2 World Trade’s development rights.
In December 2012, UBS renewed its lease for about 860,000 square feet at 1285 Avenue of the Americas, an office tower near Rockefeller Center. Switzerland’s largest bank had been in negotiations to lease offices from Silverstein at the trade center site before withdrawing from talks in 2011, according to people with knowledge of the matter.
Credit Suisse and Citigroup intend to rework and upgrade their properties. Credit Suisse plans to move to the less-expensive lower floors of 11 Madison, and spend the next four years renovating those offices, according to a statement to employees by Rob Shafir, the bank’s chief executive officer for the Americas. It expects to save close to $700 million over the life of the lease.
As a general rule, moving into new space is cheaper in the long run than retrofitting old offices, said Richard Bernstein, a New York-based executive vice chairman at brokerage Cassidy Turley. New space is more energy efficient and conducive to open layouts that allow more people to fit into less space, he said.
Prior to the financial crisis, major banks were seeking top-of-the-line offices. In 2007, JPMorgan Chase & Co. proposed a 42-story tower just south of the World Trade Center site which would have had six trading floors jutting out over a church.
The city’s investment banks, including Lehman Brothers Holdings Inc. and Merrill Lynch & Co., were scouring the city for sites with state-of-the-art trading space and other amenities, in an effort to keep competitive with Goldman Sachs Group Inc., whose Hudson riverfront headquarters was under construction at the time.
In the financial meltdown that followed, Merrill was sold and Lehman went bankrupt. JPMorgan wound up acquiring the near-bankrupt Bear Stearns Cos. in March 2008, inheriting its headquarters tower at 383 Madison Ave. as part of the deal. JPMorgan’s base at 270 Park Ave. and two other properties it leases in the area are 1960s-vintage buildings on Park Avenue north of Grand Central in the heart of the area Bloomberg administration and REBNY executives said was threatened with obsolescence.
In the aftermath of the crisis, financial companies have made office decisions “based on the options that were available to them, based on the financial conditions of the country and the world, as well as their own business plan or model,” said REBNY’s Spinola.
“There are some wonderful 50-year-old, 80-year-old buildings, many of them landmarks, and we ought to do everything to preserve them,” he said. “But that doesn’t mean we don’t want to have a continued supply of new efficient space being developed so people have such options.”
New towers have attracted some high-profile companies from outside the financial industry, the latest being Time Warner Inc., which last month sold its headquarters offices at Time Warner Center to Related and agreed to anchor a 2.6 million-square-foot tower at Hudson Yards. The media company intends to own rather than lease about 1 million square feet of space. Coach Inc., the largest U.S. luxury-handbag maker, also is going to Hudson Yards, agreeing last year to buy 750,000 square feet at the first tower under construction.
GroupM, a unit of London-based advertising firm WPP Plc, in December took a 20-year lease on 516,000 square feet at 3 World Trade Center, anchoring Silverstein’s planned 2.5 million-square-foot skyscraper. Silverstein is also the developer of 4 World Trade Center, which opened late last year and is only 55 percent leased, entirely to government tenants.
Many name-brand technology companies, such as Google Inc., Twitter Inc., Facebook Inc. and EBay Inc., have chosen to move their New York operations into vintage buildings in the area roughly between 30th and Canal streets known as midtown south, rather than to new construction.
Midtown south is “the center of New York’s technology universe,” Jonathan Mazur, Newmark Grubb’s capital markets research director, wrote in a report last week.
Other large companies that have chosen to stay in their offices in recent years after considering moves include media company Viacom Inc. and the law firms Simpson Thacher & Bartlett LLP and Davis Polk & Wardwell LLP, according to a list compiled by SL Green.
With large financial companies staying out of the market for new towers, at least for now, landlords are going to have to offer “significant concessions,” said Bernstein of Cassidy Turley.
“Rents will hold up,” he said. “But in order to realize the kind of absorption they need, until we see signs of more growth, I think they’re going to have to take that kind of strategy.”
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