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Keeping your edge in a competitive market.

With commercial and residential rents at record highs and vacancies nearing record lows, brokers, owners and developers should be beaming, and indeed, many have wide smiles.

But behind some of the grins are clenched teeth, because these entrepreneurs want to keep making deals, and that's simply not as easy as it sounds.

Even in The Bronx, Sandy Zuckerbrot, president of Sholom & Zuckerbrot, said demand has increased and supply has dwindled. "Prices are going up and it's more and more difficult to find buildings and make deals for all of our clients," he said. "For anyone who wants to sell, it's a landlord's market. But selling is one thing, and then buying is no different."

Brokers must be savvy, creative and persistent; tenants need to be ready with their financials and credit in place; and owners need to look wider for financing.

While there's a profusion of square footage in New York City, prime sites are not easy to acquire. Often, city owners would rather hang onto what they've got than find another place to park their cash.

In suburbia and beyond, however, some owners are waking up to the high prices and are starting to cash out. Also, companies like Rite Aid became developers themselves and are now occupying free-standing properties that are ready to be divested off the books and morphed to triple nets.

"Remember last year I was looking for sellers.'?," asked broker Ben Glassman of the Brooklyn-based Zev Pollack Company. "Now I need buyers." Glassman is digging for shoppers and those seeking tax-free exchanges for a multitude of various properties around the country.

City brokers, meanwhile, are seeking owners with older buildings and greater vacancies with the idea of gently prodding them towards a sale or fix-up and a leasing exclusive.

There are plenty of other owners trying to add to their portfolios - albeit not at any price, thank you very much - and persisting on the thought of the rent roll uptick after the capital improvements that today simply must include fast access to the Internet.

The Wasserman family of A.M. Properties is installing wiring known as OC-48 into 65 Broadway. "It's the equivalent of 1,400 T-1 lines," explained Jeffrey Wasserman, the chairman of Media Technology Centers, which includes the Media Technology Center at 65 Broadway, 75 Maiden Lane, 352 Seventh Avenue and 1025 Old Country Road in Westbury, Long Island. The last is being converted from an auto dealership to 240,000 square feet ready for the next millennium.

"The biggest challenge that businesses will face in the coming decade is the tremendous bandwidth and the simplicity and speed needed for accessing information," said Wasserman. "Look at the world and how it has increased in size - not geographically, but connectively."

Deal-making, however, has to include distinguishing your property and available space from all the other nooks and crannies that are still open all over town.

"Real estate should be a form of entertainment," Wasserman insisted. The lobby at 65 Broadway is getting a hologram sculpture, while ceiling lights will have changing colors. "It will be a sample of what we plan to create," he said.

With brother Paul Wasserman and father lack Wasserman in charge of leasing through their A.M. Property Holding Corp., broker incentives are unique and expensive: A Mercedes, a Jaguar, an 1.3 4000, and a Saab; trips for two to New Zealand on the QE2, to Hawaii, and to St. Martin; and mink and Sable coats. Brokers either take a prize for each deal or accumulate points towards better incentives, depending on the amount of space leased.

But when owners lure a tenant with smashing spaces, elegant decor and hot wiring, or tempt brokers with great prizes, they still have to ensure the lease payments will be made.

Owners have to worry whether a commercial tenant that's now in with escalations at $20 a foot can still make the rent on a new lease that starts at $30.

And what happens when the next escalations kick in? Those involved in real estate in the early 1990's, (1970's, etc.) may recall when office tenants didn't even make the partial payments they could afford. They simply stopped paying altogether, and eventually either moved out in the dead of night or begged for a rent reduction.

Joan Fields, principal of Synergy Realty, who specializes in office leasing and building sales primarily in Midtown South, says owners are being more careful about prospective tenants simply because the rents and the amount of money at stake are greater.

"The owners have always been particular, because a lot of start-ups came in here and were disappointing, so now they really examine the tenants," she explained. "There are rental rates you couldn't conceive of a few years ago. There are spaces that were $15 a foot three years ago that are now going for $25 and $30 a foot."

Fields now must thoroughly qualify tenants before bringing them on their hunt.

"The more imaginative, sophisticated owners can see the potential [of the new technology-based tenants]," she said, For instance, she represented Razorfish, which Was initially in a small, under 2,000 square-foot space. "Within no time at all they were moving into 10,000 square feet," she said.

