Manhattan’s office market is in the midst of a series of fundamental changes that include tenants asking for and receiving shorter lease terms, a backlash against density – but not flexibility, and an uptick in demand for boutique, amenitized space, according to panelists at Mazars NY Commercial Real Estate Summit.
There’s a fundamental mismatch between the average life of a company and the average lease term, according to Simon Wasserberger, a senior v.p. at Equity Office Properties. On average, a company only exists for about seven year but lease terms tend to range from 10 to 15 years.
Another problem landlords are facing today is the age of buildings in the city, Wasserberger said. Sixty percent of office buildings in Manhattan are at least 60 years old and renovations on these properties are frequent. “A functionally obsolete 75-year-old building that doesn’t fit the cultural vision needs something dramatic done to the amenities and outdoor spaces,” he added. “We want truly stabilized buildings – if a tenant moves every year, they can’t have culture. Rents are going up, and I would rather have term than lease space every year.”
Michael Mandel, co-founder and ceo of Compstak, said his company has tracked 45,000 leases in New York City over the past 10 years and found that while tech tenants are volatile and have a short lifespan, lease terms are increasing and concession packages are at an all-time high. “Optimism in the business changes the market towards the landlord’s favor,” said Kenneth Fisher, partner at Fisher Brothers. “One of the biggest changes I’ve seen is in securitizing of leases, which is happening in radically different ways.”
The shift from cubicles to open-plan offices and greater density per square foot continues to play out. “This focus on scary density is played out almost entirely except for a couple of industries. The pendulum has swung the other way, with a backlash against over-densification. [Within companies that did desk-hoteling] the more senior guys said, ‘this is my office – if I show up, it better be empty,’” Wasserberger said.
Companies with assigned desks are becoming less common as classical corporate tenants only have 30% of their office filled on any given day, noted panelist John Arenas, cio of Serendipity Labs. When co-working tenants take up a part of every building, market players don’t know how to underwrite sales. “There’s a different density and load of companies coming into New York, and a corporate demand for flexibility,” said Arenas. “Buildings are financed on the idea that flexible co-working spaces are okay.”
All tenants appreciate amenities, whether a Millennial or a 56-year-old commuting into the city from Greenwich, noted panelists. “Fresh air and natural lighting affects the atmosphere at large,” said David Cheikin, executive v.p. of the New York City region at Brookfield Properties. Landlords need to do a better job of defining LEED so that they can do something meaningful for the tenant, added Fisher. “The tenant generally never asks another question about LEED after moving in,” said Michael Pollack, counsel at Ballard Spahr.
Tenants building out their own spaces used to be the status quo. Now, however, landlords are becoming responsible for supervising layout and amenities. “When we used to meet with leaving tenants, they’d tell us that they regret putting in so much conference room space,” said Fisher. “A gym was an amenity, now it’s a necessity.” Having a gym and a daycare aligns with facilities and HR people’s interests, added Cheikin. “If [the owner] can figure out the space, they’re not bad deals for the long term.”