The Wall Street Journal - Hole in One for Office Tenants
By LAURA KUSISTO
With the office leasing market increasingly favoring tenants over owners in recent months, some landlords are once again boosting the amount of money they're offering to build out interior space.
Landlords also are getting creative in the kind of perks they're offering, such as roof decks, golf simulators and private entrances.
Take the case of the top 11 floors of the former New York Times building on West 43rd Street, which Blackstone Group LP purchased from Africa Israel USA for $160 million. The new owners have a big task filling 480,000 square feet of space, which the newspaper vacated when it moved to a new building on Eighth Avenue.
Rather than simply undercutting competitors on rents, the new owners have turned to an unusual range of incentives, including more than 25,000 square feet of terrace space, offering to create private entrances for certain tenants and VIP parking. The building may even let select workers bring their dogs to work, according to brokers familiar with the space.
"It has to do with the fact that tenants out there like different things," says Lance Korman of Newmark Knight Frank, who represents Blackstone.
The leasing market has shown clear signs of slowing down in recent months. Tenants with more than 5,000 square feet leased 5.9 million square feet in the fourth quarter, compared with 6 million square feet in the third quarter and 6.2 million square feet in the fourth quarter of 2010, according to Colliers International.
In 2012 so far there have very few major leases. Partly due to the contraction of the financial services sector, brokers expect the overall leasing volume in the first half of this year to be well below what it was during the same time in 2011.
Typically, landlords first respond to a leasing slowdown by offering tenants incentives such as interior work and other perks. They much prefer to do this than cutting rent, something that investors and lenders monitor closely in determining property values.
"If you're going to refinance or sell down the road, headline rents are much better to have embedded," says William Elder, an executive vice president at RXR Realty.
Columbia Doctors recently negotiated a deal at Vornado Realty Trust's 1290 Sixth Ave. that gave the medical tenant its own entrance at the side of the building. "In a bull market it's very hard to do things like this," says Mark Weiss, of Newmark Knight Frank, who was on a team that represented Columbia.
There's evidence that the financial incentives that landlords are offering to get tenants into their buildings has been on the rise in recent months. In Midtown, the average tenant improvement allowance rose to more than $41 a square foot in the fourth quarter of 2011, from $32 a square foot in the first quarter, according to Robert Sammons, vice president of research at Cassidy Turley.
In Midtown South, the average allowance likewise rose to just over $30 a square foot in the fourth quarter of 2011, from about $20 at the beginning of the year.
Interior work is particularly important to tenants these days because increasingly they're looking to reinforce their brand and image in their office space, which typically costs more money. Typical of recent projects were the interiors designed by TPG Architecture for Healthfirst, a not-for-profit managed care organization, at 100 Church St. and for the advertising firm holding company at 745 Fifth Ave.
"Rather than adorn the walls with fine art, this is another way to support the essence of an enterprise," says Jim Phillips, the founder of the firm.
Aside from financial incentives, landlords also are increasingly willing to do small things that cost little, but can push a deal over the finish line.
At Silverstein Properties' 529 Fifth Ave., a silver sign for the International Federation of Accountants features prominently beside the building's entrance. Such a sign would normally be reserved for the likes of a 100,000-square-foot or larger tenant, but the federation occupies just 25,000 square feet, according to Daniel Horowitz, of Studley, who represented the tenant.
Occasionally, landlords offer to pick up the full tab for renovating new office space for tenants. While that's been common practice in smaller buildings, Paul Amrich, who specializes in landlord representation at CBRE Group Inc., says he's seen large owners in Midtown and downtown prepared to offer tenants fully renovated space no matter what the size.
Landlord brokers in particular expect incentives to ease up by the end of the year or early next year, when they expect a series of lease expirations to drive renewed activity in the market. But some predict that the market may favor tenants for some time, as new space is delivered at the World Trade Center and other new developments.
"I challenge my owners to think, 'How are we going to come out on top that isn't giving away the store, but allows you to put something in front of the tenants?'" Mr. Amrich says.
Write to Laura Kusisto at firstname.lastname@example.org
A version of this article appeared Mar. 18, 2012, on page A22 in some U.S. editions of The Wall Street Journal, with the headline: Hole in One for Office Tenants.