Manhattan’s Class B Office Space Bucks the Hive Mind on Demand

Statistics suggest that far from doomed to obsolescence, the borough’s commodity spaces have life in them yet

reprints


Cliches die hard. It’s difficult to go up against collective wisdom once it becomes widely accepted.

Such is it with the notion of a flight to quality to Manhattan’s Class A office space. The notion — born of the successes that state-of-the-art office towers such as One Vanderbilt and One Manhattan West had in leasing up in the face of a trend toward reduced office demand in New York and other cities — is feeding decisions about what to do with older office buildings, ones that feature just plain old offices, the ones commonly referred to as Class B or commodity space.

SEE ALSO: Powell Hints Fed Won’t Lower Interest Rates Until Late This Year

The collective wisdom began to take for granted that this B space was not as desirable to tenants and therefore might become a financial albatross for its owners, who had loans to pay off and operations to maintain. New uses for it were inevitable. Even the administrations of New York Gov. Kathy Hochul and New York Mayor Eric Adams were pushing incentives to convert Class B offices into residential apartments. 

Then you see recent stats like the ones from brokerage Colliers (CIGI) that show B office demand is not trailing Class A space by nearly the margin this wisdom would have you believe. 

Colliers reports the five-year rolling annual average for Manhattan office leasing volume for Class B space, leading up to the pandemic, was 2.15 million square feet. For the last two years, through the second quarter of this year, the rolling average has been 1.63 million square feet, representing a 23.8 percent dropoff.

For Class A, the pre-pandemic average per quarter was 6.58 million square feet, and over the last two years, it was 5.21 million square feet — a 20.9 percent dropoff. 

It’s not great for either Class A or B space to lose that much demand, but the spread is not as bad as some might tell you.

As of June 30, which marked the end of this year’s second quarter, Class B availability in Manhattan was 18.4 percent, while Class A was 18 percent, said Franklin Wallach, Colliers’ executive managing director for research and business development.

Those comparable numbers make owners of Class B space feel they’re being unfairly maligned.

“Simply put, it rankles me when I read certain owners of Class A properties alleging the death of Class B, generalizing that as a group Class B properties have become unleasable, awaiting their final demise,” said Michael T. Cohen, president of Colliers’ New York tri-state region. “This runs contrary to the experience I and other Class B owners have had. We boiled it down to this: There is a crisis in Class B, [but it’s] very much like there is in B-plus and A-minus.

“These proclamations by Class A owners are self-serving,” Cohen added.

It’s worth noting that Colliers has a real estate-owning firm, Williams Equities, embedded in its New York office. Its portfolio includes 655 Madison Avenue, 136 Madison Avenue and 1201 Broadway — buildings that never have to worry about a crush of tourists or being on postcards. In fact, Cohen’s grandfather Victor Cohen was one of the founders of Williams, and Michael T. Cohen remains one of its principals. It is being a Williams principal that helps inform his position that people — including fellow real estate owners, brokers, lenders and, yes, the media — have been underrating B properties.

What they fail to take into account, Cohen said, is that people often see the bars, restaurants and gyms close to an office as part of a particular office’s amenity package. It has been widely assumed that landlords must spend the capital to build increasingly fancier amenities — including entire floors sometimes, which are marketed as tenant lounges — into their properties because people need to want to come to the office. They no longer feel compelled to commute to work.

“It’s just plain wrong,” said Cohen. “There are B spaces that have fabulous light and architectural details and that are in thriving neighborhoods.”

Cohen is also chairman of the Flatiron NoMad Partnership, a coalition of local businesses that makes sure their neighborhoods are clean and attractive. Flatiron and NoMad are part of Midtown South, the area south of Times Square that has become Manhattan’s mecca for startup technology companies as well as media and advertising (known in commercial real estate parlance as TAMI — technology, advertising, media and information), industries known for attracting postgraduate 20-somethings.

The dropoff in office demand from TAMI tenants was one of the drivers of the collective wisdom that Class B space was in terminal decline. TAMI went from rivaling FIRE (finance, insurance and real estate) as the animating force in Manhattan office leasing in the pandemic’s early days to falling back into its historic role as an also-ran. 

Companies such as Meta and Google have announced since late 2022 that they will spend billions of dollars to shed office space nationwide, and Colliers data from the spring showed the FIRE industries accounting for 40 percent of Manhattan leasing activity vs. 31 percent for TAMI. A second-quarter report from brokerage Newmark cited TAMI as “the driver of both an increase in sublease space and decline in demand” for the Manhattan office market overall. 

James Mettham, president of the Flatiron NoMad Partnership, said that he has seen little dropoff in the neighborhood’s tech-fueled hustle and bustle. Yet, Mettham said he thinks there will be a share of office buildings that will have to be converted to residential.

“All things are on the table,” Mettham said. “It’s important that our stakeholders and friends in government weigh their incentive tools, and what it’s going to take for a building to sustain itself. There’s no doubt in my mind that in some cases, given the overarching concern about having enough housing, and making it more appealing for people to return to work, there’s some opportunities here, in NoMad in particular. But, at the same time, there are plenty of entrepreneurial businesses that don’t necessarily need the glass tower.”

As for the area’s general vibe, including its street traffic, Mettham says it’s steady. 

“It still feels like there’s vitality,” he said. “On the ground when you’re here, it feels like there has been an incremental increase from the peak of the pandemic until now. Yes, there are going to be changes in terms of, like, who the tenants may or may not be down the road, or how they structure leases, or how spaces are built out inside, but the appeal of being in Flatiron or NoMad or around Madison Square Park, those are still going to do that. It will still be a desirable place to open up shop and invest in.”

Meantime, one area landlord, the firm Himmel + Meringoff, has put out a flyer touting its NoMad office buildings among its portfolio of more than 2.4 million square feet and 15  properties, one of the many things it is doing to maintain its buildings’ occupancy levels. Leslie Wolhman Himmel, a co-founder and managing partner at Himmel + Meringoff, said owners’ efforts on behalf of Class B office came down to one thing, much as any efforts do on behalf of the Class A space with which it’s still deceptively competitive: getting people back in the office. 

“If you’re at home and the dog is barking, or the baby’s crying, what do you do? It’s not a work environment,” she said “I liken this to skiing. I like to ski. When I lock into my skis and I start going down a hill, I go faster and faster. And, when I get into an office, I work really fast and I’m very productive, and I’m totally locked in. When I’m working from home, I feel like I’m on a slope that’s not even downhill.”

Another landlord echoed those sentiments, adding a practical economic argument for the demand for non-Class A space. Companies, whether they are small or large, need a place to keep their workers on the same page, said Brian Feil, executive vice president and president of leasing at the Feil Organization, a diverse Manhattan-based real estate company whose portfolio includes 200 West 57th Street, 250 and 251 Park Avenue South, and the Fred F. French Building on Fifth Avenue.

“The 100,000 square-foot deal gets headlines, but the majority of deals are in the 5,000- to 10,000-foot range, at a price point a majority of tenants can afford,” Feil said. “Maybe people are back Tuesday through Thursday, but there’s still 100 people and those 100 people need places to be.”

CORRECTIONS: The article originally listed 635 Madison Avenue as in the Williams portfolio. It’s not. But 655 Madison is. The article was also updated to reflect the correct size of Himmel + Meringoff’s portfolio.