Cover Story

We Are OK: New Technology and Existing Resources Are Allowing Sandy’s Victims to Avoid Subleasing

On Thursday, Nov. 1, Virgo Business Centers made 27,321 square feet of temporary, furnished office space available at 14 Penn Plaza. Companies displaced by Hurricane Sandy filed in one by one, and by the following Thursday, the space was full.

“Typically, that process takes about a year,” said Pasha Erkin, director of sales at the company. “It’s all about readiness. You could literally bring me 40 people today, and I could have the space ready tomorrow. All you have to do is walk in, flip on a switch, plug in and start working.”

In that building alone, the company took on 177 employees from displaced companies like Coronet, amfAR, Linda Decorato, Ambrose and others located on the eastern tip of Downtown and other areas hit hard by the hurricane.

cover image for web We Are OK: New Technology and Existing Resources Are Allowing Sandys Victims to Avoid Subleasing

Businessman walking in Lower Manhattan, after the storm.

The company offers furnished space for stays as short as one month for between $1,200 and $5,000 per month, depending on the size of the office space. Companies offering plug-and-play access to furnished office space without the commitment of a traditional lease have fared well post-Sandy.

They offer just one of the alternatives to subleasing that, in many ways, will put a damper on the hopes of companies with extra space, as displaced companies, many of which have lease obligations that will resume once buildings reopen, avoid signing into complicated agreements, experts told The Commercial Observer.

With 37 of 183 buildings in Lower Manhattan remaining closed as of Nov. 12, according to data from Jones Lang LaSalle, the reality of the situation is that more and more companies will not be able to return to their offices for weeks or even months.

But the technologies and existing resources major companies have in place are allowing them to avoid subleasing, in some cases by operating from company-owned offices elsewhere in the city or remotely, and with strikingly little impact on normal operations, said Chris Caltabiano, an adjunct professor at NYU Schack.

“I don’t think the sublease space is being significantly affected, because it just doesn’t make sense,” Mr. Caltabiano said, who added that companies with extra space may find their hopes somewhat blunted. “I think they were looking for opportunities to move some of this space, but I think they realized that in this short-term situation a lot of companies are looking to use technology and other resources to ride it out.”

S&P moved its employees into parent company McGraw-Hill’s headquarters at 1221 Avenue of the Americas on the Monday following the hurricane, after its 55 Water Street location sustained flooding and electrical damage, sources said. The company made sure every employee had access to a company laptop before squeezing them into the 43rd floor of the McGraw-Hill Building.

“We’re crammed into one floor, where normally we would be spread across four,” said an analyst with the company’s CMBS division who was not authorized to speak on the record. Rumors swirling around the office indicate that it could be up to three months before employees are allowed back into the Water Street location, the analyst said. “At least there are more food options in Midtown,” he quipped.

Financial giants like Goldman Sachs and JPMorgan also have access to alternative office spaces, some with large conference centers. Their employees also have the ability to access company systems and databases from virtually anywhere, and many law firms have donated conference space to major clients, Mr. Caltabiano said.

Smaller companies simply cannot afford to sublease extra space, he added.

Also, why pay to sublease when free space is being offered up across the city, as New Yorkers and the real estate industry come together in the wake of the storm: Muss Development, Forest City Ratner, Related Management, Brookfield Properties and The Lightstone Group are among those offering space through a program administered through the New York City Economic Development Corporation.

For their part, those with sublease space on the market are doing everything possible to accommodate displaced tenants and modify sublease terms if necessary, and many large companies without extra space or the resources to work remotely have no choice but to sign subleases.

“I think sublease space will be leased because there’s a lot of it around, and I do think that people are being very accommodating,” said Arthur Draznin, an executive managing director at Newmark Grubb Knight Frank.

Firms reportedly taking sublease space in the wake of the storm include insurance company Aon, which took 112,000 square feet at 299 Park Avenue; law firm Fried Frank, taking an additional 30,000 square feet at the Seagram’s Building; and Fragomen, a law firm that subleased 62,000 square feet at 1301 Sixth Avenue.

Others may be leaning in that direction. On Friday, after two weeks of make-do efforts on the 43rd floor at McGraw-Hill, S&P sent an email to employees stating that the company could be taking another floor at the building, said the analyst who spoke on the condition of anonymity (The Commercial Observer was unable to confirm whether the additional space would be subleased in time for publication).

David Berke, an associate director at Cushman & Wakefield, leased a 7,575-square-foot sublease to Avistar Communications Corporation at 708 Third Avenue in Midtown.

“We have subleases that will help tenants who are displaced to enter into three- or four-month deals,” Berke said. “These spaces have fully wired phones, meaning that someone can move in on a Tuesday and start making calls by Wednesday.”

But the subleasing that is occurring is unlikely to make a dent in the numbers, experts said. Subleasing availability hit a 2012 high of 10.4 million square feet in July, before dropping to 9.7 million square feet in September and then ticking up to 9.8 million square feet in October, according to data from Cassidy Turley.

In many cases subleasing won’t even be reported—or recorded—because the terms are so short, said Robert Sammons, vice president of research with Cassidy Turley. At best, any dent would be temporary.

“These tenants can’t just walk away from their leases,” Mr. Sammons said. “They will ultimately have to fulfill their lease obligations and work something out with the landlords.”

Subleasing “doesn’t make sense for the landlord or the tenant when people are expected to be back into their old offices,” echoed Mr. Caltabiano.

In addition, sublease space in areas affected by the storm remains inaccessible, which will further keep absorption in check; and large blocks of older space will be even harder to fill than they were before the storm. Goldman Sachs, for instance, has “tons of space” at its former 85 Broad Street location, where the company still holds a lease, and it is unlikely to be filled anytime soon, one broker said.

Lower Manhattan’s freshly exposed vulnerabilities could perhaps lead some companies to permanently relocate to Midtown, Mr. Sammons said, adding that 6.9 million of the total 9.8 million square feet of available sublease space in October was located in Midtown.

But, he added, “I just don’t know how many you’re going to see, because it’s so expensive … the fact of the matter is that Lower Manhattan still is much cheaper than Midtown.”

In the same way that the hurricane will not cause significant long-term absorption of sublease space, a much beefier economy will also prevent a fallout similar to that seen after the 9/11 terrorist attacks or during the so-called Great Recession, when sublease availability skyrocketed, experts said.

The record high of 19.7 million square feet of sublease availability was recorded in November 2002; and 17.3 million square feet of space was available at the recession’s high point in May 2009, the Cassidy Turley data shows.

“Subleasing is largely employment-driven,” Mr. Caltabiano said. “Relatively speaking, we have done well through the recession, and the employment base is more than just financial services now, with tech and health care. There’s a stronger economy with less sublease space available, and there hasn’t been a lot of new construction. That’s not likely to change.”

The hurricane could, however, serve as a wake-up call for building owners, and tenants displaced by the storm will need reassurance that owners and management companies are taking steps to shore up defenses, create mechanical and electrical redundancies, and perhaps relocate critical equipment and systems to upper floors.

Buildings, perhaps like their “earthquake-proof” counterparts in California, should be held to new standards when—or if—a consensus is reached that the city is experiencing a new normal when it comes to extreme weather.

The Loma Prieta Earthquake that struck the San Francisco Bay area in 1989 caused 63 deaths, 3,757 injuries and an estimated $6 billion in property damage, according to the U.S. Geological Survey.

Glass shattered and some structural damage occurred at older high-rises, many of which were later retrofitted, said Garrick Brown, a director of research with Cassidy Turley, San Francisco. But, he said, “The disruption to the general market was minimal,” with old industrial and residential buildings taking the brunt of the damage.

“In a lot of ways, no modern event here has had a major impact on commercial space,” he said. But especially memorable was the community response, something New Yorkers and the real estate industry are experiencing now, and will clearly remember long after buildings have reopened and communities are rebuilt.

“It was huge; the power was out for a couple of days, and for weeks everyone was raising money to put people up whose apartments went down,” Mr. Brown said, recalling an event that occurred more than 23 years ago. “The city really came together.”

Follow Al Barbarino on Twitter or via RSS. abarbarino@observer.com