Recently, the New York City chapter of the German American Chamber of Commerce moved its headquarters from Midtown to Downtown Manhattan. A key driver in the relocation was the continued cost pressures of maintaining a Midtown office.
In relocating Downtown, the Chamber took advantage of substantially reduced office space rates, as well as a number of other benefits. Although both Midtown and Downtown rates have both been rising, Midtown rates have been rising more rapidly, and the cost differential between the two sections of Manhattan has recently risen to historic highs. Therefore, companies who are in sight of their lease’s expiration date might do well to consider the potential benefits of relocating to Downtown Manhattan.
Office space rates in Midtown have been climbing sharply over the past several years, as the City’s economy has grown at a robust pace. Even though some large tenants, e.g., Verizon, are vacating Midtown space, the available Midtown office supply has not been keeping pace with the strong and growing demand from the securities industry, advertising, media, telecom and other sectors.
On the other hand, Lower Manhattan office rental rates are climbing, too, but from a substantially depressed level immediately following September 11, 2001.
Historically Large Rent Differentials
At this writing, average asking rents in Midtown have risen to $59.65 per rentable square foot ("rsf") of Class A office space, while Downtown, Class A space currently averages $41.50 per rsf -- a differential of more than $18.00 per rsf, or about 30% below the Midtown average. (Class A space is the best available space, typically in newer buildings and with the greatest amount of amenities.)
Thus, based on the rent differential alone, Downtown space would seem to be a bargain compared with Midtown, and a move to Lower Manhattan can be viewed as a highly opportunistic action, particularly for a non-profit entity such as the German American Chamber of Commerce.
Midtown Concessions, Downtown Benefits
The economics of office leasing are a bit more complex, however. For example, a typical Midtown landlord might offer a “tenant improvement allowance” to offset renovation costs in the range of $40.00 to $45.00 per rsf – i.e., between 67% and 75% of the first year’s rent. At first glance, that sounds substantial.
However, when building from “raw or demolished space,” an improvement allowance of this size would only offset about half of the tenant’s total project cost for move-in condition – depending on the layout configuration, finishes (e.g., “plain vanilla” offices versus glass & wood) and timing/scheduling (e.g., an expedited job costs more for overtime labor). Additional costs, such as cabling, architectural and engineering fees, furniture and phone equipment add further to tenant costs.
Thus, the tenant improvement allowance could be essentially offset or wiped out by the project’s additional costs.
Further, Downtown office space is today subject to significant financial benefits not always available in Midtown space. For example, some landlords will provide “turnkey” move-in spaces, with the space already configured, ready for the organization to move in – i.e., requiring no additional construction costs. The German American Chamber of Commerce was able to take advantage of such a landlord’s concession package at the Chamber’s new location at 75 Broad Street in Lower Manhattan.
Downtown Incentive Payments
Another potential advantage of relocating to Lower Manhattan are federal, as well as New York City and State incentive payments that have been made available since September 11, 2001 to encourage organizations to relocate or return to the Downtown district. In addition to the concession package discussed above, in making its move, the German American Chamber was able to take advantage of such government incentives totaling nearly $100,000. Additionally, there are also tax and utility incentives available Downtown.
CRESA Partners represented the Chamber in negotiations with the landlord at 75 Broad Street; in disposing of the Chamber’s former Midtown offices at 12 East 49th Street; and in managing the construction and build-out of the new offices.
Another Advantage: Former “Telco Hotel” Space
Furthermore, because of both its original construction and its previous use, quite a bit of space outside of Midtown offers additional benefits to tenants. For example, the selection of 75 Broad Street as a location for the German American Chamber’s new headquarters reflects a recent trend in Manhattan real estate. This trend – the quiet transitioning of former “telco hotel” locations back to traditional office tenancies – offers “big block” or “large floorplate” spaces in buildings that historically, have had large quantities of available space. “Telco hotels” are buildings that were designed (or retrofitted) to be used primarily for telecommunications switching equipment. These buildings were shared warehouses of fiber optic cable and telephone wiring for the co-location of voice, data and Internet providers. They were one-stop warehouses for switching networks that were either too valuable or too vulnerable to be housed in traditional office buildings.
These telecom equipment warehouses, while having their advantages – e.g., in terms of faster Internet connections – peaked in the marketplace in the early part of this decade. The end of the dot.com era began a downturn in the economy and in the futures of the telecommunications companies and the telco buildings where they were occupants. Other factors, such as zoning restrictions and power shortages, contributed to this downturn.
Thus, a significant amount of former telco hotel space has come onto the market as being available for traditional office leasing. Such space offers a multitude of advantages. These are typically older, sturdier buildings, with high ceilings. As telco hotels, they were upgraded with advanced telecom and broadband infrastructure. And, as the industry matured, additional services were provided in these buildings beyond space and broadband infrastructure – such as reinforced concrete construction, closed circuit TV surveillance, firewall protection, auxiliary power generation, biometric hand scanners, Kevlar-coated bullet resistant walls, and laser-aided intruder detection systems.
Where Many Household Names Have Moved
These advantages, in addition to the significantly lower rents compared with Midtown, have created substantial motivation to move into these buildings, especially for companies that are heavy users of telecommunications and broadband technology.
The building at 75 Broad Street, where the new offices of the German American Chamber are located, is a former telco hotel.
The lower rental rates Downtown, as well as the additional advantages, have induced many companies with household names in a variety of industry sectors to locate offices further south of Midtown. These include RAI Broadcasting, Cambridge University Press, Bartle Bogle Hegarty (advertising), Google and WebMD, all of whom are currently occupying space in buildings formerly marketed as telco hotels.
The bottom line: Downtown Manhattan is a viable location – with many available advantages – that companies should consider when evaluating new office locations. While the rental rate differential between Midtown and Downtown may narrow in the years ahead, as overall economic conditions, as well as office space demand and supply, evolve, the benefits of locating Downtown will not evaporate.