We're excited to announce, that today The Real Deal released the first-ever tally of the most valuable office leases in Manhattan. In previous yearly tallies, The Real Deal has gauged deal size by square footage, but this year, using CompStak data they were able to create a list based on the actual value of the deals. The following article is the feature of The Real Deal's September issue. Enjoy!
Despite the excitement and anticipation of finding a new office space, corporate relocations always come with risk. There is the chance of signing a poorly timed lease at the height of the market or bungling a build-out.
Compounding matters now is that employment growth for global and national firms has been weak in Manhattan.
“Most tenants have a predisposition not to move,” said Michael T. Cohen, president of the tri-state area for commercial firm Colliers International. “The reason is that it is usually a lot cheaper to stay. And the typical driver, ‘This space does not work for me anymore…’ is job growth. And we are not seeing a lot of that.”
While media giant Viacom’s record-breaking, 1.6 million-square-foot renewal and expansion at 1515 Broadway in Times Square was a boon for landlord SL Green Realty, it further underscored that reluctance to relocate.
In fact, as of late August, only seven of Manhattan’s 20 largest leasing deals were relocations, information from real estate tracking firm CoStar Group shows.
This month, TRD looked at the tenants who did move to new offices, in an effort to zero in on what made them take the leap when so many of their counterparts would not.
Using data generated by Midtown South-based real estate tracking firm CompStak, we tallied a first-ever ranking of the 10 largest leasing relocation deals of the past year in Manhattan — by total economic value to the landlord.
That means that instead of simply ranking deals by square feet or by taking rent, we looked at the size of the deal, the price per square foot and the length of the lease, and then subtracted the free rent and landlord contributions. The result is essentially the landlord’s total revenue over the life of the lease.
The ranking also reveals just how much money landlords must dole out — in cash for tenant improvements, commissions and free rent — to attract a large tenant.
While commission statistics are generally not public, TRD applied the standard commission formula to get a rough idea of how much the landlords paid in brokers’ fees. We calculated the commission for the tenant broker as 32 percent of the first year of full-lease payments. However, because brokers often discount their fees and rebate up to 50 percent of their commissions to the tenant on large deals, we provided a range.
From left: 1 World Trade Center, Douglas Durst, 1770 Broadway, Steven Roth
We assumed landlord-side brokers were paid about half that, which is common in the industry.
Brokers say that landlords generally view the commission, free rent, build-out fees and other expenses as the cost of doing business. But those payments can be equivalent to two years or more in revenue.
“Most landlords and their capital sources and partners understand you are buying a stream of cash flow,” Cohen said.
Still, not all landlords have the financial wherewithal to make those payments.
The landlords capable of signing the biggest relocation deals in this market are those who are in strong financial shape and can maintain the building without having rent come in for some time.
Interestingly, tenants are signing on for longer than usual. While medium and large Manhattan leases typically run for terms of 10 to 15 years, six of our top 10 were longer than 15 years.
Dirk Hrobsky, managing director at commercial firm UGL Services, said getting “big companies that are so committed to New York for the long term” is a huge positive for the New York office market. He said it’s especially impressive that tenants — who will often spend millions to customize their space — have made the investment at a time when the economic climate (at least nationally) is so precarious.
TRD shared the deals with the firms that brokered them, including CBRE Group, Cushman & Wakefield and Newmark Grubb Knight Frank, which declined to comment on the data. We also shared the data with the landlords, who either did not respond or declined to comment.
However, other sources, including several landlords and commercial brokers, told TRD that the list appeared solid.
Below is a behind-the-scenes look at the 10 most economically valuable Manhattan office leases for the 12 months ending Aug. 1, including what sweeteners landlords provided to convince their respective tenants to sign on.
From left: Charles Schumer, George Soros, Tara Stacom and Bruce Mosler
U.S. General Services Administration: $351 million (20 years)
After more than five years of talks, the federal government’s real estate management arm signed a lease in July for 270,104 square feet spread over six floors at the under-construction 1 World Trade Center. The building is owned by the Port Authority of New York and New Jersey and the Durst Organization.
The total value of the lease came to a stunning $351 million over 20 years, and the tenant has renewal options. A spokesperson for the GSA — which was originally planning to take about 650,000 square feet in the tower — told TRD it had not decided which federal agencies would take space in the building. The federal government currently has agencies scattered throughout the city, though several of them were located in 6 World Trade Center before it was destroyed in the 2001 terrorist attacks.
As part of the lease, the Port Authority has authorized approval for $42.5 million to pay for tenant improvements, and $4.4 million in commission fees to GSA’s brokerage Studley, according to minutes from a June Port Authority meeting. The minutes do not state how much Durst will contribute. The two owners represented the building in-house.
