David M. Levitt
New York’s Times Square, which moved past its era of porn and squalor by luring companies to new skyscrapers, now faces defections by some of those very tenants.
The most recent is Ernst & Young. Its departure from 5 Times Square, announced this month, may leave the tower’s approximately 93,000 square metres of office space empty. The neighbourhood’s effective office rents – the rents that tenants actually pay, after concessions – have fallen by 1 per cent annually for two years, according to CoStar Group, a research firm that tracks office leasing.
One problem is a rise in tourism and a proliferation of panhandlers. Some are dressed as Elmo and Spider-Man; others, like the “desnudas,” are hardly dressed at all.
“It’s not ideal to wind through costumed characters on your way to work,” said Lauren Baker, New York City market analyst for CoStar. “There’s so much noise and commotion.” The neighbourhood “obviously isn’t ideal for professional tenants,” she said.
Supply and Demand
Bumping into Elmo now and then may not seem like a deal breaker, but there’s plenty of competition around the city for tenants seeking space. Office construction in Manhattan is at a 30-year peak, with 1.4 million square metres to be added between this year and 2019, according to a study released last month by the New York Building Congress. All over Midtown, landlords have had to offer more in improvement allowances and concessions to compete, as tenants decamp for the Hudson Yards area on Manhattan’s West Side.
“There’s going to be short-term pain, and we’re already seeing it,” Baker said. “Grand Central and the Plaza District and Times Square are all kind of in the same boat.”
EY is taking about 55,000 square metres at a 67-storey, 195,000-square-metre skyscraper that Brookfield Property Partners is building at its Manhattan West project, at 9th Avenue and West 33rd Street. One of the accounting and consulting firm’s co-tenants will be the law firm Skadden Arps Slate Meagher & Flom, which is moving from the Durst Organisation‘s 4 Times Square into the Brookfield tower. Another is the National Hockey League, moving from 1185 Avenue of the Americas, a building very close to Times Square owned by SL Green Realty, the largest New York office landlord. The deal was sweetened by an ice rink to be built in the plaza in front of the tower.
Skadden shared 4 Times Square with Conde Nast, for which the building was named and which moved in 2014 to 1 World Trade Centre, in lower Manhattan. Conde and EY were two of the area’s anchor tenants in the late 1990s whose presence – along with Walt Disney’s acquisition of the New Amsterdam Theatre along 42nd Street, which had fallen into disrepair – helped change Times Square’s image.
Times Square’s Strengths
The area’s landlords, and CoStar’s Baker herself, say it will all work out in the end. The likes of 4 Times Square, which is undergoing an extensive makeover, are too new and attractive to stay unrented for long, and the area has some of the best mass transit links in the city. It is criss-crossed by 12 subway lines and is close to Grand Central Terminal and the Port Authority Bus Terminal.
Douglas Durst, a member of the third Durst generation to lead the company, has leased about half of the 76,000 square metres Conde left behind at 4 Times Square. New tenants include SS&C Technologies Holdings and RSM US. Durst said he expects that within the next six months he will announce deals to fill 90 per cent of the Conde space.
“We’re not getting the rents we anticipated five years ago, but we’re satisfied with the rents we’re getting,” Durst said, declining to quantify the decline. Times Square “has a very big future as an office district,” he said, if the police continue to enforce an April 2016 ordinance that restricts the itinerant characters’ range and bans aggressive behaviour.
Tourists? What Tourists?
RXR Realty last year acquired a 49 per cent interest in 5 Times Square, the building that has housed EY. This past March, the owners took out $US1.4 billion ($1.84 billion) of financing on the building, mostly with Morgan Stanley, whose headquarters, which the investment bank owns, are at the north end of Times Square. Morgan Stanley declined to comment on EY’s departure.
5 Times Square “is perfectly situated to meet the needs of the 21st-century office tenant,” said Scott Rechler, RXR’s chairman.
“We plan on building a new, two-storey lobby off of 41st Street and freeing up 100,000 square feet [9300 square metres] of retail and prime signage opportunities.” EY itself is in talks with RXR to retain a presence in the building after its lease ends in 2022, said Richard Jeanneret, EY’s managing partner for the Northeast.
Steven Durels, SL Green’s leasing director, said that “as a leasing guy I would not be scared to try to find tenants for that product at all”.
SL Green has its own tower in the heart of Times Square, 1515 Broadway, where Viacom, owner of the MTV and Nickelodeon television channels and Paramount Pictures, re-upped in 2012, through 2031. On Tuesday, SL Green agreed to sell a 43 per cent stake in the skyscraper to German insurer Allianz to reap cash from a tower that is almost full.
Durels dismissed the idea that Times Square’s crush of tourists might keep tenants away. Rockefeller Centre, with its giant Christmas tree and skating rink, also has hordes of out-of-towners, he said.
“We’re a couple weeks from the holiday season,” Durels said. “You want to see a crush?”
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