But, Fields agreed, "Eventually, there will be a shake-out in these companies."

As for tenants that didn't grow with the rents, she searching in Chelsea and the Flower District, and takes those looking for much lower rents into the West 30's.

"I put a company into 3,000 square feet and now they are considering the West 30's, where you can get a deal for $18," Fields said, adding that "Seventh Avenue is hotter than Hades," particularly if the tenant wants a lot of light and only needs 3,000 to 4,000 square feet.

Because owners are being picky about their tenants, and work letters and rent concessions are shrinking at the same time the price per square foot is increasing, National Lease Finance Corp. is stepping up its activities.

Lee J. Siracuse, the vice president of marketing, said the company provides financing for tenant improvement projects, including retail stores.

Working usually with leases of about 8,000 square feet and up, they cover all the hard and soft costs involved in the build-out, from architectural fees to demolition and construction. The money is also used to obtain carpeting and computers, office furniture, photocopiers and fixtures.

"Because the rental costs are increasing, it makes the companies worry more about how they are going to pay for the work," he said. "Traditional lenders don't like to finance these deals."

His company sets up a 60-month facility structured as an off balance sheet operating lease with a buy-out figure at the end that meets certain tax criteria for the work to be paid for by pre-tax dollars.

"We get involved in a lot of deals that have venture money behind them because that's for hiring and marketing their product, not to buy desks and computers," Siracuse said.

His company also helps brokers show how their clients can keep their new spaces affordable.

Many tenants are now desperate to find spaces, as they were put off after their initial searches a few months ago by the high numbers and a lack of choices. They are now coming back for another pass, observed Audrey Novoa of GVA Williams.

Some have reconciled with their accountants, others are warming to the realities of riding a moving van to the great frontiers of more economically appealing territory.

New Jersey's waterfront deals, which are full of incentives, pencil out to about $25 a foot for brand new Class A space. "It's a subset of Manhattan," said Kenneth M. Krasnow, director of business development and brokerage services for Cushman & Wakefield, who described the transportation, the infrastructure, the labor force and the residential component.

"That is clearly, without question, the hottest market in the tri-state area," Krasnow said. Demand is being driven by the dwindling supply of space in Manhattan, and the continued cost-savings in New Jersey. But the biggest factor weighing in with tenants is that they still have the ability to attract a workforce.

Krasnow says the economics are equally compelling in both Connecticut and New Jersey, with comparable product in the low- to mid-$20's.

"But unemployment is at record low, and if you lose them, you can't replace them," he explained of the Westchester/Connecticut area. "It's hard to find people, and it's more expensive than an extra $10 or $15 in rent. The cost to attract, re-train, retain and recruit labor is still the most expensive cost that companies are faced with. Real estate is a distant second. The bigger companies understand that."

Similar mid-$20's rents are being asked for recently refurbished properties in Westchester, such as Charles Cohen's former General Mills/Kraftheadquarters building at 333 Westchester Avenue; W&M Properties' 500 Mamaroneck Avenue; and the Jack Parker Corporation's former IBM networking center at 1311 Mamaroneck Avenue up the street.

By breaking down the former single-tenant buildings into various configurations of bite-sized spaces, they are drawing a variety of smaller firms, as well as expansions of Westchester outposts for out of town-based companies.

"We've been taking our lumps because we haven't had a big tenant come in and invigorate the market," said Krasnow. "They've had to rely on the tenant base from within the existing community, and it has taken some time for that tenant base to grow and develop, but we're at the point now where we are seeing some positive signs."

In the outer boroughs, Marjorie D. Seaman, managing director with Insignia/ESG, said most of the industrial building deals have to get over the environmental contamination issues.

"Whether people want to or not, they must be remediated. Not all sellers are willing to deal with it, but if it's in the contract, they are doing it," Seaman said.

Thomas Lauricella, a broker with A&H Property Management of Brooklyn, says the professional owners and investors know how to massage the numbers and see if the purchase or lease will work for them.

"Those that are new in the market are forcing the prices up because they have money in their pockets," he said. "They will spend outrageous money, and I don't know how they will survive. I don't think they are projecting four or five years into the future."

To get to "Yes," Lauricella said he must be as sophisticated as both the buyer and the seller. "You have to be prepared to say to the buyer, 'Here's the potential of this building,' and I have to project out almost the same information he can gather," he explained. "It has to be a hard-core stack of information or you are wasting your time."

