(Bloomberg) — The fortunes of Manhattan’s office market seem to be coming in new versus old.
Glassy skyscrapers that have popped up in recent years are luring companies looking for new space and preparing for the hybrid-work era, a sign of New York’s revival from the depths of the pandemic. Left behind are countless old buildings that have not been modernized over the past decade, posing a costly problem for landlords.
The question for owners of those buildings is whether it’s worth putting hundreds of millions of dollars into a complete gut-renovation—a gamble at a time when office use is typically low, available space is accumulating at a record rate and high. Ho-profile companies such as Deutsche Bank AG and HSBC Holdings plc are reducing their global footprints.
“We’re going to see less use of offices as hybrid work becomes more popular,” said Ruth Kolp-Haber, chief executive officer of brokerage Wharton Property Advisors. “Really cool buildings have a huge amount of activity. But for anything other than the ‘really good,’ landlords are struggling and the dichotomy is getting worse.”
Making a major change is no guarantee a property will compete. Not doing so would mean a diminishing rent roll, potentially leading to mortgage defaults and foreclosures. Another approach – converting obsolete office buildings into housing – can be complicated and prohibitively expensive.
Manhattan has an office-vacancy rate of 12.3%, up from 7.8% two years ago, CoStar Group Inc. data shows. On 15% of existing buildings, at least a fifth is available.
As leased last year, about 65% of new deals were in high-quality buildings – meaning properties recently built or undergoing a significant renovation, and topped with outdoor spaces and natural light – Average maintenance. to costar.
In a city where nearly 90% of office stock is more than 20 years old, the disparities are enormous. New skyscrapers have filled up rapidly, including the Hudson Yards mega-development and One Vanderbilt near Grand Central Terminal, attracting the world’s largest finance and tech tenants. Meanwhile, old buildings that haven’t been repaired in the past decade can barely attract interest even with big discounts on rent.
Mary Ann Tighe, CEO of New York, said, “The market is telling us very clearly that the era of driving office space at the most affordable prices, regardless of its status, is no longer an acceptable real estate strategy for most companies. ” Tri-state region for brokerage CBRE Group Inc.
Tenants are moving to best-of-the-best trophy properties that are close to transit hubs and come equipped with posh amenities, including gyms, luxury restaurants, and outdoor terraces. If workers are going to leave their home offices comfortably, they want good allowances in return.
“The requirements for a building to come out of the pandemic are enormous,” said Sarah Hawkins, CEO of Hines’ Eastern Region, working with SL Green Realty Corp. On the redevelopment of One Madison.
Building upgrades are routine for homeowners, who regularly reinvest capital to maintain older properties. But small updates won’t do much to increase their appeal.
“It has to be a real commitment to transform the property,” said Peter Rigardi, president of the tri-state region at Jones Lang LaSalle Inc. “We are seeing a lot of renovations that are going beyond just minor face-lifts, where they are taking out slabs, getting creative with floor plates, removing and replacing heating and air conditioning systems, Changing windows.”
Even for landlords who have reinvested significantly in their properties, the supply of space can far exceed the demand. According to CoStar, the Financial District has more than 2 million square feet (185,806 square meters) including the Starrett-Lehigh Building in 120 Broadway and West Chelsea and redeveloped offices spread over an entire city block have a vacancy rate of over 25%.
Starrett-Lehigh’s landlord, RXR Realty, hopes to renegotiate some locations in the property as the existing lease expires. The firm has just moved to another building, Roku Inc. in 5 Times Square. made a big deal with RXR spent more than $130 million on renovations and added a 50,000-square-foot facility to the tower, built in the 1990s.
“It went from a good thing to a whole lot of post-pandemic need,” said RXR CEO Scott Reichler. “We need to do this to bring tenants in.”
Older properties are competing with huge blocks of space that are being constructed in towers such as 2 Manhattan West in the Hudson Yards area, and Deutsche Bank’s former headquarters at 60 Wall St, a 1980s building with at least one The overhaul is taking place at a cost of $250 million. Several towers are also under development, which will only add to the extreme supply.
The Financial District is particularly saturated with aged towers.
“Downtown is a whole other thing because there are so many of these low-quality buildings,” Kolp-Haber said. “The buildings that suffer are the old 1970s, with nothing different about it, no special charm, fewer windows.”
While many buildings in the area have undergone more-minor updates, they haven’t had the kind of overhaul that’s needed to lure in tenants these days.
From the New York Stock Exchange at 14 Wall St., the vacancy is closer to 30%. Built in 1912 as the original home of the Bankers Trust Company, the property has received some lobby improvements and amenities, including a convention center, but hasn’t been renovated recently. Goldman Sachs Group Inc.’s former headquarters at 85 Broad St. received an upgraded lobby, bike rack and wellness room as part of interior renovations after Hurricane Sandy. Still, the tower’s vacancy rate is around 20%.
“We can’t deny that 85 Broad St. is a vintage 1983 building, but given its prime location and with ongoing investments it will continue to appeal to current and future tenants,” said owner, Ivanhoe Cambridge said in an email.
Even if landlords are willing to spend on modernizing their old buildings, some properties will not be able to compete.
“It really boils down to the basic elements of the building: ceiling height, structure, location, window line — all that matter,” Hawkins said. “Even with a perfect spot, you can’t compete because of the bones in the building.”
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