Hilary Spann, BXP’s NYC Chief, On Tenant Allowances, Construction Costs and More

The biggest Class A office owner in the country seems to be doing just fine — swell, in fact.

BXP’s current portfolio of 53.7 million square feet across 186 properties is about to get a little larger with three New York City development sites underway, including projects at 3 Hudson Boulevard, Site K at 418 11th Avenue, and the former Metropolitan Transportation Authority headquarters at 343 Madison Avenue.

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Hilary Spann, executive vice president of the New York region for the real estate investment trust, pointed out a “lack of really high-quality, premier workplace space in Midtown” as the need for these new developments, especially 343 Madison.

Just last week, BXP announced it had started vertical construction at 343 Madison, which will become a 46-story, 930,000-square-foot tower with offices, dining spaces, terraces and a seemingly endless amount of amenities.

The REIT has also already signed a letter of intent with a “prestigious, investment-grade financial institution” (which Spann declined to name) to anchor and occupy nearly 30 percent, or 274,000 square feet, of the building — a feat Spann said was incredibly “meaningful” for the property.

At 3 Hudson Boulevard, BXP is planning a 1.8 million-square-foot office tower destination for even more financial services tenants, while Site K will be a residential project with 1,349 apartments and potentially a 400-key hotel, Spann said. BXP is developing it with The Moinian Group and BRP.

All of the new developments come on the heels of a strong second quarter for BXP, which reported revenue of $868.5 million, compared to $850.5 million during the same three months last year.

Commercial Observer caught up with Spann last week at the company’s New York offices to discuss BXP’s strong reputation and its new developments in the city.

This interview has been edited for length and clarity.

Commercial Observer: BXP just announced that it started full vertical construction of 343 Madison. Tell us more about that project and its timeline.

Hilary Spann: We broke ground in October when we committed to the MTA to do an entrance to the new Madison Concourse for the Long Island Rail Road. And, actually, we’ve done all the excavation. We’ve poured the foundation there, and we are bringing steel in next week.

It will be complete around the third quarter of 2029, and it will be stabilized in 2031. We will be able to start turning floors over to tenants to begin their own build-out in the second quarter of 2028. … The earliest tenants will be able to complete their space and be able to take advantage of the new space right away.

This is one of the few office projects in Manhattan that’s going up right now. Talk a little bit about that.

We’ve been working on this site for over a decade. The MTA owns this site. It had three prewar buildings on it, and in 2012 or 2013 they took out a request for proposals for redevelopment. It took 10 years to get through the process of the negotiation with the MTA. … We signed the ground lease around 2023.

There’s an incredible lack of really high-quality, premier workplace space in Midtown. And, so, what we started to see was that tenants who ordinarily would be looking for space two years out or three years out, were going, “We are not going to have space if we don’t start looking right now, because there just isn’t any.” So that really gave us a lot of confidence that we were going to be able to lease it. 

And we have over a million and a half square feet of letters of intent in circulation at the moment, so we think that we will probably land one more anchor tenant in the base of the building, and then I think we’ll wait and see how it evolves. I think the top of the building, where we’re expecting rents in the high $200s per square foot, will probably go to private equity firms and hedge funds, etc., that need a floor or two and are willing to pay top dollar to get the best space in the market.

How would you say tenant improvement allowances play a role now versus a year ago, especially when you’re looking at 343 Madison and incoming tenants?

For 10- to 15-year leases in the very best existing buildings, the tenant improvement packages are about $175 per square foot. That is entirely consistent with where it was three years ago. 

What I would tell you is that starting in probably 2019, but definitely running up through COVID, construction costs increased radically. Tenant improvement costs increased 50 percent over a five-year time period, and so that $175 per square foot is what it is today because people actually need every penny of that and more to build out their space. That’s pretty consistent with what we think we’ll have to provide to tenants that are coming into this building. And I think most high-end build-outs cost well in excess of that.

Are you anticipating it getting even more expensive because of tariffs and other issues?

