The Real Deal: Some Landlords Feeling Wary About Young Tech Firms

By Adam Pincus on April 01, 2014.
Some of the most valuable office leases inked in Manhattan’s Midtown South in the last year were with the new darlings of the real estate world, technology firms. Among the attention-getting deals were Twitter signing at 245-249 West 17th Street, IBM’s Watson Group at 51 Astor Place and Facebook at 770 Broadway.

Yet there is a quiet grumbling against their smaller and less credit-worthy brethren, brokers and owners said.

The wariness regarding the generally younger tech firms is stoked by those that have failed and left landlords with the expensive proposition of releasing the space. Some landlords also dislike the short-term leases such firms often require.

The perception that untested technology firms are risky is leading some owners to shy away from them and look for companies in more traditional industries like architecture, finance or advertising.

“If a company goes under, [the landlord] loses money,” Stephen Powers, director of leasing at brokerage Denham Wolf Real Estate Services, said. That antipathy to new tech tenants gave him leverage representing an architect in Midtown South.

Traditionally, landlords sought someone with strong credit, “but suddenly the market was hot for a different type of tenant. It was not what they were used to, and [some] got burned,” he said.

Cautious landlords will consider taking on young tech companies, but are asking for a year or more in security deposit, according to one landlord, who asked not to be identified. That’s two or three times a standard deposit range.

Despite misgivings over some tech firms, the overall Manhattan office leasing market was much stronger in the first quarter than it was a year ago.

The average asking rent rose sharply last quarter to $63.59 per square foot, a 14 percent jump from the first three months of 2013, when it was $55.74 per foot, data from commercial firm Colliers International shows. At the same time, the availability rate — which measures space available now or in the next 12 months — declined by 0.7 points to 11.4 percent, compared with the first quarter of 2013.
“At the end of the day, with the market supply constrained, you can be pickier with the type of tenant,” said Greg Kraut, a principal with the commercial firm Avison Young.

Midtown
The largest block of space to hit the market in the last six weeks was for eight floors at the Paramount Group’s 2.5 million tower at 1633 Broadway, between 50th and 51st streets, according to an analysis of data from the CoStar Group

The more than 415,000 square feet on floors 23 through 30 in the 48-story building is available for occupancy in 2015, earlier than some of the large office towers planned or underway in the Hudson Yards area. Although there is no published asking rent, insiders said the landlord was pricing it in the high $70s per square foot.

“I don’t think that building will be too challenging to lease up at those numbers,” Kraut said. The number of large blocks of space available is declining in Manhattan, Kraut said, citing his firm’s statistics.

“We like the near immediate timing of the availability of this block, and the location of the block (in the middle of the tower) because it has excellent views and light, relative to the other opportunities of this size and quality in the city,” said Peter Brindley, vice president of leasing at Paramount. That price is slightly above the average asking rent for Midtown, which in the first quarter was $73.49 per square foot. That is up 13 percent from the same period one year ago, when it was $65.02 per foot, Colliers figures show. During that same period, the availability rate declined by 0.6 points, to 11.8 percent.

Brindley said the mix of firms already in the building, including Allianz, Warner Music Group and the law firm Kasowitz Benson Torres & Friedman, is a draw for prospective mega-tenants.
“I think the roster at 1633 is noteworthy. It is not limited to financial services and law firms. You have leaders across multiple industries, which reflects the broader trends we are seeing in Midtown,” Brindley said.

Midtown South
The Midtown South market tightened sharply in the last quarter, eradicating a rise in availability that impacted the market during the second quarter of 2013, and pushing the availability rate down to 8.8 percent.

The tightening was driven not only by tech firms, but also by other types of companies, including architectural firms like BKSK Architects at 28 West 25th Street, between Broadway and Sixth Avenue.
BKSK renewed its lease for 10 years for 11,000 square feet, with additional expansion options at the building, Powers said. The asking rent was in the high $50s per square foot, but the landlord constructed a “creative,” solution that allowed the architecture firm to remain, even as asking rents have risen dramatically in the building, as well as in the overall market.

Asking rents for Midtown South rose to $55.53 per square foot last quarter, a 9.

7 percent increase from the same quarter a year ago, while the availability rate declined by 0.2 points from the first quarter of 2013, Colliers figures show.

The Midtown-based real estate investment firm Brickman purchased the West 25th Street building in early 2013 for $55.4 million, and is rehabilitating it. Powers said most of the tenants would likely turn over.

Downtown
The availability rate in Lower Manhattan fell the most among Manhattan’s three markets during the past year.

The rate dropped 1.7 points, to 14.4 percent in the first quarter, from the same period a year earlier, when it was 16.1 percent, the Colliers figures show.

The large technology and business software firm Computer Generated Solutions signed a 10-year lease renewal at Brookfield Properties’ 2.4 million-square-foot building at 200 Vesey Street, with a starting rent in the mid-$50s per square foot, information from leasing database CompStak reveals.

A representative for CGS confirmed the renewal lease was signed, but declined to comment further.
Hal Stein, a managing principal with Newmark Grubb Knight Frank, represented the tenant, while the landlord was represented in-house by David Cheiken, a vice president of leasing at Brookfield, Stein said.

CGS looked at options in Jersey City and Lower Manhattan but decided to stay, considering the $250 million redevelopment of Brookfield Place. Developments such as the World Trade Center and its related retail give tenants additional incentives to stay put.

The firm did not even look in Midtown South, the city’s main tech center.

“You really can’t find the space, and when you can find it, the price is too high,” Stein said. The starting rent figure for CGS was slightly above the $50.25-per-foot-average asking rent Downtown during the last quarter. That figure was a 10.6 percent jump from the level in the first quarter of 2013, when it was $45.45 per foot, Colliers figures show.

Regina Glick

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