Edgy Buildings Lure Companies That Want It All -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 9, 2017).

The niche market of small, upscale office developments has lured some high-end tenants willing to pay up for an amenity-packed floor or two.

Now some developers are seeing another potential opportunity for these so-called boutique buildings: as headquarters for big firms looking to lease entire buildings.

These office buildings, often stamped with edgy or historic architecture and located in neighborhoods such as Chelsea or the Meatpacking District, are attracting established companies that in many cases are looking to use real estate to recast their image in an economy where "disrupters" like Amazon.com Inc. are in vogue.

One of the more recent high-profile leases was Aetna Inc.'s deal earlier this year to establish new headquarters and take all the office space at 61 Ninth Ave., a $152 million West Chelsea development of Vornado Realty Trust and Aurora Capital Associates.

Aetna, which will keep thousands of jobs at its current Hartford, Conn., headquarters, plans to move 250 jobs to the nine-story building next year. Vornado has two others in the works, including one at 512 W. 22nd St. adjacent to the High Line Park that has been fielding interest from companies with similar intentions, the company said.

"If you had asked me my expectations, it would be that these boutique buildings would be leased on a floor-by-floor basis or two-floor basis, not that a tenant would take the entire building," said David Greenbaum, president of Vornado's New York division. "What we're seeing realistically are companies thinking much more of these buildings as truly headquarters office buildings."

As many Midtown South neighborhoods such as Chelsea, SoHo and the Flatiron District have matured as cool office destinations, so, too, has the inventory of upper-tier, new or redeveloped office space.

Although opportunities to develop ground-up office buildings in the submarket is limited, developers have found space, working within smaller lots, height limits and frequently landmark restrictions, eyeing potential rents that stretch well above $100 a square foot and are comparable to pricing at the big skyscrapers in Midtown's Plaza District neighborhood.

Vornado's underwriting for its boutique buildings in the Chelsea area anticipated rents in the triple-digits, Mr. Greenbaum said.

Four new boutique buildings dotted the Midtown South area between 2007 and 2012 totaling 340,000 square feet, according to Jonathan Mazur, senior managing director of national research at Newmark Knight Frank. Rents then ranged from $70 to $125 a square foot. From 2015 through 2019, developers are expected to have completed at least 11 new buildings with 1.4 million square feet of space, Newmark estimated. Rents for completed deals and asking rents for these buildings are all above $125 a square foot.

Asking rents for 300 Lafayette, an 80,000 square-foot retail and office building in SoHo, are between $150 and $200 a square foot, according to Related Cos., which is partners with LargaVista Cos. on the seven-story development located across from the historic Puck Building.

"We're talking to big brands that want to plant their flag and want a presence there," said Stephen Winter, vice president of commercial leasing at Related Cos. "You're seeing big corporates that may not have their headquarters here."

A drop in commercial property sales in the city has increased lenders' appetites for financing boutique office deals in Midtown South, where ground-up or redeveloped office properties by well-capitalized developers are drawing high rents, said Dustin Stolly, co-head of Newmark Knight Frank's Capital Markets Debt and Structured Finance division. These projects are in an office submarket where vacancy rates are generally low and demand is high.

But the location, design and timing of these projects are still critical, developers said.

"Things get risky when developers purchase sites at peak pricing based on peak market rents that are necessary to finance the acquisition," said Jared Epstein, vice president and principal of Aurora Capital Associates.

Shifts in corporate workplace strategies also have played into the attraction of firms potentially taking most or all of these buildings, brokers and real-estate executives said. More companies are using their offices to define their culture, attempting to stand out from other firms and attract and retain employees. These companies are hoping to appeal to the same type of skilled workforce sought by tech giants such as Google parent Alphabet Inc. and Facebook Inc., which have helped build Midtown South's cachet with their New York offices. Aetna's new headquarters will be across the street from Google's Manhattan office.

"A lot of tenants want to utilize real estate to define an organization or change the image of an organization," said Adam Ardise executive managing director of real estate services firm Cushman & Wakefield.

Midtown South's boutique office buildings are tapping into a broader demand for better quality office space in the office submarket, said Peter Turchin, vice chairman at CBRE Group Inc. The upper end of the market, consisting of higher quality, upgraded office space, has had more leasing activity, he said.

"If you're an owner and you are in the middle of the market, you want to invest capital to be in the top of the market," Mr. Turchin said.

Write to Keiko Morris at Keiko.Morris@wsj.com

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October 09, 2017 02:47 ET (06:47 GMT)