“New York City is a very unique market.” This might seem like an obvious statement but most people have no idea how true it is. Ryan Baxter, PropTech Advisor for the New York State Energy and Research and Development Authority (or NYSERDA), it into context as the moderator of a panel at our Building the Future event last month. “The largest owner of real estate is the city of New York and their annual budget is larger than the next 19 largest U.S. cities combined.” It isn’t just the city’s active (at times hyper-active) role in the real estate landscape that sets the market apart from any other in the world. “Our midtown office market has windowless basement space that rents for more than the top of the Willis Tower in Chicago,” Ryan explained.
The density of office stock that New York has been able to achieve while still remaining a sought out a place to vacation and live is second to none. It has done this by thinking big, or in this case tall. While Chicago might be considered the birthplace of the idea of the skyscraper, New York City is where it was honed. Even now, after the tallest building in the world fever has settled down for all but the remaining few dictators looking to make a statement, midtown Manhattan continues to set records with its innovative “supertall” buildings.
The kind of density that makes New York City unique might actually be a glimpse of the future of many cities around the world. The technologies and techniques that are being used in some of New York’s frighteningly slender new additions to the skyline are likely similar to what will be adopted by the larger built world soon.
The future proofing that goes into these multi-billion dollar projects is partially due to the time it takes to build them. Many of the buildings that are being marketed now took years to complete due to their complicated designs and the city’s arduous permitting process. “You only get to build a building every five or six years,” says Carlos Valverde, Vice President of Real Estate Development at Silverstein Properties. “By that time all of the rules and regulations have changed and you have to figure it all out again.” Calros says that they often don’t expect revenue for as much as 2 years after completion years, as much as 12 years total. That makes it hard to figure out which tenants both your financial projections and your future tenant needs.
Carlos gave an example of a building in their portfolio that had a lot of tech clients. The theory was that these tenants would need to have power for their servers even if the city’s power grid was interrupted so a large generator was installed. But now most companies are using a decentralized cloud storage and computing architecture that can adapt if there are any local outages so the building was left with what he called “a really expensive paper weight taking up valuable space.”
Brookfield Property Partners is another group in the middle of a giant development in midtown. ManhattanWest was started in 2011 but won’t have all of its 7.5 million square feet ready to lease until 2023. The multi-building campus was built on top of an active railroad junctions where 16 train lines cross. The buildings are constructed on platforms above the rail lines and the work had to be done in a way that did not disrupt the public transportation that many in the area rely on. Christian Heimple, Vice President of Construction at Brookfield explained the stakes of these long term bets. “You have to decide what tenant you want to chase with your $2 billion dollars,” he said. “For us it is all about flexibility. The development of these projects is so long that every time we try the “crystal ball” we are proved wrong. You are designing for tenants that won’t occupy a space for five years and will be there for another fifteen on a property that we expect to own for a hundred years or more so those needs might change once you are ready for them.”
Not all projects in an old, geographically constrained area like Manhattan can be beautiful new builds like ManhattanWest. Many older buildings are undergoing incredible transformations in the form of extensive remodels. Karen Oh, the Director of Energy Solutions at Vornado Realty Trust, has been a part of a lot of those large remodels. She was surprised by how spaces that were once considered unusable are now being activated. She explained that, “spaces that were undesirable are now being snapped up. Undergrounds spaces are being used for quiet room and nap rooms. Outdoor setbacks are being activated in any way possible to create another space.”
The sophistication of offices in New York City are a function of the growing sophistication of the tenants that lease them. Technology, advertising, media and information companies (or TAMI tenants as they are called by the NYC real estate crowd) are much more demanding in order to make their offices comply with corporate values and be a recruiting tool for high-skilled workers. Things like energy reporting, comfort control and air quality monitoring are becoming standard. The city itself is also pushing buildings to improve. The fire ordinances now require things like in-building repeaters so rescue workers never lose their communication signals. The New York State agency NYSERDA is pushing an energy upgrade retrofit incentive designed to help older buildings be more efficient in order to help the state meet its carbon emission goals.
New York’s office market is certainly unique. But it may not always be. As the global economy slips further into the information age and turns towards cities as generators of productivity we might see other cities resemble New York’s crown jewel. Idiosyncrasies that now seem isolated to a bustling metropolis like Manhattan could become standard in other smaller cities as they march down the path of progress. Learning how certain forward-thinking real estate firms are dealing with development in the city will certainly give valuable lessons for others to use in their own markets in the coming years.
