Office Building Owners Lean Into Amenities Despite Risk
Analysts and landlords like Rudin, Durst and SL Green see tenant sweeteners as a key way to compete post-COVID
Amenities, according to Merriam-Webster, are something that help to provide comfort, convenience or enjoyment to a user.
Help to, nothing. In today’s office market, amenities drive the bus.
Take 151 West 42nd Street, for example. You might know it better as One Five One, or by its old name, Four Times Square.
Two years ago, BMO Capital Markets, a subsidiary of the Bank of Montreal, was looking to upgrade offices. To hear the folks at the family-run Durst Organization — which controls 151 West 42nd — tell it, amenities were key to clinching the deal, especially the event space and the food options, which involve Michelin-starred chefs. BMO’s interest may have dated from when the company had its 2018 office Christmas party in One Five One’s event space.
“It was really the amenities that helped attract them to the building in a big way,” said Rob Becker, who runs the amenities program for the Durst Organization. Becker placed the cost of the amenities “in the millions of dollars.”
Bill Rudin begs to differ. The scion of another multigenerational New York real estate family, Rudin said it was the larger trading floor at One Five One that attracted BMO over from Three Times Square, aka the Thomson Reuters building, which Rudin Management controls and not the amenity package. Blaming the amenities would be “1,000 percent inaccurate,” Rudin said.
Becker said the 49,000-square-foot trading floor was indeed a factor in inking the office deal with BMO in April 2019, but the amenities package was as well. (Requests for comment to a BMO spokesperson were not returned.)
Nonetheless, Rudin is spending multiples of millions — Bill Rudin won’t say exactly how much — to upgrade the goodies available for future tenants of its 30-story Three Times Square. In addition to a triple-height, glass-walled lobby, Rudin Management is planning a 16th-floor amenity extravaganza, with a dining area and lounge overlooking Times Square, a coffee bar, a conference and event space that can hold up to 220, and a fitness center with locker rooms. A similar project is under way at 80 Pine Street in the city’s Financial District, another Rudin building.
Such is how it goes in Manhattan these days. There’s an arms race over who can offer the most elaborate amenities package, with landlords picking up most, if not all, of the expense, with an eye toward landing the biggest and most credit-worthy tenants. And with a transition going on from the world of COVID-19 lockdowns to the post-COVID new normal — and literally millions of workers learning they can be just as productive, or even more so working from home than in their offices — the arms race that was already going on gets even more fevered.
“I would say amenities are no longer a nice thing to have, it’s a must-have,” said Ryan Simonetti, CEO and co-founder of Convene, a company in position to take advantage of the need to complement workspace with play, feeding, exercise and educating space. In addition to providing flex offices and event space, Convene provides operating expertise to landlords interested in expanding their amenities menus.
“There’s a greater premium than ever for having the right amenities,” said Michael Lirtzman, principal in charge of properties management for Colliers International, a commercial property brokerage. Higher-end buildings “are sparing no expense on amenities and being handsomely rewarded in the middle of a pandemic,” Lirtzman said. He specifically referenced SL Green Realty Corp.’s One Vanderbilt, which opened late last year in Midtown East.
Convene has been hurt by COVID, and the egregious impact it has had on live events as well as demand for coworking space, Simonetti said. And, while it has yet to take advantage of rising demand for amenities, he said the company has had “lots of great conversations” with potential customers and “the momentum is there” to expand this part of the business. Managing amenity spaces was about 25 percent of Convene’s business pre-COVID “and we do expect that to become a much more meaningful part of our business. It will be a core focus of ours.”
At 530 Fifth Avenue, Convene already manages a facility for workers that includes a fitness studio, a food and beverage cafe, and an on-site clinic with Eden Health. It expanded its partnership with Eden Health in the midst of the pandemic, which is available to Convene members nationwide.
The march of events during COVID has proven one of what Simonetti called his underlying assumptions when he got into the business about 10 years ago: that office landlords would have to move in the direction of hoteliers in providing services to paying guests.
“It’s clear that landlords are starting to rethink about spending capital again right now, which wasn’t the case over the last 15 or 16 months,” he said.
Over at 10 Grand Street in Williamsburg, Brooklyn, it’s hard to imagine a more desirable office location. Two Trees Management, which developed much of the Dumbo district nearly a generation ago, built 10 Grand as part of a 45-story residential high-rise, with 137,000 rentable square feet of offices divided into single-floor suites averaging 6,083 square feet apiece, plus two base floors — one 16,000 square feet, and the other 13,000. The tower looks out at the East River and the Manhattan skyline, with the Williamsburg Bridge just off to the left. It’s part of Two Trees’ larger redevelopment of the old Domino Sugar refinery.
On top of that, there’s an elaborate amenities package, a sky-lit atrium with cafe seating, multiple private video-enabled conference rooms, a private 48-seat auditorium for live presentations or screenings, a dedicated bike lobby with bike storage, a fitness center complete with locker rooms and showers, and rooftop cabanas available for entertaining and events.
And, yet — at least, partly due to the pandemic — about half of the office space is still available. With two leases signed, but not yet announced, 50 percent of the offices are occupied, said Alyssa Zahler, Two Trees’ director of commercial leasing.
