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Wall Street Journal / Biz - Money

In a Softening Market, Manhattan Office Landlords Pump Up the Perks

Owners of midtown Manhattan trophy towers have ramped up the concessions they make to tenants to build out office space, according to market reports and real estate executives.

By

Keiko Morris

Owners of Midtown Manhattan trophy towers have ramped up the concessions they make to tenants to build out office space, often taking on the construction work themselves and incorporating high-end touches in hopes of speeding up leasing and keeping rents up, according to market reports and real-estate executives.

In the third quarter, the average tenant improvement allowance offered by landlords of top-tier Midtown buildings was $87.27 a square foot, almost triple the $30 a square foot levels logged in 2008, just before the commercial real-estate market crashed, according to real estate services firm JLL. Midtown asking rents for trophy properties are $107 a square foot today, below the $111 a square foot peak reached in 2008, according to JLL.

One of the factors driving the tenant allowance increase is the demand for office space between 2,000 and 10,000 square feet that has already been built out and is ready for occupancy, said Cynthia Wasserberger, a JLL executive managing director.

For tenants with plenty of options, that has translated into an expectation of upscale finishes such as marble floors or counters, and pantries with top-of-the-line appliances.

“To attract tenants and remove the hurdle to relocating, which is the capital cost to build out space, landlords are continuing to build out space,” Ms. Wasserberger said. ”When one does it, it becomes the rising tide until now it becomes the norm.”

Landlord concessions at the top of the office market reflect the broader rise of concessions across all levels of office buildings. Building owners are offering longer free rent periods in addition to assuming the construction work and costs to create ready to occupy offices as well as customized build-outs, brokers and real-estate executives said. Rising construction costs also have pushed up the amounts landlords are spending so they can maintain or boost rents, they said.

The amount Manhattan landlords spent on free rent and tenant allowances rose to $173 a square foot in the first quarter of 2017, up almost 14% from $151.93 in 2015, according to real estate services firm Savills Studley.

In the third quarter, the vacancy rate for Manhattan office space rose 0.1 percentage point from the previous year to 10.7%, according to Savills Studley. In addition, there is a large amount of so-called shadow space, or space that will be vacated in 18 months or more by relocating tenants, said Jeffrey Peck, executive managing director at Savills Studley. Landlords have had to up their game, offering not just prebuilt, ready-to-occupy spaces but custom-built spaces at their expense.

“Now the tenant is saying, ‘I don’t want to fit into your prebuilt space, I want you to build it to my specifications,’” Mr. Peck said. “So where a prebuilt space costs $100 a square foot, a new building installation can cost landlords $150 to $200 a square foot.”

Landlords generally expect to benefit from leasing the space more quickly and at a higher rent, said Andy Levin, senior vice president at Boston Properties Inc., which has long offered prebuilt and customized office construction as part of its leasing strategy.

Many tenants today opt to leave building and upfront costs to building owners.

“Tenants prefer to focus on their business and leave the building of space and investment of capital in that space to landlords, if they are willing to do it,” Mr. Levin said.

The rise of emerging, often smaller tenants in the technology, advertising, media and information industries as a driving force in the market also has helped push more landlords to invest in prebuilt office space, said Bill Brodsky, a founder of Tribeca Associates. His firm, which is part of a venture that owns 30 Broad St. in the Financial District, has undertaken a $30 million project to reposition the building, which includes prebuilt office space.

In addition, the growth of co-working providers such as WeWork Cos. as an option for small tenants has made ready-to-occupy space offered by landlords more prevalent, Mr. Brodsky said. Small tenants, particularly in the technology sector where “everybody thinks they want to be the next Google,” don’t want to get locked into long-term leases because of uncertainty about the pace of expansion. At the same time, they are looking for cool, vibrant offices, he said.

Yet, bigger landlord concessions are tied to rent growth, he said.

“Five years ago, rent downtown was $30 a square foot and now it’s $50 a square foot,” Mr. Brodsky said. “So theoretically you can put more money in the space to attract tenants.”

Write to Keiko Morris at Keiko.Morris@wsj.com

Corrections & Amplifications
In an earlier version of this article the photo caption incorrectly stated the address as 45 E. 57th St.11/06

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