The 12th floor of 55 Fifth Avenue, just south of Union Square, is an active construction zone. Walls are being torn down. Infrastructure and pipes are fully exposed as the 22,000-square-foot floor gets a face lift in the hopes of attracting a new tenant.
The gigantic space with views spanning from the Empire State Building to Greenwich Village has been vacant since a medical office associated with Memorial Sloan Kettering departed late last year. That wasn’t a surprise, said Brian Soto, director of acquisitions and asset management for Time Equities Inc., the real estate firm that owns much of the office building. He knew they were reviewing their needs even before the pandemic. But it was terrible timing.
With the additional departure of two smaller tenants last year, Soto said the building’s occupancy has fallen from about 95% pre-pandemic to just over 80%. “The property hasn’t been at 81% occupancy probably for 20 years,” he said.
Across Manhattan, office buildings are still suffering from a glut of available space more than a year after the pandemic sent workers home and shut down most leasing activity. According to the real estate firm CBRE, the availability rate in older, “commodity” buildings like 55 Fifth Avenue was almost 20% at the end of June, nearly double the 2019 rate of 11.1%.
Older buildings without top flight amenities are also known as Class B office space. They don’t have fancy bathrooms and cafeterias. Built in 1910, 55 Fifth Avenue only has three elevators. It’s nothing like the gleaming towers around midtown and Lower Manhattan that are considered Class A office space, or trophy buildings.
Rents have fallen for both types of buildings since the pandemic. But Nicole LaRusso, director of tri-state research and analysis for CBRE, said there are only about 200 “better buildings” among the 844 Manhattan office buildings tracked by her firm. This means older, commodity buildings make up the bulk of the market and are under more pressure to upgrade.
“Landlords feel increased competition to attract tenants,” she explained.
Flight to Quality
The real estate industry was already seeing what it calls a “flight to quality” before the pandemic. Tenants who could afford to were moving into Class A space, and developers were building more of it around Grand Central, the World Trade Center, and Hudson Yards. That triggered a wave of improvements in Class B buildings. Now that there are many more vacancies, LaRusso said they’re scrambling to provide more services for choosy prospective tenants.
“If you have an older asset that maybe has older building systems, doesn’t offer a lot of amenities, maybe slow elevators,” she explained, “these are all the kinds of investments that landlords might consider making to make their buildings more attractive and more competitive.”
This is why the 12th floor of 55 Fifth Avenue is getting a major makeover. Soto can’t count on prospective tenants to be wowed by the views, and imagine a new space of their own, like he could before the pandemic. “Given the environment we’re in, we really have to put our best foot forward,” he explained.
That includes demolishing the tiny medical suites and bathrooms with subway tiles. Concrete floors will be polished and a few pre-built offices will be installed. Soto is also planning to build a gym upstairs. All this investment, though, has a cost.
“We certainly are taking a haircut,” he acknowledged. “I mean, we’ve adjusted our asking rents to where we think transactions will happen.”
Time Equities isn’t the only firm, by far, making improvements to Class B space. Grant Greenspan, who manages leasing for the Kaufman Organization, said the spaces his company renovated before the pandemic have been leasing first, at about $57-$62 per square foot. Prior to the pandemic, he said they were going for $65-$75.
Finished spaces are “going like hotcakes,” added Leslie Wohlman Himmel, founder and co-managing partner of Himmel + Meringoff Properties. To attract tenants, she said her firm also made online tours of its properties much more accessible for people who couldn’t physically travel to look at spaces.
The real estate industry worried companies would move to smaller offices after the pandemic, now that more people are working from home. Experts say the jury’s still out. Scott Rechler, the CEO and chairman of RXR Realty, predicted employees will have higher standards post-pandemic for what they want in their offices, especially around communal spaces, even if they only return a few days a week. He said they’ll be looking to “engage with colleagues and get a sense of community and purpose.”