A New Generation of Medical Office Space Arrives on the Upper East Side

If one walks west along East 61st Street starting at the East River, it’s easy to see how big hospital companies and private developers are reshaping the neighborhood. At the corner of East 61st Street and York Avenue, Memorial Sloan Kettering just put up a brand new 16-story, 179,000-square-foot surgery center. The facility, designed by Perkins Eastman, focuses on outpatient procedures for cancer patients and holds 12 operating rooms, a rooftop garden for staff, an 18-bed recovery unit and 28 private patient rooms. On the same block are two older medical office properties used by Weill Cornell, 425 and 407 East 61st Street, the latter of which was converted from a Rolls-Royce showroom to a medical research center in 2008.

On the next block, between First and Second Avenues, developer William Macklowe and LaSalle Investment Management are constructing a new six-story medical building at 323 East 61st Street. Memorial Sloan Kettering leased the entire 75,000-square-foot property in February, with plans to use it for both clinical and administrative space, as Commercial Observer reported. Just west of the elevated Queensboro Bridge ramp, which bisects the block, JMC Holdings is revamping a 110-year-old loft property known as the Interior Design Building. The seven-story, 82,000-square-foot structure has long held furniture stores, art galleries and antique sellers. After purchasing the building for $47 million last year from New York REIT, JMC saw where the neighborhood was going and decided to market the property to medical tenants, a niche but often higher-paying class of businesses.

Mark Weiss, a broker from Cushman & Wakefield who sold a block-long site at East 76th Street and Third Avenue to Lenox Hill Hospital last year, said that the owners of commercial properties in the area are looking to health care providers because there aren’t many other kinds of office tenants who would want to move to the far-flung neighborhood at the foot of the Queensboro Bridge.

For a property like 323 East 61st Street, “a lot of office users don’t wanna be there,” he said. “It’s kind of out of the way. There’s not a lot of choices for a building like that.”

While hospitals were never in short supply in the neighborhood, large blocks of medical space are actually difficult to find in Lenox Hill, according to brokers and market-watchers.

Mike Hargrave, a principal at medical real estate data company Revista, said that Lenox Hill was one of the tightest medical office markets in the country. Occupancy rates for medical space have remained at 99 percent or higher over the past year, according to his data. However, the amount of available space has increased slightly year over year, to 13,253 square feet in the first quarter of 2019 from 6,022 square feet in the first quarter of 2018. Asking rents have also increased very slightly year-over-year, to $76 from $75 a square foot.

Michael Burgio, a broker at C&W who has leased big spaces in the area to Memorial Sloan Kettering and NewYork-Presbyterian, said, “If one of the major institutions came to me, it’d be difficult” to find a vacant chunk of medical facility that was 50,000 square feet or larger.

Corcoran Group commercial broker Paul Wexler is marketing 323 East 61st Street and a handful of other properties in the neighborhood to medical tenants. He attributes the uptick in properties being developed and repositioned for medical tenants to a number of factors, including the constantly expanding nearby hospital systems, the new Second Avenue subway, and “a fairly large patient population of baby boomers and other people who are older and need care” living on the Upper East and Upper West Sides.

“The Upper East Side has been for years and continues to be the most sought-after location for health care providers to locate,” he explained. The demand for medical space, he said, is “happening Downtown as well but not to the same extent as on the Upper East Side.” Wexler noted that medical tenants in Lower Manhattan are more focused on “health, wellness and preventative care,” while those in the East 60s and East 70s are more geared toward treatment.  

Further west at 110 East 60th Street, between Park and Lexington Avenues, William Macklowe and Dune Real Estate Partners have spent $20 million converting the former headquarters of the Lighthouse Guild, a nonprofit for the blind, into a medical property. Wexler said he’s already signed eight leases totaling 40,000 square feet in the 170,000-square-foot building, with tenants that include a fertility clinic, a plastic surgery group, a women’s health clinic, a dermatology practice and a dental office.

Other properties in the neighborhood are being repositioned for health care, too. A former United Artists movie theater at 1210 Second Avenue has been leased to an ambulatory surgery center. And Sotheby’s International Realty is leaving a five-story, 30,000-square-foot commercial condominium building at 38 East 61st Street after 20 years, and it’s being marketed as medical and office space.

However, developers who are building on spec may ultimately have a hard time filling their new medical facilities in the East 60s, Weiss argued, because they may not understand the changing market, or the power-heavy infrastructure needs of health care tenants.

“They’re trying and, in many instances, they’re doing it without great knowledge of what their tenants will be,” he explained. “It’s a market that’s forming and taking shape but unfortunately it’s a lot of trial and error.”