Costs have leveled off a lot. And over the last two years or so, I would say that we’ve seen a plateauing in the cost for tenant builds. What we’re seeing in the construction market right now is — actually, I was going to use a bad pun on the earnings call today — constructive. It’s a moment-in-time opportunity. I don’t think this window will last forever, but as some of the major projects that were going on around the city have wrapped up, there’s this moment where we’re actually seeing prices come in under what we’ve budgeted. And we budgeted this building well before any conversation around tariffs.

There just aren’t that many big projects built right now. We’ve put a few packages out on the street, and we’ve been able to bring those bids in under our budget with some level of tariff protection on materials costs. So we feel pretty good about where we are — not only from the leasing demand perspective, but also from the construction cost perspective right now.

And you guys aren’t just doing office.

That’s true. We’re already underway with the construction of 290 Coles Street in Jersey City. We finished driving piles last week, and we are ahead of schedule. We also are in pre-development entitlement work on Site K, which we were awarded in December. That will be 1,300 units of residential and potentially a 400-key hotel as well, and that’s right across the street from the Javits Center and immediately north of our site at 3 Hudson Boulevard. So we have a lot going on on the development front right now.

Has 3 Hudson Boulevard broken ground?

We built all of the subgrade infrastructure and the foundations. Amtrak cuts a corner of that site, and we had to build over the tracks, so all of that is done, and the site is now at grade. Because it’s a 1.8 million-square-foot project, and the capitalization is over $3 billion, you need a construction loan. Those things sort of dictate that you have a meaningful pre-lease before you commit to one vertical, and we’re working on that.

In terms of potential tenants, can you say what areas they’re in?

Financial services. 343 Madison is very much targeted toward high-end financial services firms. We have seen interest from non-financial services firms. There have been a couple of tech-adjacent companies that have come through. But the vast majority of the tenants that have shown interest have been asset managers, private equity firms, hedge funds, etc.

Is that the same for the Hudson Yards project?

Hudson Yards is a little bit different. The main thing that drives demand for Hudson Yards is the desire for new space that’s custom built and has an amenity package that can be customized for that tenant. You’re doing it yourself within your own space, and having a blank canvas that you can work with to do that is very attractive for a lot of the tenants that want to go over there.

There’s been a lot of leasing over the last year. Talk a little bit about that as one of the few games in town for new construction.

North of 42nd Street in Midtown East, the real vacancy rate is approaching 5 percent. Rents have begun to increase pretty strongly over the last year, and it started on Park Avenue, but it’s spilling outward. 

So, for example, this building [599 Lexington Avenue] has picked up some tenants who are being forced to expand off Park Avenue because the buildings on Park Avenue have no space available. 

We’ve raised rents across the Midtown portfolio by double digits since last year — we have signed leases at the General Motors Building north of $250 per square foot. That lack of availability is really driving rents upward, and it has leveled the cost of going to a new building with the cost of renewing in an existing building. So I think it’s a really logical thing for high-end firms to say, “Should I look at anchoring a new development?” Because now the cost is basically at parity with renewing.

Has the adaptive reuse craze, if you will, helped that, in terms of rents?

I think office-to-residential conversions are one of the big success stories in the city right now. What it does is it improves the health of the submarket by making it more mixed-use. There’s more foot traffic and there are more places for people to live, so that they can live near work. It’s fundamentally an absolute positive. 

I don’t think it actually has affected our rents that much. I think what has affected our rents is just that there is very clearly a preference for high-quality, newly built, highly amenitized space amongst our clients. Tenants in the financial services industry want the best, and they can afford to pay for it. So I think that’s really what’s driving rents.

As for AI tenants, there’s a lot of CEOs on the record saying AI is going to make a lot of career paths obsolete. How are you preparing for the effects of AI on the need for space?

Dusting off my resume. … I would be a little bit worried about those markets where companies are sending employees that are doing very repetitive work or work that is more easily automated. New York is a very high-rent market where companies really only put their revenue earners and their producers.

So I think New York actually stands to benefit from AI. We just signed a lease at 360 Park Avenue South for an entire floor with an AI-powered company. We are in negotiations for another floor with a separate AI-powered company.

