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Can One Vanderbilt be a Midtown East catalyst?

Rezoning could spark new era of office construction near Grand Central

July 01, 2015  By Ariel Stulberg

The-Real-Deal-Q&A

Manhattan office vacancies are low and prices keep rising. But while the fast-growing technology and media sectors colonize Midtown South, and new construction at the World Trade Center and Hudson Yards draws major corporations to Downtown and Midtown West, one traditional office center is lagging.

Midtown East, with its aging office buildings and infrastructure weaknesses, has seen little new development and few marquee tenants signing high-profile leases recently.

Last month, the city approved rezoning a five-block area near Grand Central Station dubbed the “Vanderbilt Corridor,” a move that will allow SL Green Realty to build a 63-story office tower, while providing a series of upgrades to nearby transportation links.

The deal with SL Green addresses some of the problems former Mayor Michael Bloomberg aimed at with his plan to rezone a much broader swath of the neighborhood, but Mayor Bill de Blasio is taking a more limited approach. The Real Deal spoke to developers and brokers knee deep in the Midtown East market to suss out whether the new tack represents a path forward for the neighborhood, or a marginal one-off that won’t address larger issues.

“The three biggest challenges facing Midtown East today are its aging commercial inventory, a solidified perception of the area as a district for certain types of businesses and not for others, and uncertainty about the administration’s future intentions for the area,” said Seth Pinsky, executive vice president at RXR Realty, who served as president of the city Economic Development Corp. during the Bloomberg years.

He praised the Vanderbilt Corridor plan, and argued for similar public-private cooperation schemes elsewhere in the area, along with more comprehensive zoning reform.

Other panelists bemoaned the administration’s small-bore approach.

“I think that Mayor Bloomberg’s original plan was an excellent one and should be implemented,” said William Montana, senior managing director at Savills Studley. “A piecemeal approach is not the right path.”

For more on the Midtown East office market, we turn to the experts.

William Montana

Senior Managing Director, Savills Studley

What impact do you think SL Green’s tower will have on the surrounding area? What other development are you expecting in that five-block area?

The new tower will bring much needed modern office space to an area that has very old, outdated building stock. Larger companies, in particular, require large floors, efficient space and “green” space with light and air. The new tower will also add a shot of vibrancy to a stodgy, older area. With regard to other sites in the five-block area, the Milstein property at 335 Madison Avenue is a prime candidate to be redeveloped.

William Montana Savills

Former Mayor Bloomberg unsuccessfully lobbied to rezone a much larger area of Midtown East. Mayor de Blasio has said he’s in favor of a broader rezoning, but has added more requirements for developers. What do you think of de Blasio’s approach and his timeline?

It’s essential that Midtown East get rezoned, so it’s good that the current mayor recognizes it. I just hope that special interests don’t hijack the process to promote their agendas. What’s good for the hotel workers union for example, is not what’s important to New York: The area around Grand Central needs buildings that will attract modern companies and the jobs that they bring.

What do you think should be done zoning-wise with Midtown East in general and why? Are you concerned that not rezoning it, or doing it in pieces, could hold up development?

I think that Mayor Bloomberg’s original plan was an excellent one and should be implemented, but with more specificity on what investments will be made on infrastructure upgrades and commitments to pay for them. A piecemeal approach is not the right path. I am also concerned about efforts to preserve buildings without architectural value. Such buildings should be razed so that new and hopefully beautiful modern office space can be built.

Do you think any rezoning should allow for residential development?

This is not the place for residential development. This is a commercial area and needs to be preserved for that use. Grand Central is one of the main transportation hubs and it’s essential that modern office space be located near that hub, so that commuters can easily get to and from work. Residential development does not need to be so close to a transit hub.

How is leasing activity in Midtown East doing and how does that compare to Manhattan’s other submarkets? Downtown and Midtown South have obviously been attracting media and tech tenants. How is that impacting Midtown East?

Leasing activity is fairly robust. It’s not as hot as Midtown South, but that’s the hottest market in the country, so it’s not really a fair comparison. However, rents in Midtown South have risen to a point where many companies have been priced out. Office tenants, the [technology, advertising, media and information] sector included, when faced with overly high rents in their preferred location, will be receptive to considering other, more affordable submarkets.  

Eric Anton

Senior Managing Director, HFF

What impact do you think SL Green’s tower will have on the surrounding area? What other development are you expecting in that five-block area?

Eric Anton HFF

I think it’ll have a very big impact. I’ve spent 95 percent of my career within a two-block radius of Grand Central. I love Grand Central. But clearly, we need to upgrade the office space and the transportation access points need refurbishment. I think it will have a great impact in attracting more of the [financial, insurance and real estate] industry and hopefully, the TAMI industries too. There are two development sites that I know of. Both are confidential and in the site assemblage mode.

