Sublease Space Surges Onto Market in Manhattan
nytoday.com
BY JOHN HOLUSHA
07/01/01
SUBLEASE space is flooding onto the market in Manhattan, as dot-com and telecommunications companies go out of business or greatly shrink their operations. According to a survey by Julien J. Studley Inc., a brokerage that specializes in representing tenants, there is more than 10 million square feet of sublease space currently on the market, compared with slightly less than 2 million square feet a year ago.
And it is not just empty space. Many of the dot-coms and telecommunications companies were richly financed by venture capitalists during their brief existences, and they equipped their offices with state-of-the art telephone systems, computers and furnishings.
Unlike conventional office deals where a tenant leases empty space and negotiates with the landlord for a contribution toward building the interior, the furnished space is an attraction to companies that can save their share of construction costs and move in without waiting.
The current climate of economic uncertainty is making these finished spaces all the more attractive, said Marc R. Shapses, a senior managing director of the Studley firm, who recently brokered a deal for Chanin Capital Partners, a financial services company, to move into 12,000 square feet of space at 330 Madison Avenue.
"In the climate of 2001, people are saying, `Let's be conservative and not invest a lot of money fixing up space,' " he said. "In the late 1990's, people lost sight of expenses and invested heavily in space."
The space at 330 Madison, which is at 42nd Street, was given up by Cypress Communications Inc., an Atlanta-based provider of broadband communications services in large office buildings. Earlier this year the company announced it was scaling back its marketing efforts so that it would not need additional rounds of financing, which was becoming increasingly difficult to obtain.
Instead of seeking to wire buildings in 28 cities, the company said it would concentrate on only seven metropolitan areas, and New York is not one of them.
The offices, on the 11th floor of the building, are nicely furnished, with executive offices on the outer rim and cubicles for workers in the interior. They also provide an indication of how fast things can change in the technology business. Some of the telephones are connected, but others are still in boxes on the desks and it appears that the space was never occupied.
Sublets like this are difficult to arrange, Mr. Shapses said, because landlords have to give their approval of the arrangement in most cases. And many prospective users of the abandoned space do not want to become the tenant of a fading or failing dot-com or communications company.
SIMILARLY, most high-tech companies are not eager to get into the real estate business and would prefer to leave the space and their lease obligations behind. "What the previous tenant really wants is to get off the hook," Mr. Shapses said.
The landlord in this case, Vornado Realty Trust, was willing to restructure the deal, Mr. Shapses said, and Cypress was written out of the picture and Chanin reached a deal directly with the landlord.
Another complication is the size of the deposit a new tenant must offer the landlord to get sublease space. Many dot-coms were forced to post letters of credit of two to three years rent to get space because of their lack of experience and credit standing.
"Landlords do not want anything less secure, even if the new tenant has better credit," said Michael J. Monahan, an executive managing director with Insignia/ESG. He said the big letter of credit was something of a tradeoff for being able to move into space built at someone else's expense. In such a case, he added, it is important to negotiate terms that reduce the deposit after four or five years of rental payments.
In many cases, landlords are still collecting rent on space available for sublease, and they are reluctant to jeopardize the rents they are able to charge for space they lease directly to tenants by having the sublets offered as bargains. According to a recent report by Grubb & Ellis, the real estate services company, most leases contain clauses barring tenants from offering sublease space at a rental rate lower that the one stated for direct space in the building.
Although the sublet space may eventually rent for less than direct space, this does not show up in rent statistics, which are based on published asking rents.
Much of the sublet space is concentrated downtown, said Ruth Colp-Haber, a partner in Wharton Property Advisors, with trophy buildings in Midtown unaffected because their owners routinely refuse to lease space to any company without well-established credit.
The availability of sublease space means that some buildings that are listing only modest amounts of vacant space really have a lot more empty floors. For example, Ms. Colp-Haber said, the building at 33 Whitehall Street has only 3 percent of its space available for direct leasing, but when sublease space is added the building is 42 percent available.
Other downtown buildings with substantial direct and sublease space availabilities, Ms. Colp-Haber said, include 100 Broadway, with 34 percent; 75 Varick Street, with 43 percent; and 233 Broadway, with 22 percent.
In Midtown, buildings with high combined space availabilities, according to Ms. Colp- Haber, include 330 West 34th Street, with 30 percent; 9 West 57th, at 41 percent; and 111 West 40th Street, at 25 percent.
The flood of sublet space, which has increased by about seven million square feet since the end of last year, is affecting the entire market for office space and increasing the negotiating power of tenants, said James Meiskin, president of Plymouth Partners, a brokerage that specializes in representing tenants.
"Sublets have increased to 20 percent of total availability as a result of the stock market, the squeeze on corporate earnings and the bursting of the Internet bubble," he said. He noted that the increased availability of these spaces was putting pressure on landlords to offer concession to attract tenants even in the strongest parts of the city.
"Landlords in the Plaza District are offering $35 a square foot for interior work and six months free rent," he said, referring to the general area between Third and Fifth Avenue in the 50's. "Eight months ago it was one month of free rent and nothing for work."
Mr. Meiskin said the office rental market had been "artificially high" in recent years as dot-coms, communications concerns and other start-up companies scrambled for limited space in Manhattan. He said space in marginal locations, like downtown, SoHo and the far west side of Manhattan, will be unable to sustain recent rent levels as more sublease and direct space comes on the market.
"Space in downtown and 12th Avenue was never worth $50 a foot," he said. "Just a few years ago that space was going for $8 to $12 a foot."
Sometimes moving into prebuilt space can be a mixed blessing, Mr. Monahan observed. He said he brokered a deal under which Fulcrum Global Partners, a financial services company, took over space at 535 Madison Avenue at 54th Street that was once occupied by eColony, an Internet company.
Much of the space is usable as is, but Fulcrum had to go the trouble of demolishing some interior offices to set up a securities trading floor. "Usually when you start to demolish a space, it is best to blow it all out and start over," Mr. Mohahan said.
But he said the configuration of the building and the quality of the existing installation made it more economical for Michael Petrycki, the chief executive of Fulcrum, to retain the perimeter offices as they were.
"Mike decided to put his money into the trading floor and some supplemental air- conditioning and kept the rest of the floor intact, taking advantage of what was there," Mr. Monahan said.
He said the cost of building offices for Internet companies ranged from $125 to $200 a square foot, because of the need for intensive wiring and telecommunications connections. By taking advantage of what was already in place, Fulcrum was able to focus its resources on the trading floor and reduce its overall expenditure. "He probably saved $30 to $50 a square foot," Mr. Monahan said. |
