Grim News from the Landlord Camp

I attended the 6/13/07 Members’ Breakfast sponsored by the Real Estate Board of New York (REBNY), an association that serves as the NYC landlord’s “lobbying” group, among other activities. The topic of discussion was new development in Midtown Manhattan and the panel featured representatives from two of the larger real estate investment trusts (REITs), Vornado and Boston Properties; as well as from two large, private landlords (TishmanSpeyer and SJP Properties).

The topic of discussion was primarily the requirements for new development in Midtown, but the overall message did not bode well for commercial tenants in NYC. Here are some of the short strokes:

• Triple-digit rents are here to stay - as development (and purchase) costs exceed $1,000 per rentable square feet (RSF), $100+/rsf rental rates are necessary to sustain the development that will alleviate NYC’s low vacancy rates;
• Increased “loss factors” or space remeasurements across entire property portfolios are common practice and accepted tactics for attaining low-profile rental increases;
• Eighth Avenue is no longer a fringe boundary of Midtown and hence, an acceptable and commercially marketable submarket (i.e., no more low rents). When landlords rename an avenue or submarket with something catchy like “Avenue of Architecture”, rental increases will follow;
• The Penn Plaza submarket will no longer remain a value neighborhood as new development occurs at Pennsylvania Hotel, Farley Post Office, Hudson Yards and potentially, the Madison Square Garden site.

There was, however, some good news in the overriding theme and messages being shared by the developers:

1. The recognition that tenants require great environments to attract and retain top talent;
2. The willingness to partner with corporations to help create their 20-30 year growth plans and solutions;
3. The understanding that environmentally sustainable or “green” construction is an imperative for any new construction;
4. The acceptance of that NYC requires a new business district;
5. The recognition of the trend towards “urban hubs”, where people can live in the city and walk to their offices.
6. The realization that from a tenant’s standpoint, building design and infrastructure “trump” location in their decision matrices and that location criteria have and will continue to be much more elastic;
7. The understanding that we are in the midst of a “golden age” of the Bloomberg era, when people want to be in NYC and that a broader perspective is a critical requirement in order to make neighborhoods better (Harlem being the poster child example).

Overall, the vision for the future of the city’s development is positive and positively exciting. It will, however, be expensive and continue to get more expensive, both to live and work in Manhattan. And as this happens, savvy NYC landlords will continue to profit and to protect their interests.

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