By Keiko Morris
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 9, 2017).
The niche market of small, upscale office developments has lured
some high-end tenants willing to pay up for an amenity-packed floor
or two.
Now some developers are seeing another potential opportunity for
these so-called boutique buildings: as headquarters for big firms
looking to lease entire buildings.
These office buildings, often stamped with edgy or historic
architecture and located in neighborhoods such as Chelsea or the
Meatpacking District, are attracting established companies that in
many cases are looking to use real estate to recast their image in
an economy where "disrupters" like Amazon.com Inc. are in
vogue.
One of the more recent high-profile leases was Aetna Inc.'s deal
earlier this year to establish new headquarters and take all the
office space at 61 Ninth Ave., a $152 million West Chelsea
development of Vornado Realty Trust and Aurora Capital
Associates.
Aetna, which will keep thousands of jobs at its current
Hartford, Conn., headquarters, plans to move 250 jobs to the
nine-story building next year. Vornado has two others in the works,
including one at 512 W. 22nd St. adjacent to the High Line Park
that has been fielding interest from companies with similar
intentions, the company said.
"If you had asked me my expectations, it would be that these
boutique buildings would be leased on a floor-by-floor basis or
two-floor basis, not that a tenant would take the entire building,"
said David Greenbaum, president of Vornado's New York division.
"What we're seeing realistically are companies thinking much more
of these buildings as truly headquarters office buildings."
As many Midtown South neighborhoods such as Chelsea, SoHo and
the Flatiron District have matured as cool office destinations, so,
too, has the inventory of upper-tier, new or redeveloped office
space.
Although opportunities to develop ground-up office buildings in
the submarket is limited, developers have found space, working
within smaller lots, height limits and frequently landmark
restrictions, eyeing potential rents that stretch well above $100 a
square foot and are comparable to pricing at the big skyscrapers in
Midtown's Plaza District neighborhood.
Vornado's underwriting for its boutique buildings in the Chelsea
area anticipated rents in the triple-digits, Mr. Greenbaum
said.
Four new boutique buildings dotted the Midtown South area
between 2007 and 2012 totaling 340,000 square feet, according to
Jonathan Mazur, senior managing director of national research at
Newmark Knight Frank. Rents then ranged from $70 to $125 a square
foot. From 2015 through 2019, developers are expected to have
completed at least 11 new buildings with 1.4 million square feet of
space, Newmark estimated. Rents for completed deals and asking
rents for these buildings are all above $125 a square foot.
Asking rents for 300 Lafayette, an 80,000 square-foot retail and
office building in SoHo, are between $150 and $200 a square foot,
according to Related Cos., which is partners with LargaVista Cos.
on the seven-story development located across from the historic
Puck Building.
"We're talking to big brands that want to plant their flag and
want a presence there," said Stephen Winter, vice president of
commercial leasing at Related Cos. "You're seeing big corporates
that may not have their headquarters here."
A drop in commercial property sales in the city has increased
lenders' appetites for financing boutique office deals in Midtown
South, where ground-up or redeveloped office properties by
well-capitalized developers are drawing high rents, said Dustin
Stolly, co-head of Newmark Knight Frank's Capital Markets Debt and
Structured Finance division. These projects are in an office
submarket where vacancy rates are generally low and demand is
high.
But the location, design and timing of these projects are still
critical, developers said.
"Things get risky when developers purchase sites at peak pricing
based on peak market rents that are necessary to finance the
acquisition," said Jared Epstein, vice president and principal of
Aurora Capital Associates.
Shifts in corporate workplace strategies also have played into
the attraction of firms potentially taking most or all of these
buildings, brokers and real-estate executives said. More companies
are using their offices to define their culture, attempting to
stand out from other firms and attract and retain employees. These
companies are hoping to appeal to the same type of skilled
workforce sought by tech giants such as Google parent Alphabet Inc.
and Facebook Inc., which have helped build Midtown South's cachet
with their New York offices. Aetna's new headquarters will be
across the street from Google's Manhattan office.
"A lot of tenants want to utilize real estate to define an
organization or change the image of an organization," said Adam
Ardise executive managing director of real estate services firm
Cushman & Wakefield.
Midtown South's boutique office buildings are tapping into a
broader demand for better quality office space in the office
submarket, said Peter Turchin, vice chairman at CBRE Group Inc. The
upper end of the market, consisting of higher quality, upgraded
office space, has had more leasing activity, he said.
"If you're an owner and you are in the middle of the market, you
want to invest capital to be in the top of the market," Mr. Turchin
said.
Write to Keiko Morris at Keiko.Morris@wsj.com
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October 09, 2017 02:47 ET (06:47 GMT)
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