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Fortunes diverge for Park Avenue office landlords

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For office owners north of Grand Central Terminal on Park Avenue, it feels like the best of times.

The bankers who occupy many of the buildings there have returned to work, an act of solidarity with landlords to whom they’ve written billions of dollars’ worth of mortgages. JPMorgan is building its 70-story headquarters, and demand for premium office space on the avenue is so strong that developers are daring to dream of building more.

But south of Grand Central, it’s the worst of times. A shortage of casually dressed office workers — who tend to work in fields such as tech and media — is causing headaches for landlords including Charles Cohen, who owns two big office buildings south of Grand Central and defaulted in February on more than half a billion dollars’ worth of personally guaranteed loans.

“North of the station, people wear suits to work, and south, it’s jeans and T-shirts,” observed Gabe Marans, vice chairman at the real estate brokerage Savills. “The jeans and T-shirt wearers haven’t come back as much.”

The widening gap between Park Avenue’s north and south sides can’t be explained entirely by location; both are convenient for commuters. But buildings to the north are newer and taller and offer amenities that enable tenants to eat or sleep at work so they aren’t affected by the scarcity of shops on the avenue below. From East 40th to East 59th streets, asking rents on Park are the city’s highest at $110 per square foot, according to Savills. The availability rate is half Midtown’s 17% average.

Southern Park Avenue, however, is more like the rest of Midtown and is part of a market with a 20% availability rate, according to Colliers. The data suggest its attractive but mostly older buildings don’t hold as much appeal to tenants when there is lots of newer space on the market. Office rents in the area average $82 a square foot.

“This is a period of adjustment, and there are landlords in the midst of trying to make it work,” said James Mettham, president of the Flatiron NoMad Partnership, a business improvement district that includes Park Avenue South.

Higher-quality offerings

Mettham is optimistic southern Park Avenue will get a jolt from the new life-sciences incubator at 345 Park Ave. South. The century-old building was recently rebranded the Cure Building, and last year a subsidiary of owner Deerfield Management got a $25 million grant from the administration of Gov. Kathy Hochul to cover half the cost of developing a 6,000-square-foot lab space. Meanwhile, bistros and cafes are thriving along the avenue’s southern half.

“In terms of retail and energy on the street, you don’t sense it’s struggling,” Mettham said.

A big reason Park Avenue’s fortunes north of Grand Central have detached from the rest of Midtown, brokers say, is that before the pandemic hit a new competitor on the Far West Side pushed avenue landlords to spend millions improving their building’s lobbies, restaurants and even in-house golf ranges. The tower 277 Park is 98% leased after $120 million in upgrades.

“Park Avenue had to grapple with a higher-quality offering from Hudson Yards,” Marans said.

A rush of developers are planning their own higher-quality offerings. RXR Realty, which owns some struggling older buildings, aims to erect a supertall at 175 Park Ave. Ground hasn’t been broken, and the project is in “predevelopment,” an RXR official said. Boston Properties dreams of developing a supertall next to Grand Central if it can secure an anchor tenant. Vornado Realty Trust is one developer that has lined up an anchor tenant, and last month Mayor Eric Adams proclaimed the firm will next year begin redeveloping 350 Park at East 51st Street and create a supertall tower for hedge fund mogul Ken Griffin’s firm, Citadel.

“I’m here to say and let you know, there’s no rumors — it’s a reality,” Adams told a business group.

‘The severity of your situation’

Reality gets tougher in the blocks south of Grand Central. “Across East 38th Street, everything changes,” said Ruth Colp-Haber, CEO of Wharton Property Advisors.

Problems on Park Avenue’s southern half can be summed up with Cohen Bros. and WeWork.

Cohen Bros., owner of nine Midtown towers and 12 million square feet nationwide, started developing office buildings in the late 1950s, not long after Fourth Avenue between East 32nd and East 17th streets was renamed Park Avenue South. Forbes reckons President Charles Cohen, the son of a founder, is worth $3 billion.

He owns 3 Park Avenue, a 650,000-square-foot tower at East 34th Street developed in 1973. Its occupancy rate has tumbled to 54%, from 86% in 2019. The largest remaining tenant, publisher Houghton Mifflin Harcourt, is trying to sublease 50% of its space, according to Fitch Ratings. Although 3 Park has excellent views and lots of corner windows, the corporate vibe is disrupted because the building’s bottom third is filled with high school students from Manhattan Academy for Arts and Language, Murray Hill Academy, Success Academy High School for the Liberal Arts and Unity Center for Urban Technologies High School.

