The 12th floor of 55 Fifth Avenue, just south of Union Square, is an active construction zone. Walls are being torn down. Infrastructure and pipes are fully exposed as the 22,000-square-foot floor gets a face lift in the hopes of attracting a new tenant.
The gigantic space with views spanning from the Empire State Building to Greenwich Village has been vacant since a medical office associated with Memorial Sloan Kettering departed late last year. That wasn’t a surprise, said Brian Soto, director of acquisitions and asset management for Time Equities Inc., the real estate firm that owns much of the office building. He knew they were reviewing their needs even before the pandemic. But it was terrible timing.
With the additional departure of two smaller tenants last year, Soto said the building’s occupancy has fallen from about 95% pre-pandemic to just over 80%. “The property hasn’t been at 81% occupancy probably for 20 years,” he said.
Across Manhattan, office buildings are still suffering from a glut of available space more than a year after the pandemic sent workers home and shut down most leasing activity. According to the real estate firm CBRE, the availability rate in older, “commodity” buildings like 55 Fifth Avenue was almost 20% at the end of June, nearly double the 2019 rate of 11.1%.
Older buildings without top flight amenities are also known as Class B office space. They don’t have fancy bathrooms and cafeterias. Built in 1910, 55 Fifth Avenue only has three elevators. It’s nothing like the gleaming towers around midtown and Lower Manhattan that are considered Class A office space, or trophy buildings.
Rents have fallen for both types of buildings since the pandemic. But Nicole LaRusso, director of tri-state research and analysis for CBRE, said there are only about 200 “better buildings” among the 844 Manhattan office buildings tracked by her firm. This means older, commodity buildings make up the bulk of the market and are under more pressure to upgrade.
“Landlords feel increased competition to attract tenants,” she explained.
Flight to Quality
The real estate industry was already seeing what it calls a “flight to quality” before the pandemic. Tenants who could afford to were moving into Class A space, and developers were building more of it around Grand Central, the World Trade Center, and Hudson Yards. That triggered a wave of improvements in Class B buildings. Now that there are many more vacancies, LaRusso said they’re scrambling to provide more services for choosy prospective tenants.
“If you have an older asset that maybe has older building systems, doesn’t offer a lot of amenities, maybe slow elevators,” she explained, “these are all the kinds of investments that landlords might consider making to make their buildings more attractive and more competitive.”
This is why the 12th floor of 55 Fifth Avenue is getting a major makeover. Soto can’t count on prospective tenants to be wowed by the views, and imagine a new space of their own, like he could before the pandemic. “Given the environment we’re in, we really have to put our best foot forward,” he explained.
That includes demolishing the tiny medical suites and bathrooms with subway tiles. Concrete floors will be polished and a few pre-built offices will be installed. Soto is also planning to build a gym upstairs. All this investment, though, has a cost.
“We certainly are taking a haircut,” he acknowledged. “I mean, we’ve adjusted our asking rents to where we think transactions will happen.”
Time Equities isn’t the only firm, by far, making improvements to Class B space. Grant Greenspan, who manages leasing for the Kaufman Organization, said the spaces his company renovated before the pandemic have been leasing first, at about $57-$62 per square foot. Prior to the pandemic, he said they were going for $65-$75.
Finished spaces are “going like hotcakes,” added Leslie Wohlman Himmel, founder and co-managing partner of Himmel + Meringoff Properties. To attract tenants, she said her firm also made online tours of its properties much more accessible for people who couldn’t physically travel to look at spaces.
The real estate industry worried companies would move to smaller offices after the pandemic, now that more people are working from home. Experts say the jury’s still out. Scott Rechler, the CEO and chairman of RXR Realty, predicted employees will have higher standards post-pandemic for what they want in their offices, especially around communal spaces, even if they only return a few days a week. He said they’ll be looking to “engage with colleagues and get a sense of community and purpose.”
In the meantime, more tenants are taking over existing leases, either to score a good deal or buy more time to figure out their post pandemic needs. Yana Collins Lehman looked at a lot of space this year after her company’s lease near Penn Station expired.
“We saw places where, like, people just abandoned their lease,” she recalled. “All of their stuff, their desks and everything, their snacks, their books were all still there.”
Collins Lehman is president of the accounting company Trevanna Post, which works with the film and television industry. She was already in a Class B space and her landlord offered incentives to keep her, but she worried crime was rising around Penn Station and she wanted a safer, nicer neighborhood. She also wanted room for her company to grow.
Trevanna Post signed a 10-year lease at 55 Fifth Avenue. The landlord is building her new offices, a kitchen and a conference room. “It’s 5,000 square feet,” she said. “And it’s a little more expensive than what we have here in Midtown, but nowhere close to as expensive as it was.”
She said Union Square and Flatiron were pricier neighborhoods for Class B space before the pandemic, and she’s thrilled to be moving downtown. Soto, of Time Equities, said two more leases are awaiting signatures for space in the building.
With landlords adding in extra amenities, tenants are able to get a lot more for their money in these older buildings. But landlords have to decide if they can afford to upgrade, because there’s a lot of extra space to go around.
Francis Greenburger, who founded Time Equities in 1966 and whose headquarters are at 55 Fifth Avenue, said he’s always concerned about the ebbs and flows of the city’s real estate market. But he said landlords with the resources to invest will be able to ride them out better than others. And he predicted the flight to quality that started before the pandemic will continue, regardless of how many people return to their offices full or part-time.
“You need to have certain amenities that people come to expect to have in their workplace,” he said. But, taking the long view, he added, “I’m more worried about climate change than I am pandemics, to be honest. Let’s not lose focus on some of the bigger events and challenges in our life.”
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