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NYC : Market’s Troubles Echo in a Building’s Vacant Floors


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Market’s Troubles Echo in a Building’s Vacant Floors




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Published: November 9, 2008


The elevators work fine, the views are great, the offices have been refurbished and no one is complaining about rats. In so many ways, the green-tinted, 41-story office tower overlooking Bryant Park seems a desirable address.


So why are tenants who rushed to rent space a year ago in the building, at 1095 Avenue of the Americas, rushing to break their leases now?


The answer says much about the increasingly precarious state of Midtown Manhattan’s real estate market at a time when once-mighty financial companies like Lehman Brothers are disappearing and the slowing economy is driving the vacancy rate up and commercial rents down.


Though the building, once owned by Verizon, just went through a two-year, $250 million makeover, several financial firms that signed leases in 2006 and 2007 say they no longer can afford the rents or the cost of outfitting new spaces. Others are laying off workers or reorganizing their offices and no longer need as much room.


The first sign of trouble came over the summer when iStar Financial, a real estate finance company, decided not to move into the 100,000 square feet of space that it had rented on the 36th, 37th and 38th floors.


Several weeks later, Metropolitan Life Insurance, whose name is now in block letters over the tower’s front doors, quietly began shopping for tenants to sublease 100,000 square feet of its space in the building, a quarter of what it signed up for in 2006.


And last month, Centerline Capital Group, a suddenly struggling commercial property finance and investment company, confirmed that it would not be moving into its 100,000 square feet of space on the third, fourth and fifth floors. The company is negotiating with the landlord, the Blackstone Group, to buy out its lease or to sublet the space, said real estate executives who have been briefed on the talks.


The companies signed leases for as much as $132 a square foot, when the market was near its peak. Despite the building’s new glass skin, refurbished space and prime location at the corner of 42nd Street, many brokers say they would be lucky to get $95 a square foot today. The difference would translate into millions of dollars a year.


Neither iStar nor MetLife have found any takers.


For landlords and brokers, the building has become a closely watched barometer of the commercial real estate market in Midtown, where the mercury is clearly falling. Although the rents being asked have hardly moved, brokers say that landlords are providing a menu of concessions that are substantially reducing the effective price.


“It’s definitely a microcosm of the last few years in the New York real estate market,” said Peter Riguardi, president of Jones Lang LaSalle, a real estate brokerage and advising company.


The problems at 1095 Avenue of the Americas are not hurting Blackstone so far. The combined unused space of Centerline, MetLife and iStar accounts for roughly one-third of the 1.06 million square feet owned by Blackstone in the building, and the three companies are obligated to pay full rent even if they are unable to sublease the space. Brokers say that Blackstone would require the companies to pay dearly to break their leases.


But trouble could emerge if any of the companies tumble into bankruptcy court and stopped paying rent.


Other tenants seem to be staying put. Dechert L.L.P., a law firm and the first tenant to sign a lease in 2006, is moving onto floors 25 through 31, and Bank of Scotland is occupying its two floors, 34 and 35. MetLife is moving into its space at the top of the tower, even as it tries to sublease its space in the middle. And Robert Alexander, chairman of the New York office of CB Richard Ellis, the real estate brokerage for the tower, said he had pending deals for two other vacant floors, 32 and 33.


“We’re signing smaller deals at premium rents, and we look forward to finishing our leasing program,” he said.


Brokers familiar with the space offered by iStar, MetLife and Centerline say competition for tenants in Midtown is growing in part because there is ample renovated space available in other buildings. As a result, many companies are demanding rent concessions from landlords or are refusing to take on the cost of adding walls, carpeting and bathrooms to newly renovated space.


“What’s missing right now is the demand for raw space,” said one broker, who requested anonymity because he was active at the former Verizon building and he did not want to alienate the landlords or other brokers.


The building was constructed in 1974 with vertical white marble slabs and few windows to house switches and other equipment for New York Telephone, which became Verizon. In 2005, as rents and sales prices for commercial buildings were skyrocketing, the company put the tower on the market, with the exception of 234,000 square feet on Floors 6 through 12.


Equity Office Properties, one of the largest commercial real estate owners in the country, won a hotly contested auction with a bid of $506 million, more than Verizon had anticipated. At the time, many analysts suggested that Equity Office had overpaid, especially after the new owner started a $250 million renovation that included replacing the marble exterior with a glass skin.


Equity Office, however, was betting that the tower would lure prime tenants and generate rents as high as $90 a square foot. And it was right: Rents escalated even higher as the vacancy rate in Midtown plunged and investors clamored to buy properties.


Blackstone bought Equity Office for $39 billion in early 2007, at what turned out to be the height of the market. It sold most of Equity’s New York buildings but held on to 1095 Avenue of the Americas. The firm signed leases last year with Bank of Scotland and Centerline for as much as $150 a square foot, brokers active at the tower said. MetLife’s average effective rent, for floors in the middle and at the top, is about $100 a square foot, or $40 million a year, according to real estate executives familiar with the deal.


The insurance giant had moved most of its New York employees to Long Island City in 2002, where rents were as low as $30 a square foot. But in 2006, MetLife reversed course, signing a lease to move about 1,300 employees from Queens into the former Verizon building.


But this year, the company reassessed how many employees were actually in the office at any one time and determined that it needed only 9 of the 12 floors it had leased in the tower.


So early next year, MetLife plans to formally market three of its floors, said John Calagna, a spokesman for MetLife.


Mr. Calagna said that the same number of people who moved into 1095 Avenue of the Americas two years ago, about 1,300, are now “moving to less space.”



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