Two Trees remains confident that the offices will be successful, she said. Six of the nine deals they have done have been since January. “Across the board, it is a conversation we’ve had,” she said of the appeal of working from home. “The general sentiment that I’ve heard is people want to have an office again. They want it to be loud. They want people to be excited. They want people to be energized to come back.“
Back in Manhattan, the owners of 136 Madison Avenue in NoMad have spent more than $1 million to amenitize a vintage 300,000-square-foot building, according to Michael Cohen, president of tri-state operations for Colliers, which manages the address. One of the things the landlords did was make the elevators go to the building’s top, so that people with physical challenges can enjoy the finished roof terrace; the move also makes the terrace compliant with the Americans With Disabilities Act.
While landlord after landlord declined to put a number on it, all made clear that the focus on amenities was not cheap. Bringing in high-end chefs, Peloton bikes, finishing outdoor terrace spaces, and providing bike storage rooms — and then operating all of it — adds a layer of cost that wasn’t there back in the days, when all you needed to do was provide a workspace and a place to plug in a coffee percolator.
There’s also a rise in insurance premiums to consider, as providing all of these things also provides an opportunity for an occupant to get hurt on a property, creating a potential for workers’ compensation claims that wasn’t there before.
If an office tenant’s interest in an amenity is de minimis — for example, if it moves into a building that offers some amenities, but the tenant does little to nothing to publicize them to employees — it might be able to avoid financial responsibility if someone gets hurt, said Edward Obertubbesing, an attorney in the office of Alex Dell of Albany, N.Y., and a member of the New York Bar Association’s workers’ compensation division.
But, if the company encourages its employees to use the on-premises gym, for instance, it could be considered liable if a worker gets hurt blasting their quads.
If an employee can prove their employer sponsored the activity, “that’s where most of the cases are generated,” Obertubbesing said, especially if it can be shown that the employer provided financial support for it.
“More often than not, under Section 10 of the workers’ comp law, an employer does not have liability for just having the gym available,” Obertubbesing said. But, “maybe an employer gives a financial incentive to people for being physically fit. Those kinds of things can result in liabilities as well. Running, spinning classes or Zumba classes, where the employer gets more involved, those activities can result in liability.”
Even when an employee has no case, he or she can still file and force the company to defend itself. “It’s a blurry line,” Obertubbesing said.
As for who’s on the hook should an amenity injure a building, so to speak, by not catching on with tenants, that’s the financial responsibility of landlords. They, by and large, take the risk in installing them in the first place. But that’s a small risk, said Alexander Goldfarb of Piper Sandler, a real estate investment trust analyst.
“There’s nothing guaranteed in life but taxes and death,” he said. “You can do it and not make money, but these are not just whimsical ideas. Some landlords, yes — but if you look at what Vornado does, what SL Green does, what Boston Properties does … when they overhaul their amenity tenants, when they redo lobbies, there’s a tremendous amount of thought that goes into that.”
Nevertheless, even with all the costs, it can come out good in the end for landlords if having high-end amenities lure a high-paying company to take space in a building. Durst and Rudin people may disagree about why BMO went across the street, but they agree that funding their amenity packages is money well spent, and that landlords with the foresight and the courage to amenitize their buildings sooner will have an advantage over those that might have been slower on the trigger.
“The purpose of the amenities is bigger than just having the facilities,” Durst’s Becker said. “It really is to have an attraction for new tenants, and to retain the existing tenants by providing all the services. That’s the real economics of this. It was very critical before COVID to have this. Landlords that have amenities now are going to have an advantage in getting their tenants back, and to retain those tenants as leases are coming up. There’s no question that a building with quality amenities will trade at a premium.”
There will be some future workers who will choose a “hybrid” existence, working from home sometimes, in the office sometimes, other places sometimes, Bill Rudin said. But that’s not going to stop companies from wanting to have attractive, interactive offices.
He said his firm’s interest in amenitizing its buildings grew from Dock 72, the new building it co-developed with Boston Properties, which coworking company WeWork anchors. That building, designed in 2013, leads with its amenities, including an outdoor basketball court, a sprawling food hall, and a rooftop deck looking out at the East River and Manhattan skyline.
“This was the theme that kept coming up” in conversations with brokers and tenants, “that we needed to have these buildings amenitized,” Rudin said. “That this is much more on the minds of tenants now makes us look like we’re forward-thinking owners.”
Concern over the ability to fill offices post-COVID just might be overblown, too. While Piper Sandler’s Goldfarb said he was “absolutely” concerned about the ability of office real estate investment trusts to generate revenue, while “people who are motivated in their careers can work from home and be successful,” he also noted that a lot of quality workers had already been working one day a week outside the office before the pandemic. Now, maybe, they will work two days a week remotely, with the rest in big office buildings.
“There’s no game you can win if you’re not on the field,” Goldfarb said. “If you’re a company and you want to train the next generation of workers, you need your more experienced workers there. If you think you’re going to work from home, you’re not going to be paid big-city wages. It’s not going to happen.”