What do you think of de Blasio’s approach to rezoning and his timeline?

I think it is reasonable to request from the private development community a bigger payment for the additional air rights. That being said, we shouldn’t make it too onerous or too complicated. Even though we’re in a boom time, planners need to make sure the process is streamlined. Otherwise, we’ll delay and delay and delay, and may be out of the boom time before anybody can build something.

Do you think any rezoning should allow for residential development?

The current zoning allows for residential. If one wanted to build an apartment building right in the center of the Grand Central district, you could do that. I would like to see more residential, though the primary function of Midtown and Grand Central is office. I don’t see it as a future family-type neighborhood. But pied-á-terres and very high-end, luxury small apartments … would be an excellent compliment to Midtown’s 24/7 nature.

Proponents of a larger Midtown East rezoning argue that the area’s aging office supply cannot compete with other world-class international cities for major office tenants. How big an issue is that?

I think it’s partially true. And it’s going to be very difficult to assemble blocks of square footage that can accommodate the massive banking operations and trading floor operations for global banks. So I’d be surprised if we see more than two or three of the really large-scale buildings. I think any of the massive corporations that need that kind of floor plate are most likely going to go over to the West Side, where there’s more land and more room for development, and for customized headquarters construction. But, I think Midtown East can compete better than the West Side or Lower Manhattan for hedge funds, private equity firms, sales operations, marketing operations, advertising companies that don’t necessarily need 40- or 50,000-square-foot floor plates. I think the future can be very bright for boutique buildings and high-end buildings.

Are you seeing properties listed or preparing to sell as assemblages in anticipation of a rezoning? On the flip side, are sellers holding off until there’s more certainty about rezoning?

I think for the moment sellers are holding off. We’re not seeing a large amount of assembles being listed or sold. I think the uncertainty is dampening assemblages, yes.

Seth Pinsky

Executive Vice President, RXR Realty

What do you think should be done zoning-wise with Midtown East?

The administration and City Council should move as quickly as they can to clarify the direction in which they intend to proceed with respect to zoning. Additionally, to the extent that they propose changes (which I believe to be necessary to ensure continued investment in the area), the administration and Council should focus on how to keep this area, first and foremost, a commercial district, generating the jobs, economic activity and tax revenue that are so critical to the continued prosperity of our city.

Do you think any rezoning should allow for residential development?

While creating more housing in the city is, appropriately, a priority for the de Blasio administration, it should not be its only priority. It is becoming increasingly difficult for businesses in the city (especially small businesses) to find reasonably priced real estate. In the long run, the squeeze on businesses and the jobs that go with them will have as pernicious an impact on the ability of New Yorkers to afford to live in the city as the rising cost of housing. We, therefore, must focus — especially around our most important transit nodes — on preserving and expanding the overall supply of commercial space.

Do you think there’s tenant demand for more new Class A offices in Midtown East given all of the new and planned office space at the World Trade Center, Hudson Yards and Manhattan West?

New York City contains approximately 400 million square feet of office space. This total has not changed meaningfully in many years, due to residential conversions and the horrible events of 9/11. The projects Downtown and on the West Side only begin to make up for the dearth of modern supply that has come to market in recent years. Because of its incredible transit accessibility, regardless of what happens elsewhere in the city, there will always be interest in Midtown East, provided that there is modern office space in the area to accommodate demand.

What are the biggest challenges that the Midtown East market faces?

The three biggest challenges facing Midtown East today are its aging commercial inventory, a solidified perception of the area as a district for certain types of businesses and not for others, and uncertainty about the administration’s future intentions for the area. The best way to address all three of these challenges is for the administration to come forward as soon as possible with a plan that encourages investment and development in the area to preserve its role as one of the world’s most important central business districts.

What do you think of tying project approvals with a requirement that developers pay money toward public improvements as part of a rezoning deal?

Leveraging development to provide a portion of those resources is a smart move on the part of the city, subject to two caveats. First, it would be foolish for us to believe that such private investments can substitute for the significant public investment that is increasingly needed to keep our transportation system up to standard. Second, government must be careful, in negotiating for public contributions to infrastructure, that the price that it is exacting is not so high that it ends up inhibiting development altogether — a risk that government seems to have, to its credit, skillfully avoided with the Vanderbilt project.

A. Mitti Liebersohn

Principal and President, Avison Young New York office

Do you think the “Vanderbilt Corridor” carve out for SL Green was justified and do you think developers at other nearby sites could make the case for getting on that same fast track?

