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Class B offices offer savings for growing companies
THE much ballyhooed “flight to quality” was supposed to mean one thing: frill-less Class B office buildings are left in the lurch. But that’s not exactly true. While the biggest property owners are indeed spending fortunes to kit out their glittering glass office towers like five-star hotels, half of the city’s nearly 400 million square feet of offices are occupied by tenants that worry more about price than gym equipment. After all, Class B rents are down 25% from their peak; some below a third.
Tenants that require between 5,000 square feet and 25,000 square feet signed nearly 90 leases in Manhattan in Q3 alone, totaling almost 900,000 square feet, researchers at Williams Equities found. In 2023, 1.1 million square feet was leased in B buildings in Manhattan — the most since the end of 2019.
“To say that B buildings are dead and obsolete is nonsense,” said Michael Cohen of Williams Equities. “It’s fake news.”
Williams recently signed a lease with Lacoste for 18,364 square feet on the 17th floor of 136 Madison Ave. In another large B building deal, Ramp leased 66,000 square feet at 28 and 40 W. 23rd St.
In the third quarter, Two Sigma renewed 265,000 square feet at 100 Sixth Ave. At the same time, Ralph Lauren renewed 256,000 square feet at 601 W. 26th St., aka the Starrett-Lehigh Building. So did Zocdoc, which renewed a 46,000-square-foot lease at 568 Broadway.
Unless blocked by their lenders because of high loan-to-value ratios, most building owners are also willing to make concessions on rental pricing, tenant improvement allowances and free-rent periods.
“In the West 30s we have done leases under $30 a foot and the market was $40 to $48 pre-pandemic,” said Christopher Okada of Okada & Co. “The rise in interest rates has squeezed the value tremendously in these properties.”
Last year, Okada’s team completed 152 transactions in Manhattan. The surge in leasing activity is also seen by attorney Joshua Stein whose office now works on several leases of varying sizes at any one time.
Having properties close to transportation options is something that David Levy of Adams & Co. brags about. The company also dubbed the area between the Port Authority Bus Terminal, Grand Central Terminal and Penn Station the “Transit Triangle.”
“The [tenants] want a good, clean building with someone they can talk to and that is close to transportation so they can take one train or one bus,” Levy said. “From 33rd to 41st streets we have just a couple of small spaces available here and there.”
But in areas further from these main transportation hubs, like the Flatiron and Hudson Square, properties are “more challenged.”
“That market has not recovered well,” Levy said.
Even so, Paxos, a tech-driven financial solutions firm, is relocating from Midtown’s 450 Lexington Ave. to 15,000 square feet at 71 Fifth Ave.
Generally, the city’s smaller tenants are “regular” New York businesses, family businesses, product-oriented businesses, apparel and accessories firms, along with service companies like architects, engineers and accountants. And they often hop from one building to another within the same asset class.
“There are also As among the Bs and they will outperform,” said Cohen of properties with much nicer lobbies, elevators and other capital improvements.
Another reason for those tenants to hop buildings is due to the financial condition of certain landlords, Cohen added. Some tenants are worried if their building’s owner really has the cash to pay for the promised office installations and capital improvements. Those buildings tend to have been purchased for a high price in the last decade via lenders that won’t approve leases at a lower market rent. Interest rates are high, but their building is now worth less, and despite the activity, vacancies are still high.
There’s roughly 98 million square feet available — 18% of the total Manhattan market — with 3% of that on special servicer or watch lists, said Franklin Wallach of Williams Equities, meaning they “cannot transact.” Sure, there is the “flight to quality,” Levy agrees, but Class B owners that have little to no debt and have put their cash to work maintaining their properties over the last 20 years — “those are solid,” he said.