How does New York City’s office market compare to markets on the West Coast?

New York is clearly the leader, but the Back Bay of Boston is also performing very, very strongly. Washington, D.C., in the submarkets that we are in, is performing strongly. 

The West Coast has historically been more shaped around tech and media in our portfolio. … Those companies were more susceptible to remote work before the pandemic, and certainly coming out of the pandemic. So I just think that it has been a longer pathway for those markets to get back to a healthy equilibrium on office occupancy.

What I would say about that, though, is therein lies the opportunity, because San Francisco is one of the best markets in the world for talent. … Those markets are going to be growth stories and recovery stories, and I think there’s actually a lot of embedded upside there.

So you said 343 Madison was a 10-year process, and you’ve got another four years before it’s finished. What are you watching out for in New York over the next four years?

BXP is a 50-year-old company, and we do not build our strategy around a five- or 10-year time horizon. We’re in this for the very long term. … I think we are at the high end of firms that commit equity to their investments, and, because we are committing significant equity to every investment that we do, we have to think about them from a very long-term perspective. 

So I can’t forecast the next four years exactly, but we have the balance sheet, and we have the team to figure those things out. We’re very confident about the path forward for 343 Madison and for New York more broadly. Developing in New York is not for the faint of heart.

Any opinion on Zohran Mamdani?

I think it’s entirely likely that Mamdani will be elected, but he will have to operate in an ecosystem where the state government has a lot of control over some of what he can do. … I think we, and the clients that we do these developments on behalf of, believe that New York will succeed.

Following the devastating shooting at 345 Park Avenue last week, has BXP been having any conversations about security?

Yes is the short answer. BXP has a long history and practice of having our security headed by former law enforcement, and so in every market that we operate in our heads of security are former very high-
ranking law enforcement officials. We have a comprehensive, multilayered approach to security that includes hiring off-duty, paid detail. We have security guards. We have turnstiles. If you want to access our buildings, you have to register ahead of time and get a QR code and get that QR code processed.

I think what happened was unprecedented, and we’re constantly evaluating our security protocols to make sure that they’re appropriate. … It’s very much case by case, but, yes, we’ve had very intense conversations over the last 48 hours about it.

Tell us a little bit about how you got into real estate.

I studied architecture in undergraduate school and urban planning for graduate school, and I think very early on I knew that I wanted to go to work in the private sector. So my first job out of school was as a consultant. I worked at PricewaterhouseCoopers in the valuation group, and my last consulting assignment was at J.P. Morgan.

I wound up working in New York City acquisitions at J.P. Morgan. The vast majority of what transacted in New York at scale back then was office, because most of residential was pretty closely held, and so I wound up doing a lot of office deals. Then I moved over to CPPIB and did the U.S. for a couple of years.

When BXP was looking for a head of New York, I thought, “I really want to be connected to New York.” Working for a developer, or working in a company that owns and operates, was a totally new experience for me, and I thought it was a really good way for me to get deeper into real estate.

What do you think of the REIT market in New York City right now?

As a blanket statement, the market has been more constructive around those companies that are focused on New York as a market. For obvious reasons, New York has outperformed all of the other markets in the country, and I do think that that has benefited the New York-centric REITs in recent history.

As always, flight to quality and flight to economic centers that have great educational institutions and great cultural institutions will always wind up being the net winners in the end. … If you own good assets and you’re a really good operator, and you have capital to commit and pay your leasing commissions, and you treat your vendors well, those companies are doing well.

Is BXP planning to stay in its current asset classes, like office and multifamily?

The three verticals are workplace — that’s the biggest — and then life sciences and residential. We will stick to those. I think that there is more opportunity to go deeper into our existing markets, and that would be our first preference, versus going to a different market. … 

The companies that are going to drive the economy of the country want to be in markets where top talent wants to be, and vice versa. And I think New York comes out on top in that analysis.

Isabelle Durso can be reached at idurso@commercialobserver.com.