The carve out is in line with prior plans for the area, and given that it delivers first-class office space to an area that has demand, the rezoning was appropriate. The only remaining “corridor” sites that would seem to have real “fast track” potential are located on the block between 44th and 45th Streets, where the MTA already controls half the block, and, to a lesser extent, the Roosevelt Hotel.

How many development sites do you think exist in the Midtown East district? How many new office towers would you like to see in the next 10 years?

There are approximately 18 potential development sites that have been identified. Given that most of those are buildings encumbered with commercial tenant leases, it will take close to 10 years just to gain occupancy of a typical site and to commence a project, unless significant buyouts occur.

What are the biggest challenges that the Midtown East market faces?

Having the existing Class B buildings — the ones already known not to benefit from the proposal — to continue to upgrade and improve their assets. The longer they remain on the sidelines, the more difficult it will be for them to compete for the upper rents in the market.

What are the most surprising trends you’re seeing in the Midtown East market?

Our statistics show a tight correlation between changes in asking rents and changes in vacancy. Right now, they are in near lockstep with little to no lag, which is unusual.

Anything else you can add about the Midtown East market that we didn’t cover?

Midtown East needs to allow for a broader area within which there is a fluid market for the excess Transferable Development Rights (TDRs) of landmark property owners. These include Saint Patrick’s, Saint Bartholomew’s, Central Synagogue and Grand Central Terminal. The sale of their TDRs is an important source of capital that can enable them to fund the costly preservation of these treasures that the city has deemed worthy of preserving.

Dana L. Moskowitz

President, EVO Real Estate Group

What impact do you think SL Green’s tower will have on the surrounding area?

The new tower will definitely have a significant visual impact on the Vanderbilt Corridor, and will enhance people’s perception of the area. A successful leasing campaign of the SL Green tower with rents near and above the triple digits will spur additional development opportunities.

What do you think should be done zoning-wise with Midtown East in general and why? Are you concerned that not rezoning it, or doing it in pieces, could hold up development?

Zoning changes must allow for larger buildings to accommodate today’s tenancies. Doing it in pieces could work, as long as there is continuity. Not making any changes would definitely be to the detriment of the area.

What do you think of tying project approvals with a requirement that developers pay money toward public improvements as part of a rezoning deal?

Rather than making it a requirement, I believe developers should be incentivized by receiving bonuses for public spaces.

Chris Helgesen

Executive Vice President and Managing Director, DTZ

What do you think of de Blasio’s approach to rezoning?

Clearly, there is a positive outcome from the partnership approach that would have developers commit funds and expertise to improve the local infrastructure in exchange for the opportunity to create or change building envelopes. Ultimately, the requirements may thwart some development, which is a good thing as well.

How many development sites do you think exist in the Midtown East district? How many new office towers would you like to see in the area?

Chris Helgesen

The current main development sites in the Midtown East district are at varying stages. At 390 Madison Avenue, there is a $240 million construction project underway, which is an as-of-right development to add 8-10 stories at the top of the building and increase the ceiling heights. There are other potential development projects at 425 Park Avenue, the Solow site on the East River between 36th and 41st Streets and the Roosevelt Hotel site on Madison Avenue between 45th and 46th Streets. Clearly, a rezoning will add additional projects to the pipeline, and I would like to see as many new office towers in this area as the market bears.

Do you think there’s tenant demand for more new Class A offices in Midtown East given all of the new and planned office space at the World Trade Center, Hudson Yards and Manhattan West?

There is always demand for new Class A office space. Our research predicts that evolving market fundamentals in the near term will see supply diminish across Manhattan, despite new construction. Demand will be slightly greater year-to-year as an effect of job growth, and rents will therefore increase. This may justify the decisions to move to new or re-constructed office product. WTC, Hudson Yards and Manhattan West suffer from transportation issues. They’ve been resolved in part, but travel distance cannot be eliminated. Midtown East is convenient because it’s central, and will be improved with the Second Avenue subway line.

How is leasing activity in Midtown East?

I have seen far improved activity in Midtown East over the past 18 months. Almost 2.7 million square feet have been absorbed, with the availability rate dropping to 8.5 percent. … In more than a few instances, we moved tenants to Midtown East. For two reasons: First, it’s an economically viable alternative for mature, low margin businesses in Midtown South who would not consider Downtown for commuting reasons, but would not add 50 to 75 percent increases to their rental structure. And second, the area caters to Midtown tenants looking for slightly larger blocks of space with economically attractive rental structures. Empirically, I am seeing far fewer 25,000 square foot and larger options and rents have grown 10 percent during this time. TRD

Answers are edited for space and clarity.