The re-emergence of the big blocks.
However, today we are experiencing a striking re-emergence of big blocks, many of which have come on line somewhat unexpectedly as a result of corporate restructuring and downsizing. The renewed availability is not as a result of new construction. There has been nothing substantive built in Midtown since 1987 after the West Side floor area bonus expired and after the stock market crash quelled developers' and banks' remaining enthusiasm to build new product.
Rather, these blocks have come on line as a result of what amounts to a game of musical chairs being played by major corporations within the existing stock of Midtown office buildings. For the most part, these blocks exist, or are coming available in what could be considered Class B and perhaps B + quality office space.
The blocks of A space, while there are a few, remain fairly tight and the competition for those truly A blocks is reminiscent of the much stronger market in the early 1980's. Large tenants who are looking for truly Class A space may find themselves forced to compete with numerous other tenants who are looking for the same space in the same time frame.
An example of the corporate downsizing and restructuring which has resulted in substantial blocks being added to the market is Avon Products, Inc.'s move to 1251 Avenue of the Americas, the former Exxon building, and 1345 Avenue of the Americas, the Alliance Capital Building.
Avon had in excess of 600,000 square feet at 9 West 57th Street, a/k/a the Solow Building, when it embarked on a corporate restructuring designed to save both space and dollars by moving a quarter million square-foot unit, (specifically the North American Business Unit) into the base of 1251 Avenue of the Americas, and the International Unit into mid-rise floors at 1345 Avenue of the Americas. This freed up a block of over 600,000 square feet in 9 West 57th Street, which will be coming on line in 1997, and helped to fill a block in 1251 Avenue of the Americas, which had been left vacant by Kidder Peabody, who had recently dissolved.
The interesting point of this transaction is that while two Class A buildings benefited from Avon's moves, there was no net absorption involved in the transaction, since Avon is vacating over 600,000 feet at 9 West 57th Street in order to occupy a total of 400,000 feet at 1251 and 1345 Avenue of the Americas. This transaction is indicative of a marketplace which involves at the same time a flight to quality, (corporations taking the opportunity to trade up to better buildings) at lower rents than they perhaps were previously paying. These corporations are re-doing their space standards in the process in order to affect greater efficiencies in their layout and hence renting substantially less square footage.
It appears now that Bear Stearns has opted to lease and develop all of 383 Madison Avenue (the proposed 800,000 square foot development on Madison Avenue and 44th Street). While this will result in a Class A building being built, it will also add a million square feet to the market at their present location, 245 Park Avenue. While Bear Stearns motivation is not necessarily price (since the cost of new construction is not inexpensive), the efficiencies they will probably gain by consolidating all of their operations in this new project and re-doing and fine-tuning their space standards in the process will ultimately, through efficiency, achieve substantial savings from their real estate holdings.
But again, this transaction (should it be completed) would not result in any net absorption because a new building is being built on their behalf and close to one million square feet are being added to existing stock. The net result is a negative absorption of a one million square feet.
First Boston's unusual move to 11 Madison Avenue was another example of a major corporate downsizing and restructuring where a major corporate Midtown user occupying approximately a million square feet in various locations, opted to consolidate all operations under one less expensive roof. 11 Madison Avenue (located in Midtown South) afforded First Boston relatively low rent, yet gave them an opportunity for such amenities as 100,000 square-foot trading floors and the opportunity to re-do all space standards to the highest efficiency factor. Again the trend continues of negative absorption, certainly for Midtown, because First Boston is moving to Midtown South and freeing up substantial blocks of space at 55 East 52nd Street, a/k/a Park Avenue Plaza (almost a half million square feet), 509 Madison Avenue and 149 East 49th Street, a/k/a Tower 49.
It is also important to note that the 11 Madison space was freed up as a result of the corporate restructuring and downsizing of Met Life, who was the former occupant of the space which First Boston will be moving into.
The flight to quality has precipitated a great demand for the truly Class A properties and when a block of space in a truly Class A building comes available there is immediately competition for the space, as opposed to perhaps lesser quality buildings where major blocks of space have tended to languish for long periods of time. Examples are the million square feet at 150 East 42nd Street, a/k/a Hiro Plaza (formerly the Mobil Building), which has been vacant since Mobil moved out of the building at least 8 years ago; 335 Madison Avenue, where downsizing at the Bank of America has resulted in over 300,000 square feet of availability which has been on the market for quite some time; 685 Third Avenue, where downsizing by American Home Products has resulted in over 350,000 square feet of availability which has remained on the market for quite sometime; and 866 Third Avenue, where over 300,000 square feet has been available for quite sometime as a result of the MacMillan Publishing downsizing.
Examples of recent transactions where major tenants have opted to trade up to Class A property include the Equitable Life Assurance Society, consolidating the bulk of their operations from 2 Penn Plaza and 135 West 50th Street to 500,000 square feet at 1290 Avenue of the Americas; Alliance Capital, who also moved from 135 West 50th Street to 1345 Avenue of the Americas for 400,000 square feet; and Anderson, Kill, Olick & Oshinsky P. C., who traded up from 666 Third Avenue, a/k/a The Chrysler Building Annex, to 1251 Avenue of the Americas for 160,000 square feet.
The investment banking firm of Ladenberg Thalman moved from 540 Madison Avenue to 590 Madison, a/k/a the IBM Building, for 50,000 square feet. The law firm of Kirkpatrick & Lockhart moved from 1 Rockefeller Plaza to 1251 Avenue of the Americas for 40,000 square feet. The National Hockey League consolidated their operations from 1633 Broadway and 650 Fifth Avenue into 1251 Avenue of the Americas for 100,000 square feet, and in the most recent transaction, the Baltimore-based law firm of Piper Marbury (who was located Downtown at 55 Wall Street), opted to move to Midtown, again to 1251 Avenue of the Americas, for 60,000 square feet.
When Morgan Stanley purchased 1585 Broadway and announced it was moving out of 1251 Avenue of the Americas, the resulting large block of space (coming on the market in stages from 1996 - 1998) was in great demand even before the space was officially on the market. As a matter of fact, even before Morgan Stanley had vacated four of the floors totalling 160,000 square feet, the Industrial Bank of Japan decided to move their operations from 245 Park Avenue to 1251 Avenue of the Americas. The next three floors, which were vacated by Morgan Stanley, have resulted in brisk competition between tenants for the available space.
Buildings with Class A systems, state-of-the-art technology, large floor plates and large contiguous blocks continue to demand a premium and have no shortage of interested tenants.
Likewise, buildings such as 9 West 57th Street, a/k/a the Solow Building, where Avon is vacating; 345 Park Avenue, where Bristol-Myer Squib has a 250,000 square-foot long-term sub-lease on the market; and 55 East 52nd Street, a/k/a Park Avenue Plaza (where First Boston is vacating) will probably have a tremendous surge of activity and not go begging for tenants (unless of course they are priced improperly).
On the other hand, the lesser tier of buildings with large blocks in the city continue to languish and will probably need to offer somewhat extraordinary concessions or lower than market rental in order to stimulate activity.
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|Title Annotation:||Annual Review and Forecast; Manhattan, New York, New York office spaces|
|Publication:||Real Estate Weekly|
|Date:||Jan 31, 1996|
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