Gilding the Lobby Lily
Dana Rubinstein Nov. 17, 2009, 4:21 p.m.
The frugality fad is fading fast.
Bidders are dropping multimillions on Warhols at Sotheby’s; Goldman Sachs wives are preparing holiday shopping extravaganzas in anticipation of record bonuses; and in the realm of commercial real estate, tenants are spending more than $100 a square foot on office space (in which to hang their newly acquired artwork?).
Right now, an Italian Bank is negotiating for offices atop Mort Zuckerman’s monumental white marble GM Building for more than $120 a square foot. Bradesco Securities just signed a lease for $103 a square foot at Somerset Partners’ black-glassed 450 Park Avenue, according to two industry sources. And tenants are lavishing over $100 a square foot on rare office space opportunities at cachet-heavy midtown gems like the Lever House and the Seagram Building.
For those unaccustomed to commercial real estatese, consider this: a private-equity guy willing to pay $100 a square foot for his office space translates into a private-equity guy willing to pay $300 a year for the area occupied by the base of an office chair; or, put another way, a private-equity guy willing to pay $20,000 a year in rent to house his executive assistant (nota bene: this executive assistant would probably prefer to work out of a warehouse in Red Hook and have that $20,000 appended to her salary).
At any rate, $100 a square foot is a lot of money. In prelapsarian 2007, and even into 2008, when the notion of “a lot of money” lost its meaning and merely average midtown office space went for $80 a square foot, rents for these tippety-top-of-the-market spaces routinely scaled and ultimately surpassed such heights. And then, as the story goes, the economy collapsed. Soon, $100 a square foot began to seem a relic of a hedonistic society, like diamond-encrusted cell phones and $1,000 pizzas at Nino’s Bellissima.
Frugality was in! Tight-fistedness was chic. It was de rigueur to be stingy on office space.
Ironically (and somewhat paradoxically), it still is. The $100-a-square-foot deal, something veteran high-end broker Robert Emden, of PBS Real Estate, called “a psychological barrier” akin to the “10,000 Dow,” is indeed back. But in the final days of the bubble, when flush firms and the wealthy at their helms were willing to go so far as $150, $160 a square foot—and, in very, very, very rare instances, even breached the $200 mark—these $100 rents are comparative bargains, at least in the eyes of rich people.
“When they’re buying it for 20, 30, 40 percent less than they could have bought it for a year ago, that also spells something out to the client base,” Mr. Emden said.
Or, as Ben Friedland, CB Richard Ellis’ go-to hedge fund broker, put it, “Even groups that are in a great financial position measure themselves against their peer groups.”
BUT COMPARATIVE bargain or not, in the larger, more reality-driven world, $100 a square foot, and its return, signals something. To Steve Morrows, who handles leasing for RFR Realty’s Seagram Building and Lever House, it signals the demise of that whole short-lived frugality thing.
“I believe that the whole concept of anti-luxury that we experienced in the early part of the recession is starting to wane,” Mr. Morrows said.
He would know. In the past month, Mr. Morrows has signed four tenants at 390 Park Avenue, the Lever House, at rents above $100 a square foot: Wellspring Capital, Thomas Weisel, Sanders Capital and Stone & Youngberg.
Mr. Morrows said he has also signed two new tenants at the Seagram Building for more than $100 a square foot (he wouldn’t reveal the tenants’ names, since the transactions are not yet complete).
The luxury momentum is rooted in the revival of the hedge fund leasing market. Following Lehman Brothers’ demise, hedge funds and boutique firms shed 2.3 million square feet of office space in midtown, according to Cynthia Wasserberger, a senior vice president at Jones Lang LaSalle who tracks the hedge fund market closely.
By August, fully 44 percent of that space had been leased, subleased, or taken off the market. More precisely, 26 percent (or 583,000 square feet) has since been leased (or has a lease pending), and 18 percent (408,000 square feet) has been taken off the market.
In the over-$100-a-square-foot market, the resurgence began with smaller firms, those owned by only one or two principals who wanted between 3,000 and 10,000 square feet. Because of their small size, these firms had fewer investors eagle-eyeing the bottom line.
But even that is beginning to change. Mr. Morrows has two leases in negotiations at the Seagram Building for space of more than 20,000 square feet in size.
So what, if anything, does it mean for the larger Manhattan office market that price-insensitive office users are once again signing expensive leases?
Some would argue not much, that we have the recession to thank for making spaces at some of these top-tier buildings available, and that it’s only natural for tenants to grab them up, no matter the price.
“You cannot replicate a tenancy at 390 Park,” Ms. Wasserberger said. “The minute you tell someone you’re at the Lever House, they will know you’re a very established, well-heeled firm. … The $100 price tag is almost incidental.”
True enough. Then again, maybe leasing up this top-tier space is the first step in some sort of, dare we utter the words, market recovery? One that births a Manhattan where $100 a foot seems a bargain?
As Mr. Emden pointed out, “The A market will always recover before the B and the C markets. And the A-plus market is certainly going to always recover first.”