November 28, 2020

Square Feet: Class-Consciousness in the Office Building Market

Traditionally, four classifications are used for office buildings: trophy properties, which are mostly new construction that offer tenants the latest technologies, best locations and most exclusive tenancies; Class A, where the vintage may be somewhat older but the location or landmark architecture demands above-average rents; and Class B, mostly on Midtown side streets or peripheral locations, with average rents, services and building systems. Rounding it out are Class C properties, which are often simply Class B buildings that lack services. Often, Class C buildings will be upgraded to achieve higher rents and make better use of valuable real estate or be converted into residential units.

Trophy office towers make up 9 percent of the Manhattan market, Class A buildings make up 53 percent and Class B 26 percent; the remainder is Class C, according to Cushman Wakefield. In the boroughs, the brokerage firm tracks roughly 17 million square feet of office space in Brooklyn, about half of which is Class A, and 7 million square feet of mostly Class A and B office space in Queens.

But there is no industrywide standard, and deciding whether a building fits into one group or another is more art than science.

“There is a universal desire for a classification system that is somewhat objective, but unfortunately, it is really a very subjective process,” said David Goldstein, an executive vice president at the brokerage firm Studley.

While it varies from firm to firm, among the criteria brokers use are age, location, curb appeal, tenancy, building infrastructure and ownership. The labels help brokers categorize average rents, and vacancy and absorption rates, and are often used as a form of shorthand in marketing space to tenants. The city’s Finance Department also relies on the class system to help assessors determine real estate taxes and property values.

The Trophies

Trophy buildings are often the easiest to spot because they tend to be the newest and most technologically advanced. Both 1 Bryant Park and 7 World Trade Center, completed in 2009 and 2006, respectively, are considered trophies, and are among the country’s leaders in environmentally sustainable buildings.

Some trophies have climbed to their position through gut renovations. Jones Lang LaSalle, for example, lists 545 Madison Avenue, which underwent a $90 million renovation in 2008, as a trophy property.

“The only thing that exists from before is the concrete and steel,” said David Sigman, executive vice president and principal at LCOR, which acquired a 75-year ground lease on the property, at East 55th Street, in 2006. It is 60 percent leased, with rents in the range of the low-$70s per square foot.

Some trophies do not require such extensive work to keep current. The Solow Building at 9 West 57th Street has retained its position as one of the most exclusive Manhattan office towers despite its 1974 vintage. It commands rents from $100 to $200 per square foot and has an exclusive roster of tenants, including the private equity firm Kohlberg Kravis Roberts Company and the corporate offices of the design house Chanel.

Class A

Class A skyscrapers are characterized as well maintained, with stellar ownership, in prime neighborhoods with high-credit tenants, but are generally not of recent vintage. Rockefeller Center, for example, was built in the 1930s, but its location, the reputation of its owner, Tishman Speyer, the quality of its retail roster and the fame of the Rockefeller Center brand have kept the office complex well within the Class A status.

But while trophies are usually designated as such by acclaim, Class A properties can sometimes evoke disagreement, particularly when the location is a focus. Park Avenue, for example, in the heart of Midtown is often considered reason enough to label the buildings there Class A properties. But 230 Park Avenue and 250 Park Avenue, for example, were built in the 1920s, and some real estate experts argue that the buildings fail to live up to Class A standards.

“Do they have updated common areas that feel plush and luxurious, do they have the services?” said Marisa Manley, the president of Commercial Tenant Real Estate Representation, a brokerage firm. “Or are these buildings really just fabulously located space on Park Avenue?” While some may say the buildings are lackluster, brokers do mostly consider them Class A properties, and their rents are consistent with other top-tier buildings in the area.

In some cases, buildings can move up the classification rung. The Empire State Building spent decades in the lower classifications, but now many firms consider it Class A. Since 2006, it has undergone a $550 million renovation and has shrunk its roster list from 561 tenants to less than 190, seeking to attract bigger companies. Among the companies that have recently moved in and helped raise the building’s stature is the construction company Skanska, the Federal Deposit Insurance Corporation and the social network LinkedIn.

Class B

Article source: http://feeds.nytimes.com/click.phdo?i=5a2ec055ca4ef37921500c6e34027bcf

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