The deal came amid political pressure. Senator Charles Schumer was lobbying GSA to finalize the drawn-out negotiations, while Florida Rep. John Mica wanted to hold up the deal because of an unrelated dispute with the Obama administration over another government lease in Washington, D.C.
Condé Nast: $247 million (25 years)
It should come as no surprise that Condé Nast, the publishing giant, made the list of most valuable office leases. The firm, which is slated to move from its location at 4 Times Square in 2014, has been the source of hundreds of news articles because of the 1.05-million-square-foot deal it signed in the spring of 2011 — also at 1 World Trade Center.
But it’s not that older megalease that puts it on this list. Instead, it’s the 133,000 square feet of additional space that it added to its lease in January. The additional space, which takes up three floors, has an economic value of $247 million over the 25-year term. Following a 12-month period of free rent, rental payments will start at $65 per square foot and rise to more than $100 per foot, according to CompStak.
CBRE’s Mary Ann Tighe represented Condé Nast, and Cushman’s Tara Stacom represented Durst and the Port Authority. TRD estimated the commission for CBRE to be $2 to $3.9 million, and about half that for Cushman.
Open Society Foundations: $242 million (30 years)
The Open Society Foundations, the grantmaker started by hedge-fund mogul and Democratic Party activist George Soros, took the third spot for most valuable lease of the last 12 months. The nonprofit — which was represented by James Coleman and Steve Kaufman of Midtown-based Hanley Advisors, as well as Eric Deutsch of CBRE — signed a 152,000-square-foot lease, valued at $242 million, for the entire office portion of the Argonaut Building at 1770 Broadway. The 30-year deal, which was signed in September 2011, was the longest on the ranking. The foundation works to advance human rights and democratic societies in more than 70 countries around the world. It is moving from just 75,000 square feet at 400 West 59th Street, a mostly residential building. Landlord M1 Real Estate paid the tenant brokers an estimated $2 to $4 million, according to TRD’s estimate. Its own broker, a team led by Cohen of Colliers, likely pocketed less than half of that.
New York Genome Center: $224 million (20 years)
The nonprofit biomedical institute, which is backed by some of the city’s largest research hospitals, signed the largest relocation deal in the extremely active Midtown South market in July. It took 171,000 square feet at Edward J. Minskoff Equities’ 101 Sixth Avenue, a 425,000-square-foot tower a block north of Canal Street. The deal for floors two through seven begins with 15 months of free rent. Annual rental payments of about $11 million kick in after that, according to CompStak.The 20-year lease has a total economic value of $224 million for Minskoff, who bought out his longtime partners at the building in December.
The deal does not come cheaply, however. Minskoff committed to pay $60 per square foot for the tenant improvements, or about $10.3 million, the CompStak figures show, as well as the commission to tenant-rep brokerage Newmark, estimated to be between $2.2 and $4.4 million. The landlord agents — Paul Glickman, Mitchell Konsker and Matthew Astrachan — of Jones Lang LaSalle, received about half that, according to TRD’s estimate.
Guggenheim Partners: $190 million (16 years)
The financial services firm, which has more than $160 billion under management, signed the fifth-most-valuable relocation lease in the last 12 months. The firm — which is headed by Mark Walter, who is also the chairman of the L.A. Dodgers baseball franchise — signed a nearly 16-year lease in January for 186,151 square feet at Vornado Realty Trust’s 330 Madison Avenue. Vornado’s total take-home is an estimated $190 million. (Last year, the firm completed a modernization of the building, which was constructed in 1963, at a cost of about $100 million.)
Like the Port Authority and Durst, Vornado also scored two of the top 10 most valuable relocation leases of the last 12 months. Guggenheim locked in a starting rent of $66.50 per square foot. The financial firm currently occupies about 114,000 square feet at 135 East 57th Street, sources said, and plans to relocate in March 2013.
Guggenheim was one of just two financial firms on the top 10 list, underscoring the weak climate for investment firms.
The firm was represented by Peter Hennessy of Cassidy Turley. The firm’s estimated commission was $2.2 to $4.4 million. Vornado was represented by Frank Doyle at JLL, which likely received half of that.
Columbia Doctors, the Physicians and Surgeons of Columbia University: $158 million (25 years)
Vornado also locked in the sixth-most valuable lease of the year when it signed a 25-year deal valued at a total of $158 million at 1290 Sixth Avenue with a multispecialty practice of physicians affiliated with Columbia University Medical Center. The 122,000-square-foot lease — for a portion of the ground and second floors and the entire third floor — starts at $58.41 per square foot and rises to more than $86 per foot by the end of the term in 2036.