Then, Lauricella continued, "You have to spend as much time convincing the seller of the potential of a good buyer, That's the only way a real estate firm can operate. You can't showboat."

Owner/developer Joseph M. Mattone said real estate is still a sound investment. "There is enough of a menu in real estate to satisfy any number of investment guidelines, but you can't overpay," he explained. "And with the availability of dollars, it's hard not to do so. I have saved myself from that temptation," Mattone continued. "You just buy on current return - futures are always risky."

In Queens, Mattone is beginning the bid process for the construction work on Jamaica Site One. The entertainment retail development will include 260,000 square feet of retail and two levels of parking. With tenants National Amusements creating 15-screens with stadium seating, the Gap, Old Navy, and Walgreens moving in, he expects the project to create a nightlife for the employees at the million square-foot Social Security office across the street, the nearby Police Lab, the FDA, and for the students of York College.

In Red Hook, a manufacturing district with little manufacturing but many warehouses, Lauricella said a lot of land is being sold and converted to parking for trucks, buses and tow pounds.

"Someone has to look at tax incentives and encourage employee operations," he suggested, worried about the lack of jobs being created.

Retailing is still a city growth industry, and even locals that ogled the nationals parading in to take prime sites, have now decided to get out from behind their cash registers. They want to expand too, and are willing to be shown new availabilities, according to Meaghan Culkin, a retail associate with Robert K. Futterman & Associates.

Companies like the Rainforest Cafe, which re-circled its financials and its Times square wagons, will now have to pay higher prices for being the last guy in, rather than a pioneer on the New 42.

Big tenants are being prodded to make decisions on renewing or moving because it takes a long time to get all the leasing, financing, incentive and build-out requirements lined-up.

"Too many times, the big takers get caught a little short, and they have to be looking three years away," said consultant Richard Speciale, managing principal of Aequites LLC, discussing the lead time to complete a several hundred square foot transaction for a corporate tenant.

Since speculative new city office buildings and Class A old ones now have to bring in over $50 a square foot, Speciale said "The big institutions are going to have to get used to it."

Some companies are focusing on getting down to their core capabilities, and then deciding what departments need to he in Manhattan versus elsewhere.

"For core, I wouldn't rule out a potential headquarters," Speciale said, talking in general about a tenant for the prospective office building at 300 Madison Avenue.

Its location near Grand Central Terminal could win a law firm, he predicted, because they tend to attract employees from the Westchester/Connecticut corridor, and most would prefer landing in the Grand Central area.

On the other hand, he noted, some of the service firms have executives and staff oriented towards New Jersey, or like Ernst & Young, have executives that also need fast access to Newark Airport.

"It's the accommodation to their staff and the chance to pull their whole operation together," said Speciale of E&Y's expected deal for a Boston Properties tower next to the New Amsterdam Theater in Times square.

So will proximity to the Port Authority Bus Terminal help make a deal for the Milsteins and their joint venture partners, the Weiler and Arnow families, for their U-shaped 38,000 square-foot Eighth Avenue site that runs from 42nd to 41 st Street? They expect to construct an office tower over a retail complex - right across the street from the Bus Terminal.

Speciale's partner, Brian Howells, AIA, a Fellow of the Royal Australian Institute of Architecture, observed that no matter what country he visits, the bus terminal is never in the elite part of town. "It will be hard for that building to rise to the cache level, but it might be attractive to some companies, like those in the media business," he suggested.

Bradley P. Gerla of Insignia/ESG says many tenants are aware the market is strong and "the party's over."

"There are no alternatives," he said. "The reality is: it is what it is. If they want to be in a quality property, they have to pay the rent."

And while there's a clear distinction in rents between the prime properties and B properties, Gerla added, "You're not seeing the sticker shock on the C's."

Recently, Bruce Graeber, a principle in Omni Equities which, invests in South Beach, Miami and the New York metro area, recently lost out on a deal in Westchester.

"We were chasing a deal in Westchester near Hawthorne and the building was 80 percent vacant, which we liked. It went quickly for $60 a foot."

They instead went to contract in Rockland County on a 50,000 square-foot shopping center with triple net leases.
COPYRIGHT 1999 Hagedorn Publication
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:real estate industry
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Jun 30, 1999
Words:2653
Previous Article:Focus on technology will maintain your market share.
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