How Extell Plans to Fill a New East Harlem Office Complex Amid COVID

Still, Extell executives and the Cushman & Wakefield team that the company hired to market the office portion said they are confident that there is demand for such a modern addition to the office market beyond more conventional hubs, such as Midtown, Midtown South and Lower Manhattan, never mind Downtown Brooklyn or Long Island City.

They said the office space would be ideal for a wide variety of tenants, including government and public sector entities, nonprofits, and private companies from the almighty technology sector animating so much of the Manhattan office market these days. (Behold Facebook’s lease of 730,000 square feet at the Farley Post Office site in Midtown South, the largest New York City office deal of the pandemic so far.)

“Basically, the whole model for us and why we think the building will be a success is that it’s Class A office in a great location; great, large, efficient floor plates that tenants really want; and a number of valuable incentives,” Ari Goldstein, Extell’s senior vice president for development, said.

The incentives include the availability of business income tax credits from the city’s Relocation and Employment Assistance Program, which incentivizes companies to relocate jobs to New York or from below 96th Street northward. Such sweeteners bring down HHQ’s asking rents by about $25 a square foot, Goldstein said. He declined to elaborate on what the asking rents are.

Extell’s journey to the October leasing milestone began in April 2014. It was then that the company that Chairman Gary Barnett founded began closing on parcels along East 125th Street with only general plans to develop and redevelop sites that included empty lots, a former post office and a Pathmark supermarket. The company spent about $70 million assembling the eventual site.

Meanwhile, Extell made its biggest splash of the decade several dozen blocks south. There, along a stretch of street just below Central Park, the developer spearheaded the forest of super-tall towers that became known as Billionaires’ Row with such projects as the Central Park Tower and One57.

That move, though, teased Barnett and company’s willingness to take the sort of risks that would come to include a major, new office property in the middle of a steep downturn in the office market. One57, in particular, started construction at the tail end of the last financial crisis and in the years after asked unheard-of sums for its units — and, by and large, got them.

In the meantime, once acquired, Extell’s East 125th Street site would flit in and out of the news. At one point, it looked like the new developer might develop hundreds of apartments, including ones designated as affordable. Through it all, the shuttered Pathmark loomed empty. Then, in early summer, Extell unveiled the plans for the office project, which will also include around 50,000 square feet of retail, with more than 300 feet of frontage along East 125th Street and Third Avenue.

It was an audacious move. The advent of the pandemic earlier in the year had sent hundreds of thousands of city workers home from their offices for what has turned out to be several consecutive months of remote work.

The trend is likely to continue for most Manhattan firms well into 2021. Some analyses from the fall estimate that only about 12 to 15 percent of office workers in the borough have returned to their workplaces. Plus, more than 26 percent of Manhattan’s available office space by October was sublease space, a near-record share, according to brokerage Savills — and one that is putting downward pressure on rents.

Then, there’s brick-and-mortar retail. It was struggling pre-pandemic. A 2019 report from the city comptroller showed a sharp rise in the number of vacant city storefronts in the past several years. The pandemic has led to spikes in retail bankruptcies, delinquencies on financing, and even more empty storefronts unlikely to be majority-filled until the pandemic passes. An August count from the Manhattan borough president found 335 street-level vacancies along Broadway alone.

Extell is handling the marketing of HHQ’s retail in-house. Goldstein said potential tenants include drug stores, pharmacies, restaurants and grocers. And he said the development would benefit from other recent projects in the vicinity, as far as foot traffic, including the 163-unit Smile apartment building at 158 East 126th Street and the state’s first proton therapy center, which opened in 2019 at 225 East 126th Street.

As for the much larger office portion, HHQ does have features that increasingly appeal to tenants in a COVID-19 world. The complex will have two private lobby entrances to reduce the potential for crowding. It’s also relatively low-rise at 120 feet and nine stories. Low-rise buildings, with their potentially walkable ascents and much shorter elevator rides, appeal to tenants more now than skyscrapers, analysts say.

Extell also plans to have top-shelf air filtration in HHQ, including filters with a Minimum Efficiency Reporting Value of 14 (MERV 14), and a 7,500-square-foot rooftop terrace for tenants. Access to fresh air — and to better-filtered air in general — has become a premium amid the airborne respiratory virus pandemic.

The typical floor plate in the building — which architecture firm Gensler is designing — is due to be 56,000 square feet, with 12-foot ceilings and wide column spacings. This is the sort of layout that would allow for companies to better space
employees and ebb the flow of possible pathogens.

Still, perhaps the biggest thing Extell’s HHQ has going for it is time. The developer said it expects to wrap construction on the building by late 2022. By that point, the pandemic will likely be in the city’s rearview and companies will be much better able to assess their need for office space. 

“This is a building that’s not going to be ready for 24 to 30 months, so we don’t see the pandemic as being a challenge,” Myles Fennon, a managing director with Cushman & Wakefield’s agency consulting group, said. He’s leading the team behind the leasing for HHQ’s office space. “If anything, it provides some additional runway.”

Fennon said that interest is already percolating, in no small part, due to the novelty of it all: fresh, Class A office space in an East Harlem not used to such new development. He compared the neighborhood’s potential as a major office-user draw to what happened with parts of the Brooklyn waterfront and Queens’ Long Island City. Those areas were once passed-over afterthoughts, and now host clusters of office buildings and mixed-use projects. Plus, Cushman & Wakefield and Extell are also touting HHQ’s proximity to major Metro-North and subway arteries.

“We have had a wider variety of tenants reach out than we would otherwise have expected, given the time that we’re in,” Fennon said.

Extell said it is counting on that post-COVID-19 demand. So, it has no plans to repurpose the building’s parts as so many other owners and developers are doing, including conversions into distribution hubs for e-commerce companies, which are doing so well during the pandemic.

“It’s not really what we have in mind for this site,” Goldstein said. “I think those distribution facilities tend to go into more industrial locations. We think we’ll be able to do a great, Class A office building.”