350 Park Avenue: Midtown Manhattan’s Next Big Thing

A little over a month after a democratic socialist became mayor of New York City, billionaire Ken Griffin and his finance companies, Citadel and Citadel Securities, are voting with their feet. 

The firms’ old Park Avenue offices are scheduled to be demolished this spring, but rather than walk out on the Big Apple, as Griffin did in Chicago, the hedge funder wants to build the city’s next trophy office building — a 1.9 million-square-foot glass and steel tower at 350 Park Avenue.

Starchitect Norman Foster’s firm has designed the 62-story supertall as a series of “glass flutes” that will rise in Midtown East with block-long frontage on Park Avenue and take up half a block of land between East 51st and East 52nd streets.

The tower will join a gleaming, glistening pantheon of polished Class A product, including the newer 270 Park Avenue and One Vanderbilt in Midtown East, to bridge the chasm in office demand left by the pandemic. In the aftermath of the work-from-home era, large corporate clients are seeking sleek space to retain their top talent. 

“The best product is tightening and holding rents,” said Sam Seiler, who represents tenants and landlords as executive vice president of advisory and transaction services at CBRE, “while older commodity buildings still have to compete on price or face pressure to reposition or convert.

“The office market has absolutely had a K-shaped recovery,” Seiler said, describing the divergence in growth between the very top of New York’s market and the majority of buildings. However, given NYC’s limited supply of trophy assets, “tenants are being forced to at least look at some of the other buildings that are available. And, in order to give those tenants what they want, you have to improve.” 

The office recovery is broadening, then, if slowly.

With an estimated cost of $6 billion, 350 Park Avenue is further evidence that COVID-era fears of a “doom loop” of declining tax revenues, public services and population were overblown. On the contrary, real estate taxes are set to rise under Mayor Zohran Mamdani, who is also seeking a rent freeze for rent-stabilized apartments, unless Albany props up the city budget. 

To be sure, New York’s office market remains diminished, and recent high-water marks in quarterly leasing activity reflect optimism tempered by 67 million square feet of vacant space that remains largely unwanted, according to a recent study by the New York City comptroller.

Renovations and residential conversions will gradually trim the overhang of unused, lower-tier office space, but it may take decades at current levels of demand for the bottom 90 percent of the office market to absorb existing inventory. Meanwhile, builders of new trophy offices can hardly move fast enough.

Manhattan’s trophy office market consists of 82 million square feet across about 60 buildings, and vacancy sits well below the 10 percent threshold considered an equilibrium. Midtown East appears ready to offer a premium to office developers who can snare big tenants. 

“Park Avenue ended the year with an availability rate of 8.9 percent, which is actually lower than it was in the first quarter of 2020,” said Frank Wallach, executive managing director of research and business development of Colliers. “It has fully recovered.”

“There’s not much of a backlog at all,” added Seiler, “and, if you’re delivering true best in class in the right location, like 350 Park, that’s where all the demand is.”

Yet another green light along Park Avenue is the steep reduction of inventory in the subleasing market, which can exert downward pressure on rents in the prime market when levels of inventory are high. Low subleasing inventory has long been considered a bellwether for the health of the prime market. 

“We’ve had sublet supply cut by almost 40 percent year-over-year in Manhattan,” said Wallach. “In Midtown, it’s the tightest sublet availability since late 2019.”

“If you have sublease space that’s high quality,” echoed Seiler, “it moves before you put it on the market.”

While the top of the office market looks strong, particularly in Midtown East, Griffin hedged his bets in forming a joint venture with Vornado Realty Trust and Rudin, forgoing an option to buy the entire development site — Vornado’s 350 Park Avenue plus Rudin’s 40 East 52nd Street and 39 East 51st Street — for $1.4 billion. Vornado and Rudin likewise had the option to offload the sites to Griffin, but neither sought to.

Griffin did, however, nudge his partners to the starting line well before a 2030 deadline. 

“Ken Griffin wanted to accelerate the option exercise,” said Vornado Chief Financial Officer Michael Franco during a recent earnings call. “Which we were fine with.” 

With equity partners in place and Griffin’s companies as anchor tenants, the project will edge closer to debt financing once demolition is complete. 

Vornado will take an equity stake in the project of between 20 and 36 percent. In addition to its land, the real estate investment trust will contribute several hundred million dollars in cash to the JV. To cope with the financial implications of the project on its balance sheet, Vornado plans to capitalize Citadel’s master lease into a long-term asset while the property is not collecting rents.

Wall Street investors have expressed skepticism about Vornado’s near-term prospects for growth despite what the company characterizes as strong leasing at its marquee Penn District buildings. The share price of Vornado stock fell below $30 last week, a loss of two-thirds compared to the company’s market cap since it reached a high-water mark before the pandemic.

Responding to the dour outlook, Vornado Chairman Steve Roth said on a recent earnings call that his company is preparing a more aggressive stock buyback program. As part of the negotiations to kick off the 350 Park JV, Vornado gained more latitude to decrease its prior equity commitment of 30 percent rather than to raise it. 

Nonetheless, enthusiasm for the project is evident among Vornado’s top brass.

“The spec office space is excellent,” Glen Weiss, Vornado’s vice president of office leasing, said on the earnings call. “Tenants who[se leases] are expiring in `31, `32 and `33 are already asking us to present the project.”

Newmark has been tapped to begin marketing spaces of at least 50,000 square feet to potential tenants, roughly double what is needed by a typical business, suggesting that the eventual rent rolls will carry corporate gravitas. Vornado and Rudin declined to comment. 

Just six months after Griffin made public hay over relocating 400 employees and the headquarters of his businesses to Miami from Chicago, he had quieter terms with Vornado and Rudin to consolidate the workplaces of more than 2,000 New York employees. 

No stranger to splashy spending, Griffin set price records in 2016 with a lease for the penthouse floors at 425 Park Avenue at $300 per square foot. The old 350 Park will be fully vacated in the coming weeks as a second wave of Citadel employees decamp to Brookfield’s 660 Fifth Avenue.

Griffin’s real estate adventures in Florida might prove a cautionary tale, though. The estimated price tag of his firms’ new headquarters there — a 1.8 million-square-foot structure on Brickell Bay Drive with a timeline similar to that of 350 Park Avenue — has ballooned from north of $1 billion to approximately $2.5 billion.

The New York trophy office market is now entering a period of maturity, too. It has been two decades since Conde Nast took up space at One World Trade Center, an event that Wallach called a sea change in erasing outmoded boundaries that tied industries to certain neighborhoods.

“Then there was Hudson Yards,” said Wallach, referring to the mammoth development that opened late last decade. “This category [of office] has grown, and it’s beginning to segment. So some early 2000 buildings have some blocks of available space, whereas buildings like One Vanderbilt are practically fully leased.”

Of the many risks in real estate development, Seiler said the largest one visiting New York’s office market is not the lack of available land. 

“Financing and risk tolerance are the limiting factors,” he said. “The risk is building average product in a bifurcated market versus building premier product in the hottest markets.”

Some like it hot, and Griffin is among them, planting his corporate flags in two of the nation’s prime real estate locations. After initially claiming 850,000 square feet at the new 350 Park Avenue, Vornado representatives say the appetite of the anchor tenant is growing.

“Pricing strength today doesn’t eliminate the risk for what’s going to come over the next seven years,” cautioned Seiler. “Construction costs are higher. There are higher costs of capital. Lenders can lend on conversions, so there are fewer projects in the pipeline. Interest rates can fluctuate. Debt markets can tighten. Equity partners may require stronger return premiums.”