The Midtown East Rezoning, approved August of 2017, is a rare opportunity for the Plaza District to modernize and rebuild its aging buildings. There is however a substantial cost to rebuilding active product, and I would argue that Hudson Yards is a catalytic steppingstone in helping Midtown East reach its full potential.
Hudson Yards is an anomaly in NYC real estate. Related Companies and Oxford Properties Group were able to take an empty canvas, the former rail yards, develop a class A mega project creating a lifestyle, not just a product, luring class A tenants at a premium price. Thomas Birnbaum, president of NYC Realty Advisors, noted of the developers: “they created a place where you can go to your fitness club, you can go have coffee, you can do co-working, you can sit outside in the sunshine in the park.” Through this process, Hudson Yards and surrounding development projects now regularly achieve office rents that are nearly 30% greater than the Manhattan market average, according to Craig Leibowitz, a NewYork Research Director at JLL.
Midtown East, i.e., the Plaza District, has been the traditional home of premium office lifestyle, however, projects like Hudson Yards have highlighted the age of existing buildings. The City of NY proactively passed the rezoning, encompassing 78 blocks, greatly increasing the available floor area (FAR) in hopes this would modernize the area. The former zoning code allowed for 12 FAR for the surrounding Grand Central area and along the avenues, the FAR was 15. The new code increases the base to 14.4 FAR throughout the re-zoned area, 18 FAR on Madison, Lexington and Third Avenues, 21.6 FAR on Park Avenue and the greater area surrounding Grand Central, and 24 FAR on the adjacent blocks to Grand Central. This equates to an anywhere from a 20% to 100% increase in the buildable square footage of a property. In addition, when an owner or developer wants to exceed 15 FAR, they must contribute $250/ft to a district improvement fund that will oversee the re-development of public spaces and public transportation access points. The vision behind this re-zoning is to create a plan that both redevelops the office and public spaces in tandem.
An FAR increase like that can be a tantalizing opportunity to developers and spur the creation of modern high-tech space, but this comes at a cost. Besides the re-development cost of demolition and construction on an existing income-producing property, the owner will lose several years of rent during the rebuild. “If you have an office building, even if it’s worth $800 or $1,000 per foot, you will need at least $175 a foot for rent if you build a new building,” says Jimmy Kuhn of Newmark Knight Frank. According to Costar over the last 12 months in the Plaza District, asking rents have been averaging $86.50/ft with a high of $130/ft. Fortunately, the popularity around Hudson Yards has helped normalized mid $130/ft plus rents traditionally only seen with trophy buildings. Moving forward, this will help push more re-development projects as owners fill office space at the higher rent points.
Some developers and owners have jumped right in, understanding the value proposition of the re-zone.
• GDS Development has filed demo permits on 417 Park Avenue, a 12-story condo building they purchased for $184 million earlier this year. The existing 130,000 SF building will be razed to build a 220,000 SF office building.
• The old Pfizer headquarters on 42nd street was recently acquired by a development syndicate with plans to redevelop the two buildings of 1.15 million SF into a 1.9 million SF mega tall office building.
• JP Morgan Chase is in the process of demolishing their 52-story headquarters building at 270 Park to rebuild a substantially larger building jumping from the current 1.35 million square feet to a 70-story 2.4 million square feet building.
Adversely, many buildings will lean towards major rehab of the existing structure, plus the possibility of adding additional floors. These buildings will not be on the same level, i.e., modern office buildings, that have open floor plans with few columns and higher ceilings. But, refreshed common areas and a new lobby will increase the rental rates to a lower extent.
Hudson Yards started back in 2012 and still has a couple of years until completion. The rezoning effects will be measured in decades, not years. But with it will come new and exciting modern buildings. Keep an eye out for a new Plaza District.