“The building has a stigma,” said Michael Cohen, president of tristate operations at Colliers.

Cohen Brothers’ head of leasing, Marc Horowitz, disagrees.

“There’s absolutely nothing wrong with the building,” he said. “We lost a couple of big tenants, but existing tenants are taking additional space.”

A couple of blocks south, Cohen Brothers’ 450,000-square-foot building at 475 Park Ave. South, developed in 1969, is also about 50% vacant, according to CoStar. The building was a hub for tech companies, a sector in which working from home is especially popular.

A short walk south, a sign outside Calvary Episcopal Church at East 21st Street reads, “Enjoy your forgiveness.” Forgiveness of debt is what Cohen hopes to enjoy after defaulting on $544 million of personally guaranteed loans earlier this year, according to a lawsuit filed in March by lender Fortress Investment Group. Cohen wants the case dismissed. Horowitz said none of the defaulted loans are for properties in New York City, and he claims Fortress’s allegation that one loan was for the office building at 135 E. 57th St. was a mistake. An attorney for Fortress didn’t reply to a request for comment.

Shortly before the battle was joined, in an email sent at 1:34 a.m. on Feb. 27, Charles Cohen implored the co-chairman of Fortress, Dean Dakolias, to cut him some slack.

“Over the last 20+ years we have always found a way forward together,” Cohen said in a message shared in New York state court. “We need both meaningful relief and peace of mind to reach the goal line.”

Dakolias replied: “I am disappointed in your email and your lack of progress.”

“You’ve not made your last payment,” the banker admonished, “and you’ve not demonstrated that you understand or prioritize the severity of your situation.”

All or nothing at all

Cohen was owed about $3 million in unpaid rent when WeWork filed for Chapter 11 bankruptcy protection last November. The bankruptcy continues to reverberate down the street. WeWork tore up its lease for 419 Park Ave. South, leaving the building’s landlord, Walters & Samuels, high and dry to collect $2.6 million in unpaid rent. WeWork left 401 Park Ave. South before Chapter 11. However, it said recently that it plans to remain at 450-460 Park Ave. South, a 200,000-square-foot building developed in 1912 and owned by the Moinian Group.

A hearing to confirm WeWork’s reorganization plan is set for May 30. It has secured $450 million in new funding and plans to emerge from bankruptcy protection after purging all of its $4 billion in pre-petition obligations.

Another test comes with summer’s reopening of 360 Park Ave. South after three years of renovation work. The 450,000 square-foot building is so far only 23% leased, which may explain why the Canada Pension Plan Investment Board earlier this year sold its 29% stake back to Boston Properties for just $1. The sale means the fund is no longer on the hook for $46 million in funding obligations and $5 million in annual interest costs, a potentially painful sum if the building doesn’t fill up.

Some tenants are seizing opportunities to grab attractive office space in Park Avenue South’s handsome, historic buildings. Komodo Health, a data analysis company, is moving into 13,000 square feet at 257 Park Ave. South after leaving 90 Fifth Ave. and touring more than 15 possibilities. Chief Marketing Officer Julie Goebel loves the Carrara-marble lobby and said the 20-story building developed in 1913 has all the latest amenities.

“Inside you’d never detect this is an older building,” Goebel said.

The connection to another time attracted cutting-edge media outfits including Facebook and BuzzFeed to 225-233 Park Ave. South, a limestone building at East 18th Street developed in 1909. But Facebook terminated its lease for 44% of the space, BuzzFeed moved out, and this month the lease expires for a tenant that rented 20% of the building, engineering firm STV. The building is owned by Orda Management.

Cohen said that “225-233, like 360 Park Avenue South, was leased to a handful of large tenants. Unfortunately, that’s an all or nothing-at-all strategy.”

But 225-233 might not stay so empty for long. Brian Waterman, executive vice chairman at Newmark, said negotiations are underway with tenants who like the “incredible location” near Union Square.

“There are a few large tenants that we are in active discussions with,” he said.

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Aaron Elstein , 2024-05-23 11:48:08

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