Real Estate Weekly reported that ColumbiaDoctors, which is leaving about 100,000 square feet at 650 Madison Avenue, would pay more than $200 per square foot to build out the space — on top of the about $60 per foot Vornado will pitch in. The doctors signed the lease, in part, to justify the high cost of the build-out, according to CompStak.
Vornado paid a commission TRD estimated to be between $1.4 and $2.8 million to tenant brokerage Newmark, whose team included Neil Goldmacher and Mark Weiss. Vornado represented the building in-house along with a Cushman team, including Bruce Mosler and Arthur Mirante (now at Avison Young). The Cushman team likely earned about half of what the Newmark agents received.
Havas: $142 million (16 years)
Last spring, the Paris-based, publicly traded advertising firm Havas signed a 16-year deal with Trinity Church Real Estate in three buildings for seven floors at 200 Hudson Street, one floor at 205 Hudson and additional space in 75 Varick Street, all in Tribeca.
The lease, for a total of 256,824 square feet, started at $39 per square foot, and included a year of free rent and about $14.5 million in landlord contributions, according to CompStak. Havas is expected to bring together 1,100 employees from different divisions located in several buildings.
The ad company was represented by Newmark brokers David Falk and David Greenstein.TRD estimated their commissions to be $1.85 to $3.7 million. Trinity was repped by Cushman brokers including Robert Constable, Andrew Peretz and Mikael Nahmias, as well as Trinity’s Marc Packman. The Cushman commission was likely less than half the Newmark fee.
JCPenney: $138 million (15 years)
Moderately priced retailer JCPenney, which is partially owned by Vornado, signed a 15-year lease for 123,000 square feet of office space at Kushner Companies and CIM Group’s 200 Lafayette Street in Soho.
The deal in the rehabilitated Class B building has a value of $138 million, and starts at an eyepopping $80 per square foot after 15 months of free rent. A source said the deal may include retail space, which is why the rent is so high. The source also noted that it’s a triple-net lease, meaning that the tenant will assume all of the financial responsibility such as real estate taxes, which amount to roughly $2 million a year. If those taxes are, in fact, included, it would bring the value of the lease up to $168 million for Kushner and CIM.
That rental rate is above the average price per foot for even Class A space in Midtown South, which was $61.99 per square foot last month, figures from Cassidy Turley showed.
The estimated tenant-broker commission for New Rochelle, N.Y.-based Welco Realty was between $1.8 and $3.6 million. The building was represented by Newmark brokers David Falk, Jason Greenstein and Daniel Levine, who likely got about half that.
The IntercontinentalExchange: $128 million (15 years)
The IntercontinentalExchange — an Atlanta-based firm that offers a trading platform to commodities brokers — signed a 93,361-square-foot deal at 55 East 52nd Street in May. The firm took floors 39, 40 and 41 in the Park Avenue Plaza building in the space formerly occupied by the bankrupt MF Global, once led by former New Jersey Governor Jon Corzine.
The starting rent for ICE at the tower (which is owned by Fisher Brothers and Soho China) was $95 per foot — the highest among the top 10 deals. The total value of the deal was $128 million, with an estimated commission to the tenant brokerage CBRE and its brokers, Paul Myers and Rocco Laginestra, of $1.6 to $3.3 million. Fisher Brothers represented itself.
ICE currently has a large office space at 1 North End Avenue in Battery Park City, and also leases space at 875 Third Avenue and 7 Times Square. The publicly traded company said in its 2011 annual report that it expected to spend $30 to $35 million in capital expenses consolidating its New York and London offices.
Baker & McKenzie: $101 million (15 years)
Rounding out the top 10 most valuable relocation leases of the last 12 months is the law firm Baker & McKenzie, which signed a 15-year, 105,803-square-foot lease at 452 Fifth Avenue, which is owned by the Property & Building Corp., a division of the Israel company IDB Group. The lease includes a year of free rent and $75 per square foot of tenant improvements that are together worth about $15 million, according to CompStak. The international law firm moved from 1114 Sixth Avenue, the Grace Building, on the opposite side of Bryant Park, to its new location.
A Studley brokerage team — led by company CEO Mitchell Steir and including John Mambrino, David Goldstein and Matthew Barlow — represented the law firm for an estimated commission of between $1.4 and $2.7 million. Meanwhile, CBRE brokers Craig Reicher, Howard Fiddle, James Ackerson, Zachary Freeman, Sinclair Li and Greg Maurer-Hollaender represented the landlord, and likely received half that in commission.