Boston’s Market: Robert Selsam on Handling Mort Zuckerman’s Portfolio
As senior vice president and regional manager of Boston Properties (BXP)’ New York office, Robert Selsam oversees one of the largest collections of trophy assets in Midtown. The company’s portfolio includes some of the city’s most exclusive office towers, such as the GM Building, 510 Madison Avenue, 399 Park Avenue and 601 Lexington Avenue. Though Midtown leasing was down substantially in the first quarter from last year, Mr. Selsam says that the company’s own leasing figures bucked the trend, in part because its assets are desirable enough to attract takers even during hiccups in the market.
The Commercial Observer: It’s been a bit slow in Midtown this past quarter with negative absorption to the tune of over two million square feet. Is it tough to be a landlord in Midtown right now?
Mr. Selsam: You know, it’s easy to draw the wrong conclusions from spot data from one quarter. I’ll give you an example why. It could be that a lot of deals happen to get done before the new year. That’s one reason. It could be that there are quirks in the way availability is calculated.
As we sit here today let’s say there is a big tenant with one million square feet expiring a year from now. All the brokers know that the space is available but it hasn’t hit the stats yet. So a month later, it hits the availability and it look like there was negative absorption of one million square feet. You have to look through the numbers. Now, it was a slow quarter for most people. I’m happy to say that our first quarter was above last year’s.
Last year was one of the busiest first quarters in quite some time. How were you able to do better this year?
Demand is really strongest, strange as it seems, for high-quality, smaller spaces in newer buildings. So we’ve been very busy at assets like 510 Madison. We like to have a variety of products available in a given building so no one gets turned away, but beyond that, we do a lot of business with small financial services firms who don’t want to take time to design and build space. They really want ready-to-move-in offices, so we find that by pre-building space we get deals done and get rents started sooner.
While it definitely seems like there are smaller deals getting signed, one conspicuous hole in leasing activity has been among larger tenants. What do you make of the slowdown in the market for big deals?
Given the size of the Midtown market there will always be large tenants whose leases expire in two to four years and it takes them that long to find new space and get the lease done and the planning and figure out how they can get in by their expiration date or negotiate a short-term renewal with the landlord. They’re always out there and they have options. If they’re looking for new modern building, those are pretty scarce and nothing is going to change that for several years. For that reason we’re very optimistic about 250 West 55th Street, which we are building now and will top off in June.
What big tenants are out there?
There are several. But they’re not at a decision point. I don’t want to comment on particular tenants, but there are a lot of big tenants thinking about long-term space and where they want to be. Many don’t want to stay where they are.
Do you think big tenants that are in the market are looking at new development sites like the West Side Yards and Manhattan West, and do you look at those sites as competitors not only to 250 West 55th Street but to your entire portfolio?
There will be tenants that go to those sites. Look, if there’s growth in the market, there’s room for everyone and we want to see N.Y.C. grow too. I’m not worried about that kind of overflow to development areas. There will always be demand in the core of Midtown, in the Plaza district and on Fifth, where we have most of our assets. That’s not going away.
Boston Properties is known for its collection of top-level trophy buildings, like the GM Building and 510 Madison Avenue. Aren’t those spaces harder to lease because of the higher rents they charge in a slow market like this?
At the GM Building, our rents are not far from where they were in 2007 at the peak of the market. We don’t have much vacancy in the building and we’re not going to have any space for several more years. For the upper floors we’d charge rents approaching $200 per square foot and there are tenants that will pay. There is always a flight to quality and you see it most in down markets. There are other factors than rent that go to the bottom line of a company, like quality of life, the ability to attract staff, efficiency of the space, large windows, no convectors, no columns, high ceilings and other amenities. Those are important factors for high-end tenants and there aren’t that many buildings that can provide that.
As great as your trophy buildings are, can they compete with the amenities and features of a state-of-the-art new construction building?
The GM Building does. 601 Lexington is a column-free, center-core space that is extremely efficient. 399 Park is a very efficient building. We bought these properties because we know they have enduring value. They are timeless. And they’ll always be able to compete from the standpoint that they’re so well located. We also modernize our buildings and try to keep up.
What leasing did you do during the first quarter?
We had a flurry of deals and interest at 510 Madison, we had some renewals at the GM Building. I will say that I think the market has a pulse right now and I’m looking forward to a good second quarter too. I hope other landlords feel that, too. There is a new sense of energy out there. The global situation seems to have stabilized a little and people feel better. They know the nominees for president. That goes into the collective psyche.
Are you saying that people are relieved that a candidate like Santorum is out of the race?
I didn’t say that. I’m sticking with what I just said.
Where do you think rents are going? It doesn’t seem like landlords have had the leverage to raise them.
You’ve seen the asking rent creep up and some of the concessions have tightened a bit. I wouldn’t describe it as a rising rent market. I think we’re in an equilibrium situation, which by the way I do think is going to change when we look downstream because we have little new supply. As everyone has written, it all depends on jobs. If there is continued job growth—I think we added 70,000 jobs in the city in 2011—if anything like that continues, the space market will contract dramatically in the next two years. I have given up predicting the rest of the world and how that affects us here.
So you feel optimistic?
There is no such thing as a pessimistic developer.
New media and tech tenants taking space in Midtown South has been the story of the first quarter and one of the biggest trends for months. How come so few have come to Midtown?
Well, that’s a terrific question. They have a different set of drivers than the financial and law firm tenants. They’re all about being cool and hip and cutting edge and they’ve kind of defined Canal to 34th Street west of Fifth Avenue as their chosen location. They don’t mind older buildings and funky space. It’s a very exciting phenomenon for New York. It’s not like the dot-com bust. They tend to have real businesses and they have income unlike the speculation in 2000. It just bodes well for the city as a whole and it’s not going to hurt Midtown, it’s only going to help it. When the city is vibrant there are businesses that feed off each other. These tech tenants need accountants and lawyers, they need to invest their money and the tighter the Midtown South market is, it puts some upward pressure on Midtown too. I wouldn’t be surprised if these tech companies mature and move north in the future.
As you mentioned, you’re building 250 West 55th Street, which is going to be a beautiful new tower. You have an anchor tenant, the law firm Morrison Foerster, but what has been the reception in the market for the rest of the space?
Well, the floors are about 25,000 square feet apiece (they’re larger in the base). We’re not yet marketing the top tower floors but we are talking to a couple of tenants for space at the bottom of the building for a fairly substantial block. The top will take care of itself when we can take people up and show them how stunning those will be. You get great park views but mostly Hudson River views and the good river views start at floor 16. We’d be about 50 percent full if we fill the base.
What are asking rents in the building?
The top of the building will be very different than the bottom. Obviously, the bottom will not be triple digits. Let me leave it at that.
You’re into art and helped with the installation of a gallery of painting in the atrium of 601 Lexington Avenue. Can you talk about that for a moment? What role does art play in an office building?
Well, art definitely has a place in buildings, but some buildings have such a strong design character they don’t need it. There will not be artwork in 250 West 55th Street but the back wall of that lobby will be a water feature where water will be trickling down a wire mesh screen, something like 20 feet high. It goes wall to wall, floor to ceiling. It’s going to be quite beautiful and some might consider it a work of art. When we talk about 599 Lexington you could describe it as the property with the big Stella in the lobby [a large painting by artist Frank Stella hangs there]. It can be defining.