Bargain-minded tenants find large space blocks aplenty
by Steve Garmhausen
Crain's New York Business
Psst. Looking for big blocks of office space at competitive prices, but don’t want to leave midtown? Then swing over to Third Avenue between East 38th and East 60th streets. There, nearly 60 years after the Third Avenue El was torn down, and the Durst family and others began putting up high-rise office towers, a growing glut of available space beckons.
“Third Avenue is the softest market in midtown,” said Alan Desino, executive managing director at real estate firm Colliers International. “There’s no question that is where the best bargains are.”
In the first quarter of this year, the avenue’s availability rate leaped to 17.8%, from 15.2% in the prior quarter with a rate of 11.7% in midtown north as a whole during the same period.
Powering that rise along Third were acres of office space hitting the market in large dollops at several towers. The biggest of those availabilities is the half-million square feet up for grabs at TIAA-CREF’s 685 Third Ave., just a block up the avenue from 150 E. 42nd St. – on the corner of Third Avenue – where neighborhood mega-tenant Pfizer recently added 274,200 square feet to the market. In all, there are half a dozen buildings along the avenue that have, or will have within 12 months, at least 100,000 square feet of contiguous available space, Mr. Desino noted.
Spurred to action
The abundance of space, combined with still-subdued demand, is prompting owners to take action. The owners of buildings, including those along the avenue at 747, 767 and 850, have poured money into creating handsome pre-built office space to lure smaller tenants. Others are offering months of free rent, and in some cases even striking deals at well below their asking prices.
Third Avenue has always been less pricey than Park or the Plaza district, but in recent months some brokers note that rents have actually sunk below those of Manhattan’s former bargain basement midtown south. There, where vacancy rates are the lowest of any business district in the nation – 9.5%, according to CBRE – rents have risen despite the recession.
Third Avenue has a number of important things going for it, including a building stock that is significantly younger than the citywide average, and far younger than the citywide average, and far younger than midtown south’s.
“It’s not just a cheaper alternative; it’s one with a good product,” said Mitchell Konsker, vice chairman with Jones Lang Lasalle, who is an agent for 757 and 850 Third Ave., among others. He added that a number of tenants looking for 100,000 or more square feet of contiguous space are kicking tires along the avenue. “There’s a limited amount of large blocks of space in midtown, and I believe that in 12 to 24 months, we will see a tremendous amount of appreciation in rental values [alone Third Avenue].”
In the meantime, there are signs that the avenue’s lower rents are drawing a crowd. Among the recent arrivals is Colchester Globar Investors, which left pricey Park Avenue to take up 4,000 square feet at 885 Third Ave. late last year, according to Gerard Nocera, a principal with Herald Square Properties, which manages the building. Other newcomers include accounting firm Marks Paneth & Shron, which took 86,000 feet at 685 Third and leased 14,000 feet at 850 Third.
Meanwhile, bargains are common on the avenue but far from universal. At 885 Third, the oval tower commonly known as the Lipstick Building, rents start in the upper $70s range. But its high-end design and good location have allowed landlords IRSA and Marciano Investment Group to keep occupancy at 90%. Their willingness to pre-build spaces has also helped. Three of the four spaces recently prebuilt on the 26th floor, using snazzy designs by architecture firm Gensler, have already been leased, according to Mr. Nocera.
“Bright future”
Investors, too, are betting on the market. In February, Paramount Group Real Estate Fund IV spent $172 million to buy up the 49% of 900 Third Ave. that it didn’t already own.
“We believe Third Avenue has a bright future, particularly for those assets on the eastern edge of the Plaza district,” said Dan Lauer, Paramount’s vice president of acquisitions, in an email. He described the 595,000-square-foot, 40-year-old property as a “classic workhorse” that had until recently maintained an occupancy rate of more than 95%. Today it is slightly below that rate, according to the company.
Now all that needs to happen is for other landlords along the avenue to find a way to do that as well.
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This article originally from Crain's New York Business.
