Source: Crain's New York Business

January 05, 2016

Commercial Developers Build Small to Score Big

A growing number of builders have seized on what they believe is an underserved segment of the city’s office market: pint-size, yet deep-pocketed tenants who want to be in new, high-end buildings tailored to their diminutive footprints.

At least six developers are constructing or readying to break ground on boutique office properties. The buildings are generally smaller than 200,000 square feet, a fraction of the size of recently opened 1 World Trade Center, which is 3 million square feet, or the 2.6 million-square-foot office skyscraper rising at 30 Hudson Yards.

Builders point to several factors in boutique office development’s allure. The projects generally cost $100 million or less to build and are relatively easy to finance, don’t require elusive anchor tenants, and can achieve annual rents reaching well above $100 per square foot, near the top end of the market. Developers Aurora Capital and Vornado Realty Trust are so bullish on the demand for such space that they plan to begin a nine-story boutique property together at 61 Ninth Ave. and, concurrently, two similar office projects nearby with separate partners.

Several other owners are buying into the formula that going small is the new recipe for success.

Eric Gural, a principal of the family-owned landlord Newmark Holdings, said he is considering a boutique office building for an 80,000-square-foot development at a property he owns at 27 Union Square West.

"We are considering a boutique office building for an 80,000-square-foot development at a property we own at 27 Union Square West." - Eric Gural, Co-CEO of GFP Real Estate

Boutique buildings offer tenants amenities such as outdoor space, private workout facilities and concierge services. The 20-story, 75,000-square-foot office property that Turkish developer Sedesco built for $60 million at 34 E. 51st St. will feature a golf simulator when it opens this month.

Creating a presence

Boutique buildings also offer businesses a rare opportunity in New York City: to be a big fish in a small pond. “Tenants value the kind of presence they can have in a boutique building,” said Stuart Romanoff, whose family real estate firm is finishing development of 860 Washington St., a 113,848-square-foot office building in the meatpacking district that will open in April. “Rather than be one of two or three tenants on a floor in a normal high-rise building, they can have their names on the doors and an entire floor to themselves.”

Boutique office buildings have traditionally attracted private-equity firms and hedge funds. Many developers believe the universe of takers is expanding to booming sectors such as technology and other creative industries. Delos Living, a builder of high-end residential space with wellness amenities, for example, has leased two floors, each a little more than 10,000 square feet, at 860 Washington St. for rents around $150 per square foot.

Boutique office development does come with its own set of hurdles. Builders say it is almost impossible to pre-lease such projects because small tenants generally make space commitments very close to when they are ready to move and often want to see a finished product before they commit.

“It takes so long to plan and execute these projects that yes, sometimes the music stops and the market does drop by the time you’re done,” said Michael Cohen, the tristate president of office-leasing firm Colliers International. “I think in this case, though, the music still has some time to keep playing.”