With eight buildings totaling close to nine million square feet across a number of submarkets, Boston Properties is one of the largest owners of real estate in Midtown. Andrew Levin, senior vice president of leasing in the real estate investment trust’s New York office, has his finger on the pulse of the market. He spoke with The Commercial Observer last week about leasing trends in Midtown and Boston Properties’ development of 250 West 55th Street, which will open in fall 2013.
The Commercial Observer: Boston Properties has a significant presence in Midtown. Can you give an overview of your portfolio?
Mr. Levin: Some of our buildings are the General Motors building, which is 1.8 million square feet; 601 Lexington, formerly Citigroup Center, which is 1.7 million square feet; 399 Park Avenue, which is 1.7 million square feet; 599 Lexington Avenue which is one million square feet; Times Square Tower, which is 1.2 million square feet; 125 West 55th; 540 Madison and 510 Madison.
We are also developing 250 West 55th, which is another million square feet. It will open in September or October of this year.
Are you leasing space in the building now?
We have leased basically half to Kaye Scholer and Morrison & Foerster.
With respect to our portfolio, we don’t have much available space. If you look over our whole portfolio in the aggregate, we don’t have much available space. If you look at the market, in Midtown the vacancy is about 8 percent.
Midtown is basically a fixed-supply market; you’ve got 220 million square feet of space. Our building, which is a million square feet, is the only new building that’s going to be added for the next two to three years. Maybe 7 Bryant Park will be added in a couple years, and it will be three years before you get the Coach building on the Far West Side. The supply is fixed; the question in Midtown is always: what’s the demand? Last year, you saw an average leasing year, if you look at the five-year average.
What does the rest of this year look like?
If you look at Midtown, the major drivers are financial services and law firms. Is there anything driving financial services on a large scale? I would say there’s not much going on in terms of expected growth for the large players in Midtown.
If you look at the smaller players, it seems like the smaller players are still catching a little bit of wind. Whether that’s due to the stock market or the capital flows into the U.S., it seems the little guys are getting bigger. I think the big guys are staying the same. What does that get you in the end? I think it gets you a pretty similar demand cycle to what we saw last year. I’d say we are expecting it to be an average year. We’re not expecting hyper growth, and we’re not expecting things to go downward. I think it’s going to be pretty consistent.
Are there any submarkets in Midtown that stand out to you due to their leasing activity compared with the rest of the market?
I think Park Avenue and the Plaza District have remained quite strong. Certainly the Plaza District caters to some of those smaller, high-end tenants, and I think the velocity there has been quite good. You still see a lot of new business creation on the small financial side—people breaking off from the large banks to start their own hedge fund or private equity firm, and things like that. The Plaza District has benefited from that; we’re seeing it at 510 Madison and 540 Madison, where we’ve got smaller space to lease.
Park Avenue is pretty tight, and that’s for some of the next-stage, more mature companies from 25,000 to 50,000 square feet. We leased up 150,000 square feet of space at 399 Park relatively quickly because that high-end, good space on Park Avenue, at what I think to be a reasonable price, was pretty well sought-after. I think Park Avenue is pretty tight and attractive, and so that’s a good, tight market.
We benefit at 599 and 601 Lexington because we are technically part of the Park Avenue market, and when there’s tightness on Park Avenue, we tend to do well—and we’re seeing some of that activity.
Are any submarkets trailing?
Sixth Avenue seems a little bit softer. I think it’s just a function of pretty good size availability. You’ve got some pretty large availabilities lower down in some of the buildings there. When the large financial services firms are not there to eat up that space, who is going to? The law firms are not going to take that space. It just does not work for them physically.
The one thing that Midtown is actually lacking is a good quantity of large blocks of space. Once you get over the 200,000- to 250,000-square-foot threshold, it’s hard to find a good, contiguous block of space in Midtown. The reason you’re seeing all this activity over at the West Side Yards is because if you’re a 500,000-square-foot tenant and you’ve got expiration coming in 2018 or 2019, you can count on one hand the buildings in Midtown you can go into with space you know is going to be available. You’re forced to look at new development; you have to be that far ahead of time. A lot of them are choosing to look over in the West Side Yards versus going Downtown.
Speaking of development, how do you feel the rezoning of Midtown East and the potential development there will impact the market?
The type of space they are talking about developing for Midtown is, again, all highly priced space. So, now it’s going to be a decision: do I stay in the core of Midtown at $90 a foot, or do I go to Hudson Yards for $75 a foot, or do I go Downtown for $65 a foot? Anything that is going to be added to the core of Midtown is going to be more interesting, higher-priced, higher-margin space.
What sort of tenants are you hoping to attract to 250 West 55th Street?
When we set out the design for the building, we designed it specifically for law firms and professional service firms knowing that those firms tend to move to new buildings. A lot of firms are looking for efficiency, and a new building offers that efficiency. They’re attracted to new development. So, we saw that and said: “We’re going to build a new development for law firms, because that’s our target market.”
We have Kaye Scholer at the base, on three through 12, and we’ve got Morrison & Foerster for 17 to 24, and we really have the top of the building, a 38-story building, and a few in-fill floors. There are some growth floors and expansion floors for the tenants. What the law firms like about a new building is we can plan for their growth going forward. When you have a brand-new building, you have an open slate. You can plan for the tenant; they can